Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2013
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ________to________
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Commission File Number: 000-52979
Heavy Earth Resources, Inc.
(Exact name of registrant as specified in its charter)
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Florida
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75-3160134
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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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.
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o
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Accelerated filer
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Non-accelerated filer
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o (Do not check if a smaller reporting company)
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Smaller reporting company
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x
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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 December 12, 2013, there were 71,371,038 shares of the issuer's $.001 par value common stock issued and outstanding.
1
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
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Page
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Item 1.
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Financial Statements
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3 |
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Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012
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3 | |
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Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2013 and 2012
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4 | |
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Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012
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5 | |
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Notes to Condensed Consolidated Financial Statements
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6 | |
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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12 |
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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16 |
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Item 4.
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Controls and Procedures
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16 |
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PART II
OTHER INFORMATION
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Item 1.
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Legal Proceedings
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Item 1A.
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Risk Factors
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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16 |
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Item 3.
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Defaults Upon Senior Securities
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17 |
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Item 4.
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Mine Safety Disclosures
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17 |
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Item 5.
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Other Information
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17 |
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Item 6.
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Exhibits
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17 |
2
PART I - FINANCIAL INFORMATION
HEAVY EARTH RESOURCES, INC.
(An Exploration Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
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December 31,
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Assets
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2013
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2012
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Current Assets
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Cash and cash equivalents
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$ | 87,012 | $ | 178,136 | ||||
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Restricted cash
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- | 542,234 | ||||||
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Short term investments
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- | 103,211 | ||||||
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Other receivables
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1,950 | 873,965 | ||||||
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Inventory
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- | 45,420 | ||||||
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Total current assets
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88,962 | 1,742,966 | ||||||
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Oil and gas properties (full cost method)
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Evaluated
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- | 11,024,000 | ||||||
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Participating interest in oil and gas contract
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999,850 | - | ||||||
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Property, plant and equipment
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Well machinery and equipment
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- | 234,453 | ||||||
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Furniture, fixtures and other
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- | 61,396 | ||||||
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Less: accumulated depletion, depreciation and amortization
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- | (27,078 | ) | |||||
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Net oil and gas properties, plant and equipment
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999,850 | 11,292,771 | ||||||
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Total assets
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$ | 1,088,812 | $ | 13,035,737 | ||||
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Liabilities and Stockholders’ Equity
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Current Liabilities:
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Accounts payable and accrued liabilities
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$ | 1,417,825 | $ | 6,456,722 | ||||
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Related party payables
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373,065 | 59,470 | ||||||
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Total current liabilities
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1,790,890 | 6,516,192 | ||||||
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Convertible notes payable
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2,500,000 | 1,500,000 | ||||||
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Total liabilities
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4,290,890 | 8,016,192 | ||||||
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Stockholders’ Equity:
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Common stock, $0.001 par value 3,000,000 shares authorized,
71,263,253 and 70,509,331 shares issued and outstanding,
respectively
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71,263 | 70,509 | ||||||
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Additional paid in capital
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21,771,191 | 21,540,021 | ||||||
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Deficit accumulated during exploration stage
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(25,044,532 | ) | (14,894,348 | ) | ||||
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Accumulated other comprehensive loss
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- | (1,696,637 | ) | |||||
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Total stockholders’ equity
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(3,202,078 | ) | 5,019,545 | |||||
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Total Liabilities and Stockholders’ Equity
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$ | 1,088,812 | $ | 13,035,737 | ||||
See accompanying notes to financial statements.
3
HEAVY EARTH RESOURCES, INC.
(An Exploration Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2013
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2012
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2013
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2012
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Revenues
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$ | - | $ | - | $ | - | $ | - | ||||||||
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Operating costs and expenses
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Exploration and lease operating costs
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- | 31,306 | 59,459 | 87,541 | ||||||||||||
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Depreciation and amortization
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- | 1,660 | 3,252 | 4,985 | ||||||||||||
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General and administrative
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222,167 | 303,187 | 518,256 | 552,495 | ||||||||||||
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Legal and professional
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5,468 | 228,190 | 294,120 | 535,684 | ||||||||||||
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Impairment of oil and gas properties
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- | 4,095,016 | 19,580 | 4,095,016 | ||||||||||||
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Total operating expenses
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227,635 | 4,659,359 | 894,667 | 5,275,721 | ||||||||||||
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Loss from Operations
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(227,635 | ) | (4,659,359 | ) | (894,667 | ) | (5,275,721 | ) | ||||||||
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Other Income (Expense)
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Amortization of debt discount, BCF
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- | (1,000,000 | ) | - | (1,000,000 | ) | ||||||||||
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Interest expense
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(23,000 | ) | (5,333 | ) | (79,918 | ) | (69,950 | ) | ||||||||
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Late fees
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- | - | (59,250 | ) | - | |||||||||||
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Loss on sale of subsidiary
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(7,419,713 | ) | - | (7,419,713 | ) | - | ||||||||||
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Total other income (expense)
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(7,442,713 | ) | (1,005,333 | ) | (7,558,881 | ) | (1,069,950 | ) | ||||||||
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Net Loss Before Income Taxes
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$ | (7,670,348 | ) | $ | (5,664,692 | ) | $ | (8,453,548 | ) | $ | (6,345,671 | ) | ||||
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Provision For Income Taxes
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- | - | - | - | ||||||||||||
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Net Loss
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$ | (7,670,348 | ) | $ | (5,664,692 | ) | $ | (8,453,548 | ) | $ | (6,345,671 | ) | ||||
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Loss per share – basic
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(0.11 | ) | (0.08 | ) | (0.12 | ) | (0.09 | ) | ||||||||
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Weighted average of shares outstanding
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70,986,292 | 70,423,099 | 70,767,670 | 69,787,191 | ||||||||||||
See accompanying notes to financial statements.
4
HEAVY EARTH RESOURCES, INC.
(An Exploration Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended September 30,
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2013
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2012
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Cash Flows from Operating Activities
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Net loss
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$ | (8,453,548 | ) | $ | (6,345,671 | ) | ||
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Adjustments to reconcile net loss to net cash used in operating activities
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Depreciation and amortization
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3,252 | 4,985 | ||||||
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Common stock issued for services
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102,000 | - | ||||||
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Common stock issued for late fees
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59,250 | - | ||||||
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Impairment of oil and gas properties
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19,580 | 4,095,016 | ||||||
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Loss on sale of subsidiary
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7,419,713 | - | ||||||
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Amortization of debt discount
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- | 1,000,000 | ||||||
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Changes in operating assets and liabilities:
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Decrease in restricted cash
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542,234 | 594,737 | ||||||
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Decrease in other receivables
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872,015 | 327,528 | ||||||
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(Increase) in prepaids
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- | (2,997 | ) | |||||
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(Increase) decrease in inventory
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45,420 | (3,448 | ) | |||||
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(Decrease) in accounts payable and accrued liabilities
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(825,009 | ) | (2,488,636 | ) | ||||
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Increase in related party payables
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313,595 | - | ||||||
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Net cash provided by operating activities
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98,502 | (2,818,486 | ) | |||||
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Cash Flows from Investing Activities
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(Increase) decrease in short-term investments
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3,418 | 92,791 | ||||||
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Cost of oil and gas properties, plant & equipment
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(193,044 | ) | (4,575,397 | ) | ||||
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Net cash provided by investing activities
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(189,626 | ) | (4,482,606 | ) | ||||
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Cash Flows from Financing Activities
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Cash assumed in reverse merger
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- | 20,594 | ||||||
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Proceeds from the issuance of common stock
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- | 850,000 | ||||||
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Proceeds from convertible notes
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- | 4,365,000 | ||||||
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Net cash provided by financing activities
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- | 5,235,594 | ||||||
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Foreign currency exchange
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- | 2,061,217 | ||||||
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Net increase in cash
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(91,124 | ) | (4,281 | ) | ||||
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Cash, beginning of period
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178,136 | 6,608 | ||||||
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Cash and cash equivalents, end of period
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$ | 87,012 | $ | 2,327 | ||||
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Supplemental Cash Flow Information
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Cash Paid For:
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Interest
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$ | 34,168 | $ | - | ||||
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Income taxes
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$ | - | $ | - | ||||
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Non-cash transactions:
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Discount to additional paid-in capital from relative fair value of warrants
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$ | - | $ | 1,000,000 | ||||
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Acquisition of oil and gas properties
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$ | - | $ | 3,005,825 | ||||
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Conversion of notes payable
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$ | - | $ | 3,429,619 | ||||
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Recapitalization
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$ | - | $ | 2,997,117 | ||||
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Common stock for expenses
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$ | 161,250 | $ | - | ||||
See accompanying notes to financial statements.
5
HEAVY EARTH RESOURCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Heavy Earth Resources, Inc. (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, through its wholly-owned subsidiary Syncline Technologies, Inc., a Cayman Islands exempt company (“Syncline Technologies”) owns a 25% participating interest in the La Maye Block located in the Lower Magdalena Basin, Colombia (“La Maye Block”). The Company also owns a 15% participation interest in the Morichito Block located in the Llanos Basin, Colombia (the “Morichito Block”). Previously, the Company through its subsidiaries, Deep Core, Inc. (“Deep Core”) and DCX SAS (“DCX”) owned a 50% participating oil and gas interest in the Morichito Block.
On August 28, 2013, the Company closed a transaction with Black Energy Oil & Gas Corp., a company based in Panama with principal operations in Colombia (“Black Energy”), for the sale of the Company’s subsidiary Deep Core, whose principal asset is DCX, for the assumption of liabilities of US$6,000,000. As a part of that transaction, the Company retained a 15% participation interest in the Morichito Block, including a 100% carry up to US$10 million for all expenses related to the Morichito-5 (“M-5”) discovery well and either the M5B well or another prospect.
Basis of Presentation and Functional Currency
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, 2012 and 2011. 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 months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The Company made certain reclassifications to prior-period amounts to conform to the current presentation.
These 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 at September 30, 2013 and 2012, respectively, for purposes of the Company’s balance sheets and the average rates for the nine months ended September 30, 2013 and 2012, 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 company as defined by ASC 915, Development Stage Entities. The Company is engaged in the acquisition, exploration, development and production of oil and gas properties. As of September 30, 2013, the Company owned a 15% 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.
6
HEAVY EARTH RESOURCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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; and 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.
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 $8,453,458 through September 30, 2013 and has a working capital deficiency of $1,701,928 at September 30, 2013. The Company is subject to those risks associated with exploration 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 and to monetize economically recoverable oil and gas reserves. However, there is no assurance that the Company will be able to obtain additional financing to further its ongoing 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.
7
HEAVY EARTH RESOURCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012
3. DIVESTITURE – SALE OF SUBSIDIARY
On August 28, 2013, the Company closed a transaction with Black Energy for the sale of the Company’s subsidiary Deep Core, whose principal asset is DCX, for the assumption of liabilities of US$6,000,000.
As a part of the transaction, the Company retained a 15% participation interest in the Morichito Block, including a 100% carry up to US$10 million for all expenses related to the development of the Morichito-5 (“M-5”) discovery well and either the M5B well or another prospect.
To facilitate the transaction, the Company transferred its ownership of Deep Core Barbados, whose principal asset is a 25% participation in La Maye, to Syncline Technologies.
The Company recorded a loss on sale of subsidiary as of August 28, 2013. Consideration for the sale included the participation interest in the Morichito Block, which was valued at $999,850, representing 15% of the total consideration for the assumption of liabilities and intercompany amounts. The consideration was offset by net assets and liabilities of $7,725,403, and intercompany transactions of $694,160, resulting in a loss on sale of $7,419,713.
4. OIL AND GAS PROPERTIES
During the prior year, DCX had 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, DCX maintained 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 Morichito Block is comprised of approximately 23,000 hectares, or 57,000 gross acres. The exploration period was divided into six (6) exploration phases of which five (5) have been completed.
As described more fully in Note 3 above, on August 28, 2013, the Company closed a transaction with Black Energy for the sale of the Company’s subsidiary Deep Core, whose principal asset is DCX, in exchange for Black Energy’s assumption of liabilities of US$6,000,000. As part of this transaction, the Company retained a 15% participation interest in the Morichito Block, including a 100% carry up to US$10 million for all expenses related to the development of the Morichito-5 (“M-5”) discovery well and either the M5B well or another prospect.
The Company’s wholly owned subsidiary, Syncline Technologies, owns Deep Core Barbados, whose principal asset is a 25% participation interest in La Maye.
5. COMMITMENTS AND CONTINGENCIES
As part of the agreement with Black Energy for the sale of the Company’s subsidiary Deep Core, whose principal asset is DCX, Black Energy agreed to assume all of DCX’s liabilities, including certain legal expenses associated with DCX. The Company entered into a deed of guarantee with DCX’s Columbian legal counsel, guaranteeing Black Energy’s payment of legal expenses associated with Deep Core and DCX. The expenses total approximately US$120,000.
8
HEAVY EARTH RESOURCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012
6. CONVERTIBLE NOTES
Prior to the closing of the Share Exchange Agreement, 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 Agreement 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.
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 the aggregate for $1,000,000 (the “August 2012 Notes”).
The August 2012 Notes are due three years from August 29, 2012, the date of issuance. The August 2012 Notes 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 August 2012 Notes bear interest at the rate of 6% per annum at inception, and increased to 12% per annum on March 31, 2013 since the Company had not consummated a primary public offering of its securities with gross proceeds of at least $6,000,000 on or before that date. Should the Company’s common stock not be listed for trading on the Nasdaq Capital Market or the Nasdaq Global Market by January 15, 2014, the interest rate will further increase to 15% per annum. Last, in the event of default the rate will increase to 18%. 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 Company has the option to redeem the August 2012 Notes at 115% of the outstanding principal together with any accrued but unpaid interest at any time if certain conditions are met. The August 2012 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.
Since the combined value of the warrants ($443,291) plus the intrinsic value of the August 2012 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 during the prior year since the debt was convertible upon issuance.
On December 6, 2012, the Company entered into a securities purchase agreement with an investor providing for the issuance of an aggregate principal value of $500,000 of a 6% senior convertible note and common stock purchase warrants to purchase an aggregate of 833,333 shares of common stock in exchange for the aggregate for $500,000 (the “December 2012 Note”).
9
HEAVY EARTH RESOURCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012
6. CONVERTIBLE NOTES (Continued)
The December 2012 Note is due three years from December 6, 2012, the date of issuance. The December 2012 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 December 2012 Note bears interest at the rate of 6% per annum inception, and increased to 12% per annum on March 31, 2013 since the Company had not consummated a primary public offering of its securities with gross proceeds of at least $6,000,000 on or before that date. Should the Company’s common stock is not be listed for trading on the Nasdaq Capital Market or the Nasdaq Global Market by January 15, 2014 the interest rate will further increase to 15% per annum. Last, in the event of default the rate will increase to 18%. 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 Company has the option to redeem the December 2012 Note at 115% of the outstanding principal together with any accrued but unpaid interest at any time if certain conditions are met. The December 2012 Note is 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 December 6, 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 prior year using the intrinsic value in the December 2012 Note adjusted for amounts allocated to the warrant valuation. The intrinsic value of the December 2012 Note amounted to $909,958 based on the fair market value of common stock on the respective dates of issuance.
Since the combined value of the warrants ($236,446) plus the intrinsic value of the December 2012 Note ($319,779) exceeded the fair value of the proceeds received from the issuance of the debt ($500,000), 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 $236,446 and the remainder to the beneficial conversion feature in the amount of $263,554. The Company immediately amortized the debt discount of $500,000 during the prior year since the debt was convertible upon issuance.
On February 8, 2013, the Company entered into a securities purchase agreement with an investor providing for the issuance of an aggregate principal value of $1,000,000 of a 15% senior convertible note and common stock purchase warrants to purchase an aggregate of 2,000,000 shares of common stock in exchange for the aggregate for $1,000,000. The convertible notes will become due and payable three years from February 8, 2013, 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 $0.50 per share. 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 $0.60 per share, are exercisable immediately upon issuance and have a term of exercise of five years from February 8, 2013.
The assumptions used in the Black-Scholes option pricing model for the Warrants were as follows:
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0.74%
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Expected volatility of common stock
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103%
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Dividend yield
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0.00%
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Expected life of warrants and conversion feature
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5 years
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10
HEAVY EARTH RESOURCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012
7. COMMON STOCK
On February 7, 2013, the Company issued 200,000 shares of its common stock to two (2) consultants for services at $0.51/share, or $102,000.
On April 26, 2013, the Company’s board of directors approved: (a) the issuance of 178,922 registered shares of the Company’s common stock (“Interest Shares”) as payment of interest and late fees on its outstanding convertibles notes; and (b) 150,000 restricted shares of the Company’s common stock in exchange for the note holder’s agreeing to waive the “Equity Conditions” set forth in the notes which the Company was required to either meet or have waived by such noteholders prior to issuing the Interest Shares. The Company issued the Interest Shares and the Waiver Shares to the noteholders on May 1, 2013.
On July 22, 2013, the Company’s board of directors approved the issuance of: (a) 281,900 shares of the Company’s registered common stock as payment of interest on its outstanding convertible notes; (b) 125,000 shares of the Company’s restricted common stock in exchange for in exchange for the note holders’ agreeing to waive the “Equity Conditions” set forth in the notes which the Company was required to either meet or have waived by such note holders prior to issuing the Interest Shares; and (c) 100,000 restricted shares of the Company’s common stock to its legal counsel in exchange for such legal counsel agreeing to defer payment for fees owed for legal services provided until the Company is able to close its next financing.
On November 6 2013, the Company’s board of directors approved the issuance of 107,785 shares of the Company’s restricted common stock as payment to a consultant for business accounting and financial services.
On November 6 2013, the Company’s board of directors approved the issuance of: (a) 310,813 shares of the Company’s registered common stock as payment of interest on its outstanding convertible notes; and (b) 300,000 shares of the Company’s restricted common stock in exchange for in exchange for the note holders’ agreeing to waive the “Equity Conditions” set forth in the notes which the Company was required to either meet or have waived by such note holders prior to issuing the Interest Shares.
8. RELATED PARTY PAYABLES
During the period ended September 30, 2013, the Company received advances from officers and shareholders, for operating costs and expenses. These advances are non-interest bearing and are repaid as cash becomes available.
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 previous wholly-owned subsidiary Deep Core Inc., a Cayman Island exempt company (“Deep Core”), the 99.675% owner of its Colombian subsidiary, DCX SAS (formerly known as Petropuli SAS) (“DCX”), and the Company’s current wholly-owned subsidiary, Syncline Technologies, Inc., a Cayman Island exempt Company (“Syncline Technologies”), which wholly owns Deep Core (Barbados) Inc. (“Deep Core Barbados”).
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:
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risks associated with drilling and production programs on the Morichito and La Maye Blocks resulting from geological, technical, drilling, seismic and other unforeseen problems;
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Operators for both Morichito & La Maye blocks may experience unforeseen problems causing delays in exploration and production;
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unexpected results of exploration and development drilling and related activities on the Morichito and La Maye Blocks;
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volatility of oil prices may affect the Company’s ability to raise capital;
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continued availability of capital and financing to fund exploration and development drilling activities;
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increases in operating costs;
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availability of skilled personnel;
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unpredictable weather conditions;
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the impact of political and economic instability in Colombia;
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the ability to obtain required approvals of regulatory authorities in Colombia;
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senior management's general inexperience in oil and gas operations in Colombia;
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members of senior management not being based in Colombia; and
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other factors listed from time to time in the Company's filings with the Securities and Exchange Commission.
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Critical Accounting Policies 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, 2012 and this Quarterly Report on Form 10-Q for the period ended September 30, 2013.
12
Overview
Heavy Earth Resources, Inc. (the “Company”), a Florida corporation, is engaged in the acquisition, exploration, development and production of oil and gas properties. As of September 30, 2013, the Company, through its wholly-owned subsidiary Syncline Technologies, owned a 25% participating interest in the La Maye Block located in the Lower Magdalena Basin, Colombia (“La Maye Block”). In addition, following the Deep Core Sale (as described more fully below), which closed on August, 28, 2013, we retained a 15% participating interest in the Morichito Block located in the Los Llanos Basin of Colombia (“Morichito Block”).
Deep Core Sale
On August 28, 2013, the Company entered into the following agreements in connection with its sale of a 100% of its equity ownership of its subsidiary, Deep Core, Inc., a Cayman Islands company (this transaction is referred to herein as the “Deep Core Sale”):
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Share Purchase Agreement dated as of the same date (the “Purchase Agreement”), by and between the Company and Black Energy Oil & Gas Corp., a Panamanian company (“Black Energy”); and
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·
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Letter agreement dated as of the same date (the “Letter Agreement”), by and between the Company and Deep Core (Barbados) Inc., a Barbados corporation wholly owned by the Company (“Deep Core Barbados”), on the one hand, and DCX SAS on the other hand.
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Pursuant to the Purchase Agreement, the Company agreed to sell to Black Energy, and Black Energy agreed to purchase from the Company, the shares of Deep Core Inc., (“Deep Core”) held by the Company, representing all of the issued and outstanding share capital of Deep Core (the “Shares”). Deep Core, a Cayman Islands company, owns 99.675% of the issued and outstanding share capital of DCX SAS, a Columbian company (“DCX”) that owns a 50% participating interest in the Morichito Block located in the Llanos Basin, Columbia. In addition:
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Total consideration for the Shares is $1.5 million (the “Proceeds”) plus the assumption of $6 million of existing liabilities as well as all future liabilities of Deep Core.
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The Company shall retain a 15% participation interest in the Morichito Block (the “Interest”), to be held by Deep Core Barbados, pursuant to an agreement to be entered into by and between DCX and Deep Core Barbados.
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From and after the closing of the Agreement (the “Closing”), Black Energy (and DCX) shall hold the Interest in trust and for the benefit of Deep Core Barbados until such time that Columbia’s National Agency of Hydrocarbons can formally approve the transfer of the Interest to Deep Core Barbados.
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From and after the Closing, Black Energy shall cause DCX to commence such exploratory activities at the Morichito Block as set forth in Schedule B of the Agreement, and to pay for all attendant expenses up to $10 million. Expenses in excess thereof, as well as any other expenses, shall be borne by Black Energy and Deep Core Barbados pro rata to their respective participation interests. If Black Energy fails to perform any of its obligations described herein, Black Energy agrees to transfer the Shares back to the registrant upon notice for no additional consideration.
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The Company agrees that the Proceeds are credited toward the Company’s contribution to the initial $10 million in expenses relating to the Morichito Block that are attributable to the Interest.
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The Company has a right of first refusal with respect to any proposed transfer of the Shares, the shares of DCX held by Deep Core, or DCX’s participation interest in the Morichito Block. Black Energy shall notify the registrant in writing at least 30 business days prior to the closing of any such transfer, and the registrant shall have 10 business days therefrom to exercise its refusal right.
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Pursuant to the Letter Agreement, DCX acknowledges the Interest under the terms of the Purchase Agreement and the rights of the Company thereto.
Third Quarter Highlights
Morichito Block
The Company completed an advanced 94 square kilometers 3D seismic survey over the northern portion of the Morichito Block, located within producing trends of the prolific Llanos Basin, to define and identify high-impact exploration drilling targets. The 3D seismic survey was completed ahead of schedule and on budget and preliminary analysis has indicated the quality of the data is better than expected. Subsequent to June 30, 2012, we announced the completion of its merging of its new 3D seismic surveys with previous 3D seismic surveys and the fulfillment of its obligations for the relinquishment of 50% of the Morichito Block area in conjunction with a two-year E&P Contract extension from the Colombian ANH.
13
Black Energy is currently working in the Llanos basin in order to begin testing the Morichito 5 (M5) discovery well. This includes continuation of the roadwork necessary in order to allow access for the rig to enter the site as well as the transportation of equipment required for testing. The construction of the all-weather road will be suspended until the flow rate of M5 has been determined. The Company expects the testing will be completed prior to the end of 2013.
La Maye Block
The operator is currently working on the entry to the Noelia well located in the La Maye Block. Testing will begin soon thereafter and the Company expects such testing will be completed by the end of 2013.
Accounts Payable
As discussed more fully above, Black Energy acquired Deep Core, which, in turn, owns 99.675% of the issued and outstanding share capital of DCX. As part of that acquisition, all of liabilities associated with DCX have been assumed by Black Energy. Current accounts payable reflects the Company’s ongoing obligations with the La Maye block as well as domestic operations of the Company.
Results of Operations
For the Three Months Ended September 30, 2013, as Compared to the Three Months ended September 30, 2012.
Revenues
We had $0 revenues for the three months ended September 30, 2013 and 2012.
Operating Expenses
For the three months ended September 30, 2013, our total operating expenses were $227,635, which consisted of general and administrative expenses of $222,167, and legal and professional fees of $5,468. By comparison, for the three months ended September 30, 2012, our total operating expenses were $4,659,359, 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 of $4,095,016. The overall reduction in our operating expenses is directly attributable to the sale of our subsidiary during the current period as compared to the prior year. As a result of the sale, we do not anticipate additional significant exploration and lease operating costs in the future and will be limited to the extent of our remaining 15% participation interest in the oil and gas properties for future impairment charges. We recorded a loss on the sale in the amount of $7,419,713.
Net Loss
For the three months ended September 30, 2013, we had a net loss of $7,670,348. By comparison, for the three months ended September 30, 2012, we had a net loss of $5,664,692. We expect to incur net losses for the foreseeable future.
For the Nine Months ended September 30, 2013, as Compared to the Nine Months ended September 30, 2012.
Revenues
We had $0 revenues for the nine months ended September 30, 2013 and 2012.
14
Operating Expenses
For the nine months ended September 30, 2013, our total operating expenses were $894,667, which consisted of exploration and lease operating costs of $59,459, depreciation and amortization expense of $3,252, general and administrative expenses of $518,256, legal and professional fees of $294,120, and impairment of oil and gas properties of $19,580. By comparison, for the nine months ended September 30, 2012, our total operating expenses were $5,272,721, 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 overall reduction in our operating expenses is directly attributable to the sale of our subsidiary during the current period as compared to the prior year. As a result of the sale, we do not anticipate additional significant exploration and lease operating costs in the future and will be limited to the extent of our remaining 15% participation interest in the oil and gas properties for future impairment charges. We recorded a loss on the sale in the amount of $7,419,713.
Net Loss
For the nine months ended September 30, 2013, we had a net loss of $8,453,548. By comparison, for the nine months ended September 30, 2012, we had a net loss of $1,069,950. We expect to incur net losses for the foreseeable future.
Liquidity and Capital Resources
As of September 30, 2013, our total assets were $1,088,812. Our total current assets consist of cash and cash equivalents of $87,012, and other receivables of $1,950. As of September 30, 2013, our participation interest in the Morichito Block was valued at $999,850.
Our total current liabilities of $1,790,890 consist of accounts payable and accrued expenses of $1,383,333, and related party advances payable of $373,065 as of September 30, 2013.
Over the last nine months, we have been financing our operations through the previous 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.
As of September 30, 2013, we had a cash of $87,012. We will need additional funds to satisfy our working capital requirements to operate at our current level of activity 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 2013, we expect that our subsidiaries will not incur significant exploration and development costs due to the sale of the Deep Core to Black Energy. However, in 2014, the Company expects to incur exploration and development costs that will be associated with the La Maye Block. 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.
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.
15
Off-Balance Sheet Arrangements.
None.
Item 4. Controls and Procedures.
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, 2013, 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. Due to Black Energy’s recent purchase of the Company’s 100% equity ownership of our previous subsidiary, Deep Core (see description of this purchase above in the section titled “Deep Core Sale”), which in turn owns 99.675% of the issued and outstanding share capital of DCX, the operator of the Morichito Block, the Company believes that it has no legal proceedings to which it is a party, nor to the best of management’s knowledge, are any material legal proceedings contemplated.
Item 1A. Risk Factors.
Not applicable.
On or about July 30, 2013, the Company issued an aggregate 125,000 restricted shares of its common stock to two holders of its 6% Senior Convertible Debentures (dated August 29, 2012) (the “Debentures”) in exchange for their waiver of the “Equity Conditions” as defined in section 1 of the Debentures, which conditions, under the terms of the Debentures, the Company was required to either meet or have waived, in order to be able to pay interest due to such holders under the terms of the Debentures with shares of the Company’s common stock. The shares were issued to accredited investors in a transaction which the Company believes satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the “Act”), which exemption is specified by the provisions of Section 4(a)(2) of that Act.
16
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
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101.ins
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XBRL Instance Document*
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101.def
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XBRL Taxonomy Definition Linkbase Document*
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101.sch
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XBRL Taxonomy Schema Document*
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101.cal
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XBRL Taxonomy Calculation Linkbase Document*
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101.lab
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XBRL Taxonomy Label Linkbase Document*
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101.pre
|
XBRL Taxonomy Presentation Linkbase Document*
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* Filed herewith.
17
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.
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Heavy Earth Resources, Inc.,
a Florida corporation
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December 16, 2013
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By:
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/s/ Grant Draper
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Grant Draper,
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Its:
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President, Chief Executive Officer and Director
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(Principal Executive Officer)
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December 16, 2013
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By:
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/s/ Anthony Ives
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Anthony Ives,
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Its:
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Chief Financial Officer and Director
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(Principal Financial and Accounting Officer)
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18