Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HEVI > SEC Filings for HEVI > Form 10-Q on 19-Nov-2012All Recent SEC Filings

Show all filings for HEAVY EARTH RESOURCES, INC.

Form 10-Q for HEAVY EARTH RESOURCES, INC.


19-Nov-2012

Quarterly Report


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 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.


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.


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.


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.


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.


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 . . .

  Add HEVI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HEVI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.