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HEVI > SEC Filings for HEVI > Form 10-K on 22-May-2013All Recent SEC Filings

Show all filings for HEAVY EARTH RESOURCES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for HEAVY EARTH RESOURCES, INC.


22-May-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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. 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 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. In addition, these accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in this Annual Report on Form 10-K.


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 $1,767 and COP $1,942 and to USD $1.00 at December 2012 and December 2011, respectively, for purposes of the Company's balance sheets and the average rates of COP $1,796 and COP $1,846 to USD $1.00 for the years ended December 31, 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.

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 became our historical financial statements, which the condensed pro forma balance sheet and condensed statement of operations depict our recapitalization. For further information, please refer to our Current Report on Form 8-K filed on May 4, 2012.

The following discussion of financial condition and results of operations should be read in conjunction with (i) our financial statements for the period ended December 31, 2012, (ii) Deep Core's audited financial statements for the period from inception (March 29, 2011) through December 31, 2012, together with notes thereto, (iii) DCX's audited financial statements for the years ended December 31, 2012 and December 31, 2011, together with notes thereto as included in this Annual Report on Form 10-K.


For the year ended December 31, 2012, as compared to the year ended December 31, 2011.

Results of Operations.

Revenues. We had no revenues for the year ended December 31, 2012 and 2011.

Operating Expenses. For the year ended December 31, 2012, our total operating expenses were $7,689,425 which consisted of exploration and lease operating costs of $_107,584, depreciation and amortization expense of $8,688, general and administrative expenses of $1,094,167, and legal and professional fees of $1,248,406. By comparison, for the year ended December 31, 2011, our total operating expenses were $1,017,604 which consisted of exploration and lease operating costs of $91,752, depreciation and amortization expense of $27,488, general and administrative expenses of $780,334, and legal and professional fees of $145,518.

Net Loss. For the year ended December 31, 2012, we had a net loss of $8,457,415. By comparison, for the year ended December 30, 2011, we had a net loss of $1,009,073. We expect to incur net losses for the foreseeable future.

Liquidity and Capital Resources. As of December 31, 2012, our total assets were $13,035,737. Our total current assets consist of cash and cash equivalents of $178,136, restricted cash of $542,234, short term investments of $103,211, inventory of $45,420, other receivables of $873,965 . Restricted cash of $542,234 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 $103,211include 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 $45,420 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 $873,965 consists of amounts due from working interest partners in the Morichito Block for the seismic exploration costs and employees.

As of December 31, 2012, our oil and gas properties of $11,024,000 and property plant and equipment of $234,453 less accumulated depreciation and amortization of $27,078. Our oil and gas properties of $11,292,771 consist of the net costs incurred for evaluated properties and in exploration and development activities as of December 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.

Our total current liabilities of $6,516,192 consist of accounts payable and accrued expenses of $6,456,722, and related party payables of $59,470, as of December 31, 2012. A significant portion of the accounts payable on our consolidated balance sheet as of December 31, 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 assumed liabilities 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 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 May 3, 2012, we cancelled 9,324,042 shares of our common stock from a director in connection with the Share Exchange.?


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.

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.

On July 11, 2012, we entered into subscription agreements with three investors pursuant to which we issued to the investors (i) an aggregate of 333,332 shares of our common stock at a purchase price of $0.60 per share and (ii) common stock purchase warrants granting the right to purchase an aggregate of 83,333 shares of our common stock at an exercise price of $1.25 per share in exchange for $200,000 in proceeds. The shares and warrants were issued in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act, which exemption is specified by the provisions of Section 4(2) of that act and Rule 506 of Regulation D promulgated pursuant to that act by the SEC.

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 shares and warrants were issued in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act, which exemption is specified by the provisions of Section 4(2) of that act and Rule 506 of Regulation D promulgated pursuant to that act by the SEC.

On November 20, 2012, we entered into a subscription agreement with a foreign investor pursuant to which we issued to the investor (i) 50,000 shares of our common stock at a purchase price of $0.60 per share and (ii) common stock purchase warrants granting the right to purchase 50,000 shares of our common stock at an exercise price of $0.85 per share in exchange for $30,000 in proceeds. The shares and warrant were issued in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act, which exemption is specified by the provisions of Regulation S promulgated pursuant to that act by the SEC.

On December 6, 2012, we entered into a securities purchase agreement with a foreign investor pursuant to which we issued to the investor (i) an aggregate principal value of $500,000 of 6% senior convertible debentures and (ii) common stock purchase warrants granting the right to purchase an aggregate of 833,333 shares of our common stock at an exercise price of $0.85 per share in exchange for $500,000 in proceeds. The shares and warrant were issued in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act, which exemption is specified by the provisions of Regulation S promulgated pursuant to that act by the SEC.

On December 20, 2012, we issued 200,000 shares of our common stock to two consultants at a purchase price of $0.77 per share. The shares and warrant were issued in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act, which exemption is specified by the provisions of Section 4(2) of that act and Rule 506 of Regulation D promulgated pursuant to that act by the SEC.

As of December 31, 2012, we have cash and cash equivalents of $178,135. 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.

Recent Events. On February 13, 2013, we entered into a securities purchase agreement with a foreign investor pursuant to which we issued to the investor
(i) an aggregate principal value of $1,000,000 of 15% convertible debentures and
(ii) common stock purchase warrants granting the right to purchase an aggregate of 2,000,000 shares of our common stock at an exercise price of $0.60 per share in exchange for $1,000,000 in proceeds. The shares and warrant were issued in a transaction which we believe satisfies the requirements of that exemption from the registration and prospectus delivery requirements of the Securities Act, which exemption is specified by the provisions of Regulation S promulgated pursuant to that act by the SEC.


During 2013, 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 for the next twelve months. 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.

We are not currently conducting any research and development activities. We do not anticipate conducting such activities in the near future. We do not anticipate that we will need to hire additional employees or independent contractors at this time. We do not anticipate that we will need to purchase or lease additional equipment for the foreseeable future.

Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.

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