UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] 15, ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2008
OR
[ ] 15, TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-51489
Earth Energy Reserves, Inc.
(formerly Asian American Business Development Company)
(Exact name of Small Business Issuer in its charter)
Nevada 75-3000774
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
621 17TH Street #1640
Denver, CO 80293
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (303) 297-0500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.0001 par value
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [x]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange act
Yes [ ] No [x]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (section 232.406 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes [ ] No [x]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for at least the part 90 days.
Yes [x] No[ ]
2
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained hereof, and will not be
contained, to will be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of "large accelerated filer,"
"accelerated file" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [x]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the
registrant's most recently completed second fiscal quarter. The market
value of the registrant's voting $.0001 par value common stock held by
non-affiliates of the registrant was approximately $0.00.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. The number
of shares outstanding of the registrant's only class of common stock, as
September 30, 2010 was 11,059,982 shares of its $.0001 par value common
stock.
No documents are incorporated into the text by reference.
3
EARTH ENERGY RESERVES, INC.
Form 10-K
For the Fiscal Year Ended December 31, 2008
Table of Contents
Part I
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 8
ITEM 1B. UNRESOLVED STAFF COMMENTS 8
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
Part II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 9
ITEM 6. SELECTED FINANCIAL DATA 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 30
ITEM 9A. CONTROLS AND PROCEDURES 30
ITEM 9B. OTHER INFORMATION 31
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, CONTROL
PERSONS AND CORPORATE GOVERANCE; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT 32
ITEM 11. EXECUTIVE COMPENSATION 36
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE 39
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 40
Part IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 41
4
PART I
ITEM 1. BUSINESS
Earth Energy Reserves, Inc. was incorporated in the State of Nevada on
February 12, 2002 as Wiltex First, Inc. On March 10, 2005, Earth Energy
filed a certificate of amendment with the State of Nevada changing its
name to Asian American Business Development Company. On March 13, 2006,
Earth Energy filed a certificate of amendment with the State of Nevada
changing its name to Earth Energy Reserves, Inc.
On December 16, 2005, Earth Energy elected to be regulated as a Business
Development Company as that term is defined in Section 54 of the
Investment Company Act. As a BDC, Earth Energy was subject to the laws
and regulations contained in the Investment Company Act of 1940. As a
BDC, Earth Energy became subject to significant regulation of its
activities.
On February 10, 2006, the board of directors unanimously approved a
proposal to withdraw Earth Energy's election to be treated as a BDC as
soon as practicable, so that it might again conduct business as a
regular company rather than as a BDC subject to the Investment Company
Act.
Our current business plan has changed the nature of Earth Energy's
business from investing, reinvesting, owning, holding, or trading in
investment securities to an independent oil and gas company focused on
the acquisition, drilling and production of oil and gas in the United
States. The board of directors believed that BDC regulation would be
inappropriate for such activities.
Our principal geophysical areas of interest are Louisiana, Texas,
Oklahoma, Alabama, Montana, West Virginia, New Mexico and Wyoming.
Our Business Strategy
We intend to invest primarily in domestic oil and gas interests,
including prospects, leases, wells, mineral rights, working interests,
royalty interests, overriding royalty interests, net profits interests,
production payments, farm-ins, drilling to earn arrangements,
partnerships, easements, rights of way, licenses and permits. We intend
to produce and market production from the oil and gas interests and
may enter into operating, product marketing, and other such
arrangements in connection with such production and marketing.
Our primary strategy is to acquire leaseholds that are unexplored or
over looked in unconventional gas areas and hold low-risk promise of
large and wide-spread accumulations of natural gas reserves. We will
also target select producing gas fields that we identify as under-
developed by their current operator and will seek well-above average
returns by re-developing these unconventional opportunities.
We will also seek to be a low-cost developer of unconventional fields by
applying the latest multi-lateral horizontal drilling methods, in
combination with non-damaging under-balanced drilling techniques. Our
objective will be to optimize capital efficiency as we develop the full
5
reserve potential of each field. While our horizontal applications are
today more proven for a CBM reservoir, we may acquire shale gas
resources as well.
We may acquire producing properties based on our view of the pricing
cycles of oil and gas and available exploitation opportunities of
proved, probable and possible reserves. As of September 30, 2010, we
had not acquired any such additional properties.
We intend to control our overhead expenses and up-front costs in seismic
data, hardware, software, geological and geophysical overhead and
prospect generation. We also intend to outsource our geological,
geophysical, reservoir engineering and land functions and to maintain
tight control over general and administrative expenses.
Marketing and Pricing
Our future revenues will be derived principally from the sale of CBM
natural gas. As a result, our revenues will be determined, to a large
degree, by prevailing market prices for the gas. We intend to sell our
gas under contractual arrangements or on the spot market at prevailing
market prices. The price for gas is based on supply and demand, and we
cannot accurately predict or control the price we may receive for our
production.
Price decreases would adversely affect our revenues, cash flow,
profits and the value of our reserves. Historically, and particularly
in recent times, these commodity prices have fluctuated widely. Among
the factors that can cause this volatility are:
- The domestic and foreign supplies of oil and gas,
- Overall economic conditions,
- Product demand,
- Weather conditions,
- The price and availability of competitive fuels,
- Political and economic conditions in the Middle East and other
producing regions,
- The level of oil and gas imports,
- Domestic and foreign governmental regulations,
- Potential price controls, and
- Environmental issues.
We may enter into hedging arrangements to reduce our exposure to
decreases in the prices of oil and gas. Hedging arrangements may expose
us to risk of financial loss in circumstances where:
- There is a change in the expected differential between the hedge
price and the actual price of gas;
- Our production and/or sales are less than expected; and/or
- The counter party to the hedging contract defaults on its
contractual obligations.
6
In addition, hedging arrangements may limit the benefit we would receive
from increases in the prices of our production. On the other hand, we
may choose not to engage in hedging transactions in the future. As a
result, we may be more adversely affected by changes in prices than
producers who engage in hedging transactions.
Competition
We will compete with numerous other companies in virtually all facets of
our business. Our competitors in the exploration, development,
acquisition and production business include major integrated companies
as well as numerous large and small independents, including many that
have significantly greater financial resources and in-house technical
personnel.
Government Regulations
- Federal Income Tax. Federal income tax laws significantly
affect oil and gas operators. The principal provisions that will
affect us are those that permit us to deduct as incurred, rather than
to capitalize and amortize, our intangible drilling and development
costs and to claim 15% depletion on a portion of our oil and gas
production.
- Environmental Matters. Oil and gas operations are subject to
extensive federal regulation and, with respect to federal leases, to
interruption or termination by governmental authorities on account of
environmental and other considerations such as the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) also
known as the "Super Fund Law." The trend towards stricter standards
in environmental legislation and regulation could increase our costs
and others in the industry. Oil and gas lessees are subject to
liability for the costs of clean-up of pollution resulting from a
lessee's operations, and may also be subject to liability for pollution
damages. We intend to obtain insurance against costs of clean-up
operations, but we have no such insurance at this time and it is
unlikely that we will be able to fully insure against all such risks. A
serious incident of pollution may also result in the Department of the
Interior requiring lessees under federal leases to suspend or cease
operation in the affected area.
The Oil Pollution Act of 1990 and regulations hereunder impose a variety
of regulations on "responsible parties" related to the prevention of oil
spills and liability for damages resulting from such spills in United
States waters. The OPA assigns liability to each responsible party
for oil removal costs and a variety of public and private damages.
While liability limits apply in some circumstances, a party cannot take
advantage of liability limits if the spill was caused by gross
negligence or willful misconduct or resulted from violation of federal
safety, construction or operating regulations. Few defenses exist to
the liability imposed by the OPA. In addition, to the extent we acquire
offshore leases and those operations affect state waters, we may be
subject to additional state and local clean-up requirements or incur
liability under state and local laws. The OPA also imposes ongoing
requirements on responsible parties, including proof of financial
7
responsibility to cover at least some costs in a potential spill. We
cannot predict whether the financial responsibility requirements under
the OPA amendments will adversely restrict our proposed operations or
impose substantial additional annual costs to us or otherwise materially
adversely affect us.
Our operations will be subject to numerous federal, state and local laws
and regulations controlling the discharge of materials into the
environment or otherwise relating to the protection of the environment.
Such laws and regulations, among other things, impose absolute
liability on the lessee for the cost of clean-up of pollution resulting
from a lessee's operations, subject the lessee to liability for
pollution damages, may require suspension or cessation of operations in
affected areas, and impose restrictions on the injection of liquids into
subsurface aquifers that may contaminate groundwater. Such laws could
have a significant impact on our operating costs, as well as the oil
and gas industry in general. Federal, state and local initiatives to
further regulate the disposal of oil and gas wastes are also pending in
certain jurisdictions, and these initiatives could have a similar impact
on us. Our operations will also be subject to additional federal, state
and local laws and regulations relating to protection of human health,
natural resources, and the environment pursuant to which we may incur
compliance costs or other liabilities.
Other Laws and Regulations. Various laws and regulations often
require permits for drilling wells and also cover spacing of wells, the
prevention of waste of gas and oil including maintenance of certain
gas/oil ratios, rates of production and other matters. The effect of
these laws and regulations, as well as other regulations that could be
promulgated by the jurisdictions in which we have production, could be to
limit the number of wells that could be drilled on our properties and
to limit the allowable production from the successful wells completed
on our properties, thereby limiting our revenues.
Employees
As of September 30, 2010, we had five employees, including the chairman
of the board of directors, president and chief executive officer,
executive vice president and chief financial officer, vice president
internal relations and vice president administration.
We intend to use the services of independent consultants and
contractors to perform various professional services, including
reservoir engineering, land, legal, accounting, environmental and tax
services. We will also seek alliances in the areas of geological and
geophysical services and prospect generation, evaluation and prospect
leasing. We intend to rely on third parties to drill, produce and
market our gas and oil. We believe that by limiting our personnel costs,
we should be able to better control total costs and retain project
management flexibility. We intend to add full time management and
operations personnel in the future, as our business strategy is
implemented.
8
ITEM 1A. RISK FACTORS
Not applicable
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
ITEM 2. PROPERTIES
Our corporate headquarters office is located at 621 17th Street, #1640,
Denver, Colorado 80293. These offices are approximately 2,357 square
feet. These premises are leased on a 30 month basis commencing in
August 2010 for the average monthly lease payment of $2,884.
ITEM 3. LEGAL PROCEEDINGS.
The registrant is not involved in any legal proceedings at this date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of the fiscal year ended December 31, 2008, no
matters were submitted to a vote of the registrant's security holders,
through the solicitation of proxies.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 5(a)
a) Market Information. The registrant's common stock is not traded
over the counter. We may apply for the listing of our common stock
within the next twelve months.
b) Holders. At September 30, 2010, there were approximately 100
shareholders of the registrant.
c) Dividends. Holders of the registrant's common stock are entitled to
receive such dividends as may be declared by its board of directors. No
dividends on the registrant's common stock have ever been paid, and the
registrant does not anticipate that dividends will be paid on its common
stock in the foreseeable future.
d) Securities authorized for issuance under equity compensation plans.
Not applicable
e) Performance graph. Not applicable.
f) Sale of unregistered securities. In 2008, the registrant sold
25,000 shares of its $0.0001 par value common stock to one individual.
All shares sold were priced at $1.00 per share and were sold pursuant to
an exemption under Section 4(2) of the Securities Act of 1933.
Item 5(b) Use of Proceeds. Not applicable.
Item 5(c) Purchases of Equity Securities by the issuer and
affiliated purchasers. Not applicable
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Trends and Uncertainties. Earth Energy is an independent company
engaged in the acquisition, drilling and production of CBM natural gas
in the United States. Our future operations may be adversely affected
by fluctuating oil and gas prices, changing domestic and foreign
economic and political environments and any prolonged recessionary
periods.
As long-term compensation incentive, Earth Energy has granted stock
options to its officers and directors. As a result, these grants will
have a negative impact on our financial statements.
10
Investing Activities. For the year ended December 31, 2008, Earth
Energy sold oil and gas leases of $63,202 resulting in net cash flows
provided by investing activities of $63,202.
For the year ended December 31, 2007, Earth Energy acquired oil and gas
leaseholds of $126,897 resulting in net cash used in investing
activities of $126,897.
Financing Activities. During the year ended December 31, 2008, Earth
Energy repurchased common stock for $5,000 and received proceeds of
$25,000 from the sale of common stock. As a result, Earth Energy had
net cash used by financing activities of $20,000.
During the year ended December 31, 2007, Earth Energy had advances of
$2,850 from the majority shareholder and sold common stock for $110,000.
As a result, Earth Energy had net cash provided by financing activities
of $112,850.
Results of Operations. Earth Energy has not had any material revenue
since inception. All expenses have been paid by the majority
shareholder or a related party owned by the majority shareholder.
For the year ended December 31, 2008 and 2007, Earth Energy earned
revenues of $3,592 and $10,750. General and administrative expenses for
the year ended December 31, 2008 consisted mainly of travel of $58,075,
legal and professional fees of $33,885, management fees of $12,000 and
consulting fees of $35,000. General and administrative expenses
decreased from $327,519 for the year ended December 31, 2007 to $150,577
for the year ended December 31, 2008. The decrease in general and
administrative expenses was due mainly to a significant reduction in
business activities. Additionally, Earth Energy had compensation paid
in stock valued at $1,750,000 for the year ended December 31, 2007.
Interest expense increased from $10,905 for the year ended December 31,
2007 to $16,946 for the year ended December 31, 2007. The increase of
$6,041 was due to interest expense payable to a related party and
majority shareholder.
Earth Energy, together with its new management group, is presently in the
process of raising additional equity capital which effort, if successful,
will be used to partially finance its contemplated future oil and gas
business activities.
Recent Accounting Pronouncement
In January 2010, the Financial Accounting Standards Board issued
Accounting Standards Update 2010-06, "Fair Value Measurements and
Disclosures (Topic 820) - Improving Disclosures about Fair Value
Measurements." This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as
set forth in Accounting Standards Codification 820. ASU 2010-06 amends
ASC 820 to now require: (1) a reporting entity should disclose
separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the reasons for the
transfers; and (2) in the reconciliation for fair value measurements
11
using significant unobservable inputs, a reporting entity should present
separately information about purchases, sales, issuances, and
settlements. In addition, ASU 2010-06 clarifies the requirements of
existing disclosures. ASU 2010-06 is effective for interim and annual
reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. Early
application is permitted. The Company will comply with the additional
disclosures required by this guidance upon its adoption in January 2010.
In June 2009, the FASB issued guidance under ASC 105, "Generally
Accepted Accounting Principles." This guidance established a new
hierarchy of GAAP sources for non-governmental entities under the FASB
Accounting Standards Codification. The Codification is the sole source
for authoritative U.S. GAAP and supersedes all accounting standards in
U.S. GAAP, except for those issued by the SEC. The guidance was
effective for financial statements issued for reporting periods ending
after September 15, 2009. The adoption had no impact on the Company's
financial position, cash flows or results of operations.
In August 2009, the FASB issued ASU No. 2009-05, "Fair Value
Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair
Value," related to fair value measurement of liabilities. This update
provides clarification that in circumstances in which a quoted price in
an active market for an identical liability is not available, a
reporting entity is required to measure fair value using one or more
valuation techniques. This guidance is effective for the first reporting
period beginning after issuance
In April 2009, the FASB updated its guidance under ASC 820, "Fair Value
Measurements and Disclosures," related to estimating fair value when the
volume and level of activity for an asset or liability have
significantly decreased and identifying circumstances that indicate a
transaction is not orderly. The guidance was effective for interim and
annual reporting periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009. The adoption of this
guidance did not have any impact on the Company's results of operations
Also in April 2009, the FASB updated its guidance under ASC 825,
"Financial Instruments," which requires disclosures about fair value of
financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This guidance also
requires those disclosures in summarized financial information at
interim reporting periods. The guidance was effective for interim
reporting periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009.
On December 31, 2008, the SEC published final rules and interpretations
updating its oil and gas reporting requirements. Many of the revisions
are updates to definitions in the existing oil and gas rules to make
them consistent with the Petroleum Resource Management System, which is
a widely accepted standard for the management of petroleum resources
12
that was developed by several industry organizations. Key revisions
include the ability to include nontraditional resources in reserves, the
use of new technology for determining reserves, permitting disclosure of
probable and possible reserves, and changes to the pricing used to
determine reserves based on a 12-month average price rather than a
period end spot price. The average is to be calculated using the first
day-of-the-month price for each of the 12 months that make up the
reporting period. The new rules are effective for annual reports for
fiscal years ending on or after December 31, 2009. Early adoption is
not permitted.
In the opinion of management, these statements will have no material
effect on the financial statements of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EARTH ENERGY RESERVES, INC.
Index to the Financial Statements
Report of Independent Registered Public Accounting Firm 13
Financial Statements of Earth Energy Reserves, Inc.:
Balance Sheets as of December 31, 2008 and 2007 14
Statements of Operations For the Years
Ended December 31, 2008 and 2007 15
Statements of Stockholders' Equity (Deficit) For
the Years Ended December 31, 2008 and 2007 16
Statements of Cash Flows For the Years Ended
December 31, 2008 and 2007 17
Notes to Financial Statements 19
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Earth Energy Reserves, Inc.
Estes Park, Colorado
We have audited the accompanying balance sheets of Earth Energy
Reserves, Inc. as of December 31, 2008 and 2007, the related statements
of operations, changes of stockholders' deficit, and cash flows for the
years then ended. Earth Energy Reserves, Inc.'s management is
responsible for these financial statements. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Earth Energy
Reserves, Inc. as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has generated minimal revenues from
operations, has substantial accumulated deficit and working capital
deficiency raising substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 2. The 2008 and 2007 financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/Killman, Murrell & Company, P.C.
Killman, Murrell & Company, P.C.
Odessa, Texas
September 30, 2010
14
EARTH ENERGY RESERVES, INC.
BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
ASSETS
2008 2007
CURRENT ASSETS
Cash $ 8,394 $ 45,089
Accounts Receivable -- 2,204
---------- ----------
TOTAL CURRENT ASSETS 8,394 47,293
---------- ----------
OTHER ASSETS
Leon River Energy Leases - Proved Property -- 53,747
Walker Creek Unit - Unproved Property -- 73,150
---------- ----------
TOTAL OTHER ASSETS -- 126,897
---------- ----------
TOTAL ASSETS $ 8,394 $ 174,190
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Compensation Payable $ 75,000 $ 75,000
Note Payable, Related Party 78,223 60,873
Advances from Majority Shareholder 32,450 32,450
Accrued Expenses 30,893 17,873
Accrued Interest 15,732 6,732
Accrued Interest, Majority Shareholder 2,596 --
---------- ----------
TOTAL CURRENT LIABILITIES 234,894 192,928
---------- ----------
STOCKHOLDERS' DEFICIT
Series A Preferred Stock $.0001 Par Value,
Authorized 10,000,000 Shares, None Issued -- --
Common Stock, $.0001 Par Value,
Authorized 90,000,000 Shares; Issued and
Outstanding 9,422,000 and 10,927,000
in 2008 and 2007, respectively 942 1,093
Additional Paid-in Capital 5,502,358 5,482,207
Retained Deficit (5,729,800) (5,502,038)
---------- ----------
TOTAL STOCKHOLDERS' DEFICIT (226,500) (18,738)
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 8,394 $ 174,190
========== ==========
The accompanying notes are an integral
part of these financial statements.
15
EARTH ENERGY RESERVES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
---- ----
INCOME
Oil and Gas Income $ 3,592 $ 10,750
----------- -----------
EXPENSES
Lease Operating Expenses -- 2,630
Production Taxes 143 283
Compensation Paid in Stock -- 1,750,000
General and Administrative Expenses 150,577 327,519
----------- -----------
Total Operating Expenses 150,720 2,080,432
----------- -----------
NET OPERATING LOSS (147,128) (2,069,682)
----------- -----------
OTHER INCOME (EXPENSE)
Impairment Loss on Unproved Property (53,747) --
Loss on Sale of Proved Property (9,948) --
Interest Income 7 1,003
Interest Expense, Related Party (16,946) (10,905)
----------- -----------
LOSS BEFORE INCOME TAXES (227,762) (2,079,584)
----------- -----------
INCOME TAXES -- --
----------- -----------
NET LOSS $ (227,762) $(2,079,584)
=========== ===========
BASIC AND DILUTED LOSS
PER SHARE $ (0.02) $ (0.19)
============ ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 10,051,000 10,783,000
========== ==========
The accompanying notes are an integral
part of these financial statements.
16
EARTH ENERGY RESERVES, INC.
STATEMENTS CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2008 and 2007
Additional
Common Stock Paid- Retained
Shares Amount In Capital (Deficit) Total
---------- ---------- ---------- ---------- ---------
<s> <c> <c> <c> <c> <c>
BALANCE, December 31,
2006 10,697,000 $ 1,070 $ 3,622,230 $(3,422,454) $ 200,846
Common Stock Issued
For Services 1,750,000 175 1,749,825 - 1,750,000
Sale of common stock 110,000 11 109,989 - 110,000
Common Stock Returned to
the Company (1,630,000) (163) 163 - -
Net Loss - - - (2,079,584) (2,079,584)
---------- --------- ----------- ----------- -----------
BALANCE, December 31,
2007 10,927,000 1,093 5,482,207 (5,502,038) (18,738)
Stock Re-purchase (5,000) (1) (4,999) - (5,000)
Sale of Common Stock 25,000 2 24,998 - 25,000
Common Stock Returned to
the Company (1,525,000) (152) 152 - -
Net Loss - - - (227,762) (227,762)
---------- --------- ---------- ----------- -----------
BALANCE, December 31,
2008 9,422,000 $ 942 $5,502,358 $(5,729,800) $ (226,500)
========== ========= ========== =========== ===========
The accompanying notes are an integral part
of these financial statements.
17
EARTH ENERGY RESERVES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
---- ----
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Loss $ (227,762) $(2,079,584)
Adjustments to Reconcile Net Loss
to Net Cash used in Operating Activities
Interest Expense - Related Party 5,350 4,173
Interest Expense - Majority Shareholder 2,596 --
Interest Expense - Compensation Payable 9,000 --
Stock Issued for Services -- 1,750,000
Impairment of Unproved Property 53,747 --
Loss on Sale of Proved Property 9,948 --
Changes in Operating Assets and Liabilities
Accounts Receivable 2,204 (2,204)
Compensation Payable -- 75,000
Accrued Expenses 13,020 7,999
Advance from Related Party 12,000 12,000
----------- -----------
NET CASH (USED IN)
OPERATING ACTIVIES (119,897) (232,616)
----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Acquisition of Oil and Gas Leaseholds -- (126,897)
Proceeds from Sale of Proved Property 63,202 --
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 63,202 (126,897)
----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Advances from Majority Shareholder -- 2,850
Repurchase of Common Stock (5,000) --
Sale of Common Stock 25,000 110,000
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 20,000 112,850
----------- -----------
NET (DECREASE) IN CASH (36,695) (246,663)
CASH AT BEGINNING OF YEAR 45,089 291,752
----------- -----------
CASH AT END OF YEAR $ 8,394 $ 45,089
=========== ===========
18
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid During the Period for:
Interest $ -- $ --
=========== ===========
Income Taxes $ -- $ --
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Common Stock Par Value $ (152) $ (163)
Additional Paid-in-Capital 152 163
----------- -----------
$ -- $ --
=========== ===========
The accompanying notes are an integral
part of the financial statements.
19
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Earth Energy Reserves, Inc., (the "Company") formerly Asian American
Business Development Company was incorporated in the State of Nevada on
February 12, 2002 as Wiltex First, Inc. On March 10, 2005, the Company
filed a certificate of amendment with the State of Nevada changing its
name to Asian American Business Development Company and on March 13,
2006, the Company's name was changed to Earth Energy Reserves, Inc.
A related company owned by the major shareholder and the major
shareholder of the Company, has managed and financed the Company since
inception.
Purpose
In July 2007, the management of the Company made the decision to
concentrate its efforts to enter the oil and gas industry. The Company
intends to become an independent oil and natural gas company engaged in
the acquisition, drilling and production of oil and gas, with areas of
interest primarily in Texas, Oklahoma, Louisiana, Montana, and Wyoming.
In 2007 the company purchased two oil and gas leases and recognized its
first oil revenues in November 2007. In 2008, these leases were either
sold or impaired.
Basis of Presentation
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for
annual financial information and with the instructions to Form 10-K and
Article 3 and 3-A of Regulations S-X.
Income Taxes
The Company provides for income taxes by utilizing the asset and
liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the period in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets
20
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
and liabilities, the disclosure of contingent assets and liabilities,
and the reported amounts of revenue and expenses. Actual results could
vary from the estimates used.
Net Loss Per Common Share
Diluted net (loss) earnings per share reflects the potential dilution of
securities by adding common stock equivalents, including warrants in the
weighted-average number of common shares outstanding for a period, if
dilutive. All potentially dilutive securities have been excluded from
the computation, as their effect is anti-dilutive for the years ended
December 31, 2008 and 2007.
Cash and Cash Equivalents
The Company considers any highly liquid investments with maturities of
three months or less on the date of purchase to be cash equivalents.
Cash equivalents are carried at cost, which approximates fair value.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash, accounts
receivables, compensation payables, advances from shareholder and notes
payables approximate fair values at December 31, 2008 and 2007.
Revenue Recognition
Oil, gas, and natural gas liquid revenues are recognized when the
products are sold and delivery to the purchaser has occurred. Although
receivables are concentrated in the oil and gas industry, we do not view
this as unusual credit risk.
Oil and Gas Properties
The Company has adopted the full cost method of accounting for oil and
gas properties. Accordingly, all costs associated with acquisition,
exploration, development of oil and gas reserves, including directly
related overhead costs and related asset retirement costs, are
capitalized.
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-
production method using estimates of proved reserves. Investments in
unproved properties and major development projects are not amortized
until proved reserves associated with the projects can be determined or
until impairment occurs. If the results of an assessment indicate that
the properties are impaired, the amount of the impairment is added to
the capitalized costs to be amortized.
21
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In addition, the capitalized costs are subject to a "ceiling test",
which basically limits such costs to the aggregate of the "estimated
present value," discounted at a 10 percent interest rate of future net
revenues from proved reserves, based on current economic and operating
conditions, plus the lower of cost or fair market value of unproved
properties.
Sales of proved and unproved properties are accounted for as adjustments
of capitalized costs with no gain or loss recognized, unless such
adjustments would significantly alter the relationship between
capitalized costs and proved reserves of oil and gas, in which case the
gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
Reclassification
Certain previously reported financial information has been reclassified
to conform to the current year's presentation. The impact of such
reclassification was not significant to the prior year's overall
presentation.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"), the Company evaluates the
carrying value of its oil and gas leases and equipment whenever a change
in circumstances indicates that the carrying the value may not be
recoverable from the undiscounted future cash flows. If an impairment
exists, the net book values are reduced to fair values as warranted.
During 2008, the Company recorded an impairment charge of $53,747 to
write down the value of an undeveloped oil and gas lease.
Fair Value of Financial Instruments
In 2008, the Company adopted SFAS No. 159, the Fair Value Option for
Financial Assets and Liabilities ("SFAS 159"), which permits entities to
choose to measure certain financial assets and liabilities at fair
value. The adoption of SFAS 159 had no impact on the financial
statements because the Company did not elect the fair value option for
any financial assets or financial liabilities that were not already
recorded at fair value.
On January 1, 2008, the Company adopted SFAS 157 for our financial
assets and liabilities. Management uses the fair value hierarchy of
SFAS 157, which gives the highest priority to quoted prices in active
markets. The fair value of financial instruments is estimated based on
22
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fair Value of Financial Instruments - (continued)
market trading information, where available. Absent published market
values for an instrument or other assets, management uses observable
market data to arrive at its estimates of fair value. Management
believes that the carrying amount of cash and cash equivalents, accounts
receivable and accrued liabilities approximate fair value. SFAS 157
defines fair value as an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in
pricing an asset of liability. As a basis for considering such
assumptions, SFAS 157 establishes a three-level fair value hierarchy
that prioritizes the inputs used to measure fair value. The three
levels of inputs used to measure fair value are as follows:
Level 1 Quoted prices in active markets for identical assets or
liabilities.
Level 2 Observable inputs other than quoted prices included in Level
1, such as quoted prices for similar assets and liabilities in active
markets; quoted price for identical or similar assets and liabilities in
markets that are not active; or other input that are observable or can
be corroborated by observable market date.
Level 3 Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets
or liabilities. This includes certain pricing models, discounted cash
flow methodologies and similar techniques that use significant
unobservable inputs.
The following table summarizes our financial assets and liabilities
measured and reported in the Company's statement of financial position
at fair value as of December 31, 2007, segregated among the appropriate
levels within the fair value hierarchy:
Fair Value Measurements December 31, 2007
<s> <c> <c> <c>
Quoted prices in active Significant other Significant
markets for identical observable inputs unobservable
----------------------- ----------------- -------------
(Level 1) (Level 2) (Level 3)
Common Stock Issued
as Compensation $ - $ 1,750,000 $ -
23
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
The common shares issued for compensation were priced at $1.00 per share
which represented the current selling price of such shares to new
investors.
Recent Accounting Pronouncement
The Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities ("SFAS 159"), which permits entities to choose to
measure certain financial assets and liabilities at fair value. The
adoption of SFAS 159 had no impact on the financial statements because
the Company did not elect the fair value option for any financial assets
or financial liabilities that were not already recorded at fair value.
Statement No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans"-an amendment of FASB Statements No. 87,
88, 106, and 123R. This Statement improves financial reporting by
requiring an employer to recognize the over funded or under funded
status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the
year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-
profit organization.
Statement No. 157, "Fair Value Measurements". This Statement defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value
measurements.
Statement No. 155, Accounting for Certain Hybrid Financial Instruments-
an amendment of FASB Statement No. 133 and 140. This statement amends
FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities.
In the opinion of management, these pronouncements will have no material
effect on the financial statements of the Company.
NOTE 2: GOING CONCERN
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States,
which contemplates continuation of the Company as a going concern.
Since inception, the Company has incurred net operating losses. The
future success of the Company will depend on its ability to attain
additional capital, or to find an acquisition to add value to its
present shareholders and ultimately, upon its ability to attain future
24
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
NOTE 2: GOING CONCERN
profitable operations. There can be no assurance that the Company will
be successful in obtaining such financing, or that it will attain
positive cash flow from operations.
NOTE 3: LEON RIVER ENERGY AND WALKER CREEK UNIT LEASEHOLDS
In July 2007, the Company purchased a 26.37% working interest and a
19.78% net revenue interest in the Leon River Energy leasehold and a 20%
interest in the Walker Creek Unit leasehold for a total of $126,897.
As of December 31, 2007, the Company had recognized $10,750 in oil and
gas revenues; furthermore, accumulated depletion was not calculated as a
reserves report on the leaseholds was not available and revenue from the
lease was minimal. In February 2008, the Company sold the Walker Creek
Unit back to its original owner due to poor production and recognized a
$9,948 loss.
As of December 31, 2007, the Leon River Energy leasehold, an unproved
property, was reviewed for impairment. After a review of pertinent
facts surrounding the lease, the management of the Company determined
that the leasehold was impaired. The Company recorded an impairment
loss of $53,747 at December 31, 2008.
NOTE 4: NOTE PAYABLE, RELATED PARTY
The note payable to a related party represents amounts paid by the
related party for general and administrative expenses. The note is due
on demand and bears interest at the rate of eight percent calculated on
the average outstanding monthly balance.
The detail of the activity in the note payable to related party is as
follows:
2008 2007
---- ----
Balance, beginning of period $60,873 $44,700
General and administrative expenses
advanced
Management fees 12,000 12,000
------- -------
Total general and administrative
expenses 12,000 12,000
Interest expense 5,350 4,173
------- -------
Total change during period 17,350 16,173
------- -------
Balance, end of period $78,223 $60,873
======= =======
25
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
The advance from the major shareholder represents cash advanced to the
Company from the major shareholder of the Company. The advance is due
on demand and interest was accrued on the $32,450 balance at eight per
cent beginning in 2008.
NOTE 5: FEDERAL INCOME TAXES
Total income tax benefit is less than the amount computed by multiplying
the loss before income taxes by the statutory federal income tax rate.
The reasons for the difference and the related tax effects for the year
ended December 31, 2008 and 2007 are:
2008 2007
---- ----
Tax benefit at statutory rates $ 77,439 $707,059
Non-deductible expense - (595,000)
Change in valuation allowance (77,439) (112,059)
---------- --------
Net income tax benefit $ - $ -
========== ========
The components of the deferred tax assets are as follows:
2008 2007
---------- ----------
Deferred Tax Assets
Net Operating Loss Carryforward $ 239,038 $ 179,873
Oil & Gas Leases 18,274 -
---------- ----------
Total Deferred Tax Assets 257,312 179,873
Less Valuation Allowance (257,312) (179,873)
---------- ----------
$ - $ -
========== ==========
The Company has no deferred tax liabilities.
At December 31, 2008, the Company had federal income tax net operating
loss carryforwards of approximately $703,000 to offset future taxable
income, which begins to expire in 2023; therefore, there was no income
tax expense or payable as of December 31, 2008.
NOTE 6: STOCK HOLDERS' DEFICIT
In March 2005, the Company amended its charter to provide for 90,000,000
authorized shares of common stock with a par value of $0.0001 and
10,000,000 authorized shares of Series A preferred stock with a par
value of $0.0001. The Series A preferred shares are redeemable at the
option of the Company at $1.00 per share. At December 31, 2008 and 2007
there were no outstanding shares of preferred stock.
26
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
NOTE 6: STOCK HOLDERS' EQUITY - (Continued)
During 2007, the Company issued 1,750,000 shares of its $0.001 par value
common stock to four individuals for services performed. The Company
recorded these shares at $1.00 per share for financial accounting
purposes, which is the same price at which the Company sold shares to
investors in 2007.
During 2007, the Company sold 110,000 shares of its $.001 par value
common stock at $1.00 per share ($110,000).
In April 2007, the Company's President and Chief Operating Officer
resigned and returned 1,300,000 shares of common stock previously issued
to him. In June 2007, the Company cancelled 325,000 shares previously
issued for advisory services which were never fully performed. In
August 2007, the Company cancelled 5,000 shares held by a shareholder
In 2008, the Company sold 25,000 shares of its $0.0001 par value common
stock to one individual and repurchased 5,000 shares of its common stock
from one individual. All shares sold and repurchased were priced at
$1.00 per share.
In April 2008, an officer of the Company returned 1,000,000 shares of
the Company's common stock due to not being able to provide services to
the Company. In addition another 525,000 shares of common stock was
returned to the Company by various shareholders.
In 2006 and thereafter when the Company sold common stock to investors,
each investor also received three year warrants to purchase an equal
number of shares of common stock for a price of $1.50 per share. The
following is a summary warrant activity:
Number
of Warrants
-----------
Warrants Outstanding, December 31, 2006 417,000
Issuances 110,000
Expirations (5,000)
--------
Warrants Outstanding, December 31, 2007 522,000
Issuances 25,000
Expirations (5,000)
--------
Warrants Outstanding, December 31, 2008 542,000
========
The remaining 412,000 warrants issued in 2006 will expire in calendar
year 2009. The warrants issued in 2007 will expire in 2010, and the
warrants issued in 2008 will expire in 2011.
27
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
NOTE 7: STOCK OPTION PLAN
On May 1, 2005, the Board of Directors adopted the Company's 2005 non-
statutory stock option plan ("Plan") whereby the Company reserved
5,000,000 of its authorized but un-issued common stock for issuance
under the Plan. As of December 31, 2008 and 2007, no stock options have
been granted under the Plan.
NOTE 8: SUBSEQUENT EVENTS
The Company has evaluated subsequent events through September 30, 2010,
the date which the financial statements were available to be issued.
In 2009 the Company sold 45,000 shares of its $0.0001 par value common
stock to three individuals. All shares sold were priced at $1.00 per
share.
During the six month period ended June 30, 2010, the Company had the
following stock transactions:
- Issued 101,982 shares of the Company's Common Stock in settlement
of accrued compensation of $75,000 plus accrued interest of $26,982.
- Issued 138,191 shares of the Company's Series A Preferred Stock in
settlement of outstanding related party debt of $129,411 plus accrued
interest of $8,780. The shares were issued to the Company's majority
shareholder and an entity which is one hundred percent (100%) owned by
the majority shareholder. The Series A preferred shares are redeemable
at the option of the Company at $1.00 per share.
- The Company repurchased and retired 15,000 shares of its Series A
Preferred Stock. The preferred shares were purchased at $1.00 per
share.
- The Company issued 25,000 of its Series 1 units for office rent
valued at $1.00 per unit ($25,000). Each unit consists of one common
share and one warrant to purchase one common share at an exercise price
of $1.50 per common share.
- In order to raise additional capital in 2010, the Company sold
1,466,000 Series 1 units at $1 per unit to accredited investors. Each
unit consisted of one common share and one warrant to purchase one
common share at an exercise price of $1.50 per common share. The
warrants were immediately exercisable for a term of three years.
- As of June 30, 2010, the Company had recorded proceeds of $501,000
from stock sales and recorded another $965,000 in common stock
subscriptions. Cash proceeds from the common stock subscriptions were
received by the Company subsequent to year end.
28
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
The following is a summary of significant events affecting the Company
subsequent to June 30, 2010:
- Subject to shareholder approval, the Company entered into a quasi-
reorganization (also referred to as a corporate adjustment) effective
July 1, 2010. Upon shareholder approval of the quasi-reorganization all
losses were charged to retained deficit and eliminated against
additional paid-in capital. A quasi-reorganization requires that
retained earnings be dated for ten years after the quasi-reorganization
takes place.
The following is an example of the effect of a quasi-reorganization of
the Company if the quasi-reorganization had occurred on June 30, 2010:
Subsequent
Prior to Quasi- to Quasi-
Reorganization Adjustment Reorganization
--------------- ---------- --------------
<s> <c> <c> <c>
Series A Preferred Stock $ 12 $ - $ 12
Common Stock 1,106 - 1,106
Additional Paid-In Capital 7,248,355 (6,058,126) 1,190,229
Retained Deficit (6,058,126) 6,058,126 -
Retained Earnings - Since
Quasi-Reorganization
of June 30, 2010 - - -
------------- ------------ -------------
Total Stockholders' Equity $ 1,191,347 $ - $ 1,191,347
============= ============ =============
- On August 1, 2010, the Company changed its year end from a
calendar year end to a fiscal year end of June 30.
- Effective on July 1, 2010 the Company entered into an employment
agreement with its new President and Chief Executive Officer. The
employment agreement has a four year term and provides the following:
1. Base annual salary of $260,000 plus potential incentives to be
determined in the future.
2. A grant of nonqualified incentive stock options to purchase
1,000,000 shares of the Company's common stock at an exercise
price of $1 per share. 100,000 options vest immediately and
100,000 of the options vests on January 1, 2011, and each
January 1 thereafter until all such incentive options are
vested. Options fully vest on the date of his termination if
not vested before.
3. A grant of 4,000,000 restricted shares of the Company's common
stock at a purchase price of $400 subject to certain vesting
and termination restrictions.
29
EARTH ENERGY RESERVES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
- Effective July 1, 2010, the Company entered into an Offer of
Employment letter with its Executive Vice President and Chief Financial
Officer. The Offer of Employment letter was signed and accepted on July
31, 2010. The Offer of Employment letter provides for the following:
1. Beginning base salary of $125,000 per year until the Company
has successfully raised $5 million in capital, at which time
the salary will be raised to $175,000.
2. An initial grant of 2,000,000 shares of restricted Company
common stock to vest over a four year period.
3. A grant of stock options for 75,000 shares of Company common
stock with an exercise price of $1.00 expiring in ten years.
Options vest quarterly over three years of service.
- Effective July 1, 2010, the Company entered into an Offer of
Employment letter with the Vice President of Administration. The Offer
of Employment letter was signed and accepted on September 14, 2010. The
Offer of Employment provides for an annual salary of $120,000, 50,000
stock options, and a grant of 200,000 shares of the Company's restricted
common shares to be earned over a two year vesting schedule. Stock
options have a ten year expiration, a $1.00 exercise price, and a three
year vesting schedule.
- Effective July 1, 2010, the Company granted 75,000 stock options
to its Chairman of the Board and 50,000 stock options to a Company Vice
President. Stock options have a ten year expiration, a $1.00 exercise
price, and a three year vesting schedule.
- On July 29, 2010, the Company entered into a letter of intent with
an energy company to purchase various interests in producing oil and gas
leases located in the state of Louisiana. Until the definitive purchase
agreement is executed by both companies, either company may terminate
the negotiations regarding this proposed transaction, with or without
cause. The estimated purchase price is $5,800,000.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
James E. Hogue, chairman of the board, who was chief executive officer
and chief financial officer and, therefore, responsible for all
financial and accounting matters during this reporting period has
concluded that the disclosure controls and procedures were not effective
as of December 31, 2008. These controls are meant to ensure that
information required to be disclosed by the issuer in the reports that
it files or submits under the Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules
and forms and to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Act is
accumulated and communicated to the issuer's management, including its
principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
Earth Energy has not filed its SEC filings since the third quarter of
2008. Management has only recently prepared the required reports for
filing. Management intends to implement internal controls to ensure
that similar situations do not occur in the future and that required SEC
filings will be timely.
Management's Annual Report on Internal Control over Financial Reporting:
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control over
financial reporting is the process designed by and under the supervision
of James Hogue, chairman of the board, who was chief executive officer
and chief financial officer, or the persons performing similar
functions, to provide reasonable assurance regarding the reliability of
our financial reporting and the preparation of our financial statements
for external reporting in accordance with accounting principles
generally accepted in the United States of America. Mr. Hogue has
evaluated the effectiveness of our internal control over financial
reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control over
Financial Reporting - Guidance for Smaller Public Companies.
Mr. Hogue has assessed the effectiveness of our internal control over
financial reporting as of December 31, 2008, and concluded that it is
not effective for the reasons discussed above.
This annual report does not include an attestation report of the
registrant's registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject
to attestation by the registrant's registered public accounting firm
31
pursuant to temporary rules of the Securities and Exchange Commission
that permit the registrant to provide only management's report in this
annual report.
Evaluation of Changes in Internal Control over Financial Reporting:
James Hogue, chairman of the board, who was chief executive officer and
chief financial officer has evaluated changes in our internal controls
over financial reporting that occurred during the period ended December
31, 2008. Based on that evaluation, Mr. Hogue, or those persons
performing similar functions, did not identify any change in our
internal control over financial reporting that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Important Considerations:
The effectiveness of our disclosure controls and procedures and our
internal control over financial reporting is subject to various inherent
limitations, including cost limitations, judgments used in decision
making, assumptions about the likelihood of future events, the soundness
of our systems, the possibility of human error, and the risk of fraud.
Moreover, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate
because of changes in conditions and the risk that the degree of
compliance with policies or procedures may deteriorate over time.
Because of these limitations, there can be no assurance that any system
of disclosure controls and procedures or internal control over financial
reporting will be successful in preventing all errors or fraud or in
making all material information known in a timely manner to the
appropriate levels of management.
ITEM 9B. OTHER INFORMATION
None
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Our management consists of:
Name Title Term
- ---- ----- ----
James E. Hogue, age 73 Chairman of the Board Inception
to present
Chief Executive Officer,
Controller, Chief Inception to
Financial Officer June 30, 2010
James R. Phillips, age 62 Vice President, Secretary/ Inception to
Treasurer and Director present
Steven A. Kranker, age 49 Chief Executive Officer, July 1, 2010
President and Director to present
W.A. Sikora, age 73 Executive Vice President,
Chief Financial Officer July 1, 2010
and Director to present
Doyle Pennington, age 65 V.P. of Administration
and Investor Relations July 1, 2010
and Director to present
James E. Hogue, Chairman and President
Mr. Hogue has served as chairman and president of Earth Energy since
inception. Since 1991, Mr. Hogue has serviced as president of Martex
Oil and Gas, Inc. From 1996 to 1999, Mr. Hogue became president, chief
operating officer and a director of Cotton Valley Resources Corporation,
a publicly traded AMEX company (KTN). Mr. Hogue has served as chairman,
president and chief financial officer of Galaxy Partners Ltd.
Corporation, a consulting firm, since 1995.
James R. Phillips, Jr., Vice President, Secretary, Treasurer and
Director
Mr. Phillips has served as vice president, secretary, treasurer and
director of Earth Energy since March 2005. From 1993 to 2004, Mr.
Phillips was a financial consultant, registered investment advisor of
E.F. Hutton and Raymond James and Associates, Inc., Waco, Texas.
Mr. Phillips graduated from Texas Tech University in 1970 with a
Bachelor of Business Administration in Finance & Banking.
Steven A. Kranker, Chief Executive Officer, President and Director
Mr. Kranker has over 25 years of broad oil and gas experience with major
and large independent E&P companies in roles of increasing
responsibility. Prior to joining EER, he served as the Corporate
Engineering Manager for Forest Oil Corp., with expertise in acquisition
and divestiture evaluation, petroleum property optimization and
valuation studies, SEC reserve reporting and associated bank credit
33
facilities. Mr. Kranker was responsible for the oil and gas reserves and
economic evaluations in $4 billion in acquisition transactions and $3
billion in divestitures during the past five years, with recent emphasis
on the assessment of horizontal drilling in unconventional gas plays.
Previous service includes Senior Reservoir Engineer in numerous
locations with exposure to a variety of petroleum reservoirs with Brunei
Shell Petroleum, Arco Alaska, Maxus Exploration, Conoco and Shell. He
holds a Bachelor of Science degree in Petroleum Engineering from the
Colorado School of Mines.
W. A. Sikora, Executive Vice President, Chief Financial Officer,
Director
Mr. Sikora was recently named Executive Vice President and CFO, bringing
to EER over 40 years experience in corporate finance, governance,
compliance and financial analysis, reporting and accounting for numerous
public and private companies with a primary emphasis in the energy
industry. Prior to joining EER, Mr. Sikora operated for over 22 years a
successful individual consulting practice providing business, financial
and governance advisory services to corporate executive managements,
primarily in Denver and Houston. Previously, Mr. Sikora served as
Executive Vice President of TransMontaigne, Inc.; CEO and President of
Lucas Energy, Inc.; a Director and Chairman of the Audit Committee of
Appleton Papers, Inc.; and a Director of and advisor to several other
public companies. He was Founder and Co-Managing Partner of Hein +
Sikora CPA's (now Hein & Associates LLP); Partner with Touche Ross & Co.
(now Deloitte & Touche LLP); Partner with Peat, Marwick, Mitchell & Co.
(now KPMG LLP); and a Senior Manager with Arthur Andersen & Co. He also
founded and was Managing Partner of Audit Committee Advisors LP. Mr.
Sikora holds a BS degree in Accounting from the University of Colorado.
Doyle Pennington, Vice President of Administration and Investor
Relations and Director
Mr. Pennington specializes in strategic planning and management of
domestic and international special projects for non-profit
organizations. He has worked for agencies of the Southern Baptist
Convention and other non-profit organizations including the Religious
Heritage of America Foundation, Mission America Coalition, the
Consortium for Global Education, the International Evangelism
Association, Touch the World Ministries, Global Resources Ministries,
and the National Christian Foundation. Mr. Pennington has established
mission funds to ten state conventions and has managed and coordinated
numerous projects and special events for various agencies of the
Southern Baptist Convention. He has been a hotel owner-operator of
Holiday Inns and apartment complexes, and has developed, owned and
managed commercial real estate properties for many years. Mr. Pennington
holds a BBA from the University of Mississippi.
All directors hold office until the completion of their term of office,
which is not longer than three years, or until their successors have
been elected and have been qualified. All officers are appointed
34
annually by the board of directors and, subject to existing employment
agreements, serve at the discretion of the board. Currently, directors
receive no compensation.
Committees of the Board of Directors
Concurrent with having sufficient members and resources, Earth Energy's
board of directors will establish an audit committee, investment
committee and a compensation committee. The audit committee will review
the results and scope of the audit and other services provided by the
independent auditors and review and evaluate the system of internal
controls. The investment committee will review and approve all
investments in excess of $25,000 and assist in determining the carrying
values of portfolio investments. The compensation committee will manage
the stock option plan and review and recommend compensation arrangements
for the officers. No final determination has yet been made as to the
memberships of these committees or when we will have sufficient members
to establish committees.
All directors will be reimbursed by Earth Energy for any expenses
incurred in attending directors' meetings provided that Earth Energy has
the resources to pay these fees. Earth Energy will consider applying
for officers and directors liability insurance at such time when it has
the resources to do so.
Stock Option Plan
On May 1, 2005, the board of directors adopted Earth Energy 2005 non-
statutory stock option plan whereby Earth Energy reserved 5,000,000 of
its authorized but un-issued common stock for issuance under the Plan.
As of December 31, 2008, no stock options were granted under the Plan.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities Exchange Act of 1934, as amended,
an officer, director, or greater-than-10% shareholder of the registrant
must file a Form 4 reporting the acquisition or disposition of
registrant's equity securities with the Securities and Exchange
Commission no later than the end of the second business day after the
day the transaction occurred unless certain exceptions apply.
Transactions not reported on Form 4 must be reported on Form 5 within 45
days after the end of the registrant's fiscal year. Such persons must
also file initial reports of ownership on Form 3 upon becoming an
officer, director, or greater-than-10% shareholder. To our knowledge,
based solely on a review of the copies of these reports furnished to it,
the officers, directors, and greater than 10% beneficial owners have not
complied with applicable Section 16(a) filing requirements during the
year ended December 31, 2008.
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Code of Ethics Policy
We have not yet adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions.
Corporate Governance
There have been no changes in any state law or other procedures by which
security holders may recommend nominees to our board of directors. In
addition to having no nominating committee for this purpose, we
currently have no specific audit committee and no audit committee
financial expert. Based on the fact that our current business affairs
are simple, any such committees are excessive and beyond the scope of
our business and needs.
Indemnification
The registrant shall indemnify to the fullest extent permitted by, and
in the manner permissible under the laws of the State of Nevada, any
person made, or threatened to be made, a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he is or was a director or officer of the
registrant, or served any other enterprise as director, officer or
employee at the request of the registrant. The board of directors, in
its discretion, shall have the power on behalf of the registrant to
indemnify any person, other than a director or officer, made a party to
any action, suit or proceeding by reason of the fact that he/she is or
was an employee of the registrant.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the
registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceedings) is asserted by
such director, officer, or controlling person in connection with any
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issues.
INDEMNIFICATION OF OFFICERS OR PERSONS CONTROLLING THE REGISTRANT FOR
LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, IS HELD TO BE
AGAINST PUBLIC POLICY BY THE SECURITIES AND EXCHANGE COMMISSION AND IS
THEREFORE UNENFORCEABLE.
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ITEM 11. EXECUTIVE COMPENSATION
As of December 31, 2008, no officer, director or employee had received
any cash compensation, and no director, officer or employee had a
contract or commitment to receive annual compensation in excess of
$100,000.
Employment Agreement for Steven A. Kranker
In July 2010, we entered into an employment agreement with Mr. Steven A.
Kranker, our president and chief executive officer. Mr. Kranker's
employment agreement is a four year term and provides that he will
receive:
(1) $260,000 per annum base salary (which amount may be increased or
decreased under certain circumstances), plus bonus payments or incentive
compensation as may be determined from time to time by our board of
directors;
(2) a grant of incentive stock options to purchase 1,000,000 shares of
our common stock, at an exercise price of $1.00 per share. 100,000 of
the options vested on the date of the agreement, and 100,000 of the
options will vest on January 1, 2011 and each January 1 thereafter until
all such incentive stock options are fully vested. If any incentive
stock options have not vested and Mr. Kranker ceases to be employed by
us, the unvested options will become nonqualified stock options and will
fully vest on the date of such termination;
(3) 4,000,000 Earth Energy common shares, fully paid and nonassessable,
for a purchase price of $400, payable in cash at the time of issue,
which restricted shares shall remain unvested and subject to forfeiture
upon termination of Mr. Kranker's employment unless one of the following
events occurs prior to such termination:
(a) Mr. Kranker continues to be employed by us on February 1, 2013, in
which event 665,000 shares will vest on that date and become
nonforfeitable, with the remaining shares vesting in equal installments
of 667,000 shares on the first day of every third month thereafter so
long as Mr. Kranker continues to be employed by us; or
(b) Our common shares are traded on a national stock exchange and the
average reported closing price of our common shares on the principal
stock exchange or other market is $5.00 or more for 20 consecutive
trading days, in which event (i) 50% of the shares will become vested
and nonforfeitable on that date, and (ii) the remaining 50% of the
shares will become vested and nonforfeitable on the January 1
immediately following the date on which the first 50% of the shares
vested. Upon Mr. Kranker's termination or demotion coincident with a
change of control, all unvested shares shall immediate become vested and
nonforeitable.
37
Effective July 1, 2010, the Company entered into an offer of employment
letter with its Executive Vice President and Chief Financial Officer.
The offer of employment letter provides for the following:
1. Beginning base salary of $125,000 per year until the Company has
successfully raised $5 million in capital, at which time the salary will
be raised to $175.000.
2. An initial grant of 2,000,000 shares of restricted Company common
stock to vest over a four year period.
3. A grant of stock options for 75,000 shares of Company stock with an
exercise price of $1.00 expiring in ten years. Options vest quarterly
over three years of service.
Effective July 1, 2010, the Company entered into an offer of employment
letter with its Chairman of the Board. The terms of the offer of
employment letter provide for an annual salary of $175,000 and a grant
of 75,000 stock options. Stock options have a 10 year expiration, a
$1.00 exercise price, and a 3 year vesting schedule.
Effective July 1, 2010, the Company entered into an offer of employment
letter with the Vice President of Administration. The offer of
employment letter provides for an annual salary of $120,000, 50,000
stock options, and a grant of 200,000 shares of the Company's restricted
common shares to be earned over a 2 year vesting schedule. Stock options
have a 10 year expiration, a $1.00 exercise price, and a 3 year vesting
schedule.
Board of Directors Compensation. Currently board members receive no
special compensation for meetings or time incurred. Director liability
insurance may be provided to all members of the board of directors.
Outstanding Equity Awards
The following table sets forth the outstanding stock options to the
registrant's officers and directors:
Option Awards
In July 2010, we issued incentive stock options to purchase 1,250,000
common shares to our officers and directors.
Outstanding Equity Awards at September 30, 2010
Number of Number of
Securities Securities
Underlying Underlying
Unexercised Unexercised Option Option
Options/ Options/ Exercise Expiration
Name Exercisable Unexercisable Price Date
- ---- ----------- ------------- -------- ----------
<s> <c> <c> <c> <c>
James E. Hogue 75,000 - 1.00 -
James Phillips 50,000 - 1.00 -
Steven A. Kranker 1,000,000 1.00 (1)
W.A. Sikora 75,000 - 1.00
Doyle Pennington 50,000 1.00
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(1)100,000 of the options vested on date of agreement and 100,000 of
the options will vest on January 1, 2011 and each January 1 thereafter
until all options are vested.
The registrant does not compensate its directors for their services as
such. The registrant reimburses the directors for their reasonable out-
of pocket expenses for attending meetings of the board of directors.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The following table sets forth certain information regarding the
beneficial ownership of common shares as of September 30, 2010 by: (i)
each current director and nominee for director; (ii) all executive
officers and current directors of Earth Energy as a group; and (iii) all
stockholders known by Earth Energy to be beneficial owners of more than
five percent of the outstanding common shares or preferred shares. The
information in this table is based solely on a review by Earth Energy of
its capital stock transfer records and on publicly available filings
made with the SEC by or on behalf of the stockholders listed below, and
is based on 11,059,982 outstanding common shares.
Name and Address of Number of Shares
Beneficial Owner Beneficially Owned Percent of Class
<s> <c> <c>
James E. Hogue
671 Heinz Parkway
Estes Park, CO 80517 4,000,000 36.2%
James R. Phillips
6801 Sanger Avenue
Suite 101
Waco, TX 76710 1,540,000 13.9%
W.A. Sikora(1)
9595 Doliver Drive
Houston, TX 77063 0 0.0%
Steven Kranker(2)
621 17th Street
Denver, CO 80293 0 0.0%
Doyle Pennington(3)
2850 Wildwood Lane
Estes Park, CO 80517 101,000 .9%
Officers and Directors
as a group (5 members) 5,641,000 51.0%
(1)In July 2010, Earth Energy authorized a restricted stock grant to Mr.
Sikora of 2,000,000 common shares subject to vesting terms over a four
year period and forfeiture in the even of certain employment termination
conditions.
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(2)In July 2010, Earth Energy authorized a restricted stock grant to Mr.
Kranker of 4,000,000 common shares subject to vesting terms over a four
year period and forfeiture in the even of certain employment termination
conditions.
(3)In July 2010, Earth Energy authorized a restricted stock grant to
Mr. Pennington of 200,000 common shares subject to vesting terms over a
four year period and forfeiture in the even of certain employment
termination conditions.
Unless otherwise indicated, Earth Energy believes that all persons named
in the table have sole voting and investment power with respect to all
common shares beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person
within 60 days from the date indicated above upon the exercise of
options, warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants or
convertible securities that are held by such person (but not those held
by any other person) and which are exercisable within 60 days of the
date indicated above, have been exercised.
Warrants. There are 1,586,000 warrants issued and outstanding at June
30, 2010, held by approximately 100 warrant holders. The warrants
enable holders to purchase common stock at $1.50 per share at any time
prior to expiration 35,000 warrants expire in 2010, 25,000 warrants
expire in 2011, 45,000 warrants expire in 2012; and 1,481,000 warrants
expire in 2013.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
In April 2007, John Malone, Earth Energy's president and chief operating
officer, resigned and returned 1,300,000 shares of common stock
previously issued to him.
The note payable to a related party represents amounts paid by the
related party for general and administrative expenses. The note is due
on demand and bears interest at the rate of eight percent calculated on
the average outstanding monthly balance.
The detail of the activity in the note payable to related party is as
follows:
2008 2007
---- ----
Balance, beginning of period $60,873 $44,700
General and administrative expenses
advanced
Management fees 12,000 12,000
------- -------
Total general and administrative
Expenses 12,000 12,000
Interest expense 5,350 4,173
------- -------
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Total change during period 17,350 16,173
------- -------
Balance, end of period $78,223 $60,873
The advance from the major shareholder represents cash advanced to the
Company from the major shareholder of the Company. The advance is due
on demand and interest was accrued on the $32,450 balance at eight per
cent beginning in 2008.
Director Independence
Earth Energy's board of directors consists of James Hogue, James
Phillips, Steven Kranker, W.A. Sikora and Doyle Pennington. None of the
directors are independent as such term is defined by a national
securities exchange or an inter-dealer quotation system. For the year
ended December 31, 2008, there were no transactions with related persons
other than as described in the section above entitled "Item 11.
Executive Compensation".
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees. We incurred aggregate fees and expenses of approximately
$27,293 and $17,061 respectively, from Killman, Murrell & Company, PC
for the 2008 and 2007 fiscal years. Such fees included work completed
for our annual audits and for the review of our financial statements
included in our Form 10-Q.
Tax Fees. We did not incur any aggregate tax fees and expenses from
Killman, Murrell & Company, PC for the 2008 and 2007 fiscal years for
professional services rendered for tax compliance, tax advice, and tax
planning.
All Other Fees. We did not incur any other fees from Killman, Murrell &
Company, PC during fiscal 2008 and 2007.
The board of directors, acting as the Audit Committee considered
whether, and determined that, the auditor's provision of non-audit
services was compatible with maintaining the auditor's independence.
All of the services described above for fiscal years 2008 and 2007 were
approved by the board of directors pursuant to its policies and
procedures. We intend to continue using Killman, Murrell & Company, PC
solely for audit and audit-related services, tax consultation and tax
compliance services, and, as needed, for due diligence in acquisitions.
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Part IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) List of Financial statements included in Part II hereof
Balance Sheets, December 31, 2008 and 2007
Statements of Operations for the years ended December 31, 2008 and 2007
Statements of Stockholders' Equity for the years ended December 31, 2008
and 2007
Statements of Cash Flows for the years ended December 31, 2008 and 2007
Notes to the Financial Statements
(a)(2) List of Financial Statement schedules included in Part IV hereof:
None
(a)(3) Exhibits
The following of exhibits are filed with this report:
(31) 302 certification
(32) 906 certification
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Earth Energy has duly caused this
Report to be signed on its behalf by the undersigned duly authorized
person.
Date: September 30, 2010
Earth Energy Reserves, Inc.
/s/Steven A. Kranker
- ------------------------------
By: Steven A. Kranker, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on
behalf of Earth Energy and in the capacities and on the dates indicated.
<s> <c>
/s/James E. Hogue Chairman of the Board 9/30/10
- ------------------------
James E. Hogue(1)
/s/Steven A. Kranker Chief Executive Officer 9/30/10
- ------------------------ Director
Steven A. Kranker(2)
/s/W.A. Sikora Chief Financial Officer 9/30/10
- ------------------------ Director
W.A. Sikora(2)
/s/James R. Phillips, Jr. Vice President, Secretary 9/30/10
- ------------------------ Treasurer and Director
James R. Phillips, Jr.
(1)Mr. Hogue was Chief Executive Officer and Chief Financial Officer
during this reporting period.
(2)Appointed officers of Earth Energy Reserves effective July 1, 2010