**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549** 

 **FORM 10-Q**

 

**x****QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended March 31, 2010**

**o****TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

For the transition period from ______ to _______

**Commission File Number 000-31423**

**FRIENDLY ENERGY EXPLORATION**

(Name of small business issuer in its charter)

 
| **Nevada**

 

**91-1832462**

(State of incorporation)

  

(I.R.S. Employer Identification No.)

 

**502 North Division Street**

**Carson City, NV 89703**

(Address of principal executive offices)

**(702) 953-0411**

(Registrant’s telephone number)

with a copy to:

**Carrillo Huettel, LLP**

3033 Fifth Ave. Suite 201

San Diego, CA 92103

Telephone (619) 399-3090

Facsimile (619) 399-0120

 

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 of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

**x**Yes     **☐** No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

**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  **x**No

As of May 15, 2010, there were 52,568,790 shares of the registrant’s $.001 par value common stock issued and outstanding.

**FRIENDLY ENERGY EXPLORATION***

**TABLE OF CONTENTS **

 

 

 

**  **

**Page**

 

 

**PART I.                 FINANCIAL INFORMATION**

 

**  **

** **

ITEM 1.

FINANCIAL STATEMENTS

4

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

19

ITEM 3.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

23

ITEM 4.

CONTROLS AND PROCEDURES

23

**  **

 

**PART II.               OTHER INFORMATION**

 

**  **

 

ITEM 1.

LEGAL PROCEEDINGS

24

ITEM 1A.

RISK FACTORS

24

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

24

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

24

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

24

ITEM 5.

OTHER INFORMATION

24

ITEM 6.

EXHIBITS

25

  

 

**Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "FEGR" refers to Friendly Energy Exploration.*

**PART I: FINANCIAL INFORMATION**

**ITEM 1. 
**FINANCIAL STATEMENTS**

The Financial Statements of the Company required to be filed with this Form 10-Q Quarterly Report were prepared by management and commence below, together with related Notes.  In the opinion of management, the Financial Statements present fairly the financial condition of the Company.

4

** **

**FRIENDLY ENERGY EXPLORATION**

**(An Exploration Stage Company)**

**CONSOLIDATED BALANCE SHEET**

 

 

 

 

Mar. 31, 2010

 

Dec. 31, 2009

 

 

 

 

 

 

 

 ASSETS 

 

 

 

 

 

 

 

 Current assets 

 

 

 

 

 Cash and cash equivalents 

 $27,447 

 

 $15,038 

 

 

 Total current assets 

27,447 

 

15,038 

 

 

 

 

 

 

 

 

 Oil and Gas Properties - unproved 

 128,550 

 

61,050 

 

 Property and equipment 

  1,181 

 

  1,418 

 

 Notes receivable 

  7,500 

 

  7,500 

 

 Other Assets 

  1,000 

 

  1,000 

 

 

 

 

 

 

 

 Total Assets 

 $ 165,677 

 

 $86,005 

 

 

 

 

 

 

 

 LIABILITIES AND STOCKHOLDERS' DEFICIT 

 

 

 

 

 

 

 

 LIABILITIES 

 

 

 

 Current liabilities 

 

 

 

 

 Accounts Payable 

 $15,791 

 

 $16,888 

 

 Payroll Tax Liabilities 

 115,021 

 

 110,431 

 

 Judgment payable 

 245,318 

 

 239,286 

 

 Deferred Salaries 

 888,000 

 

 828,000 

 

 Interest Payable 

 197,771 

 

 189,366 

 

 Loan Payable 

 690,849 

 

 180,433 

 

 Loans Payable-Related Parties 

 134,179 

 

23,877 

 

 

 Total current liabilities 

 2,286,929 

 

 1,588,281 

 

 

 

 

 

 

 

 STOCKHOLDERS' DEFICIT 

 

 

 

 

 Common stock, $0.001 par value; 100,000,000 shares 

 

 

 

 

 

 authorized, 52,568,790 and 52,568,790 shares, 

 

 

 

 

 

 respectively, issued and outstanding 

52,569 

 

52,569 

 

 Preferred Stock, $0.001 par value, 10,000,000 shares 

 

 

 

 

 

 authorized, 4,742,302 and 8,842,302 shares, 

  4,742 

 

  8,842 

 

 

 respectively, issued and outstanding 

 

 

 

 

 Additional paid-in capital 

 3,681,734 

 

 4,097,805 

 

 Accumulated deficit during the development stage 

  (2,201,561)

 

  (2,201,561)

 

 Accumulated deficit during the exploration stage 

  (3,658,736)

 

  (3,459,931)

 

 

 Total stockholders' deficit 

  (2,121,252)

 

  (1,502,276)

 

 

 

 

 

 

 

 

 

 Total liabilities and stockholders' deficit 

 $ 165,677 

 

 $86,005 

5

**FRIENDLY ENERGY EXPLORATION**

**(An Exploration Stage Company)**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

 

 

 

 

 

 

 From Inception  

 

 From Inception  

 

 

 

 

 

 

 

 Development Stage 

 

 Exploration Stage 

 

 

 

 For the 

 

 For the 

 

 (Jan. 7, 1993) 

 

 (Feb. 11, 2005) 

 

 

 

 Three Months Ended 

 

 Three Months Ended 

 

 through 

 

 through 

 

 

 

Mar. 31, 2010

 

Mar. 31, 2009

 

 Feb. 10, 2005 

 

Mar. 31, 2010

 Revenue 

$

8,900 

 

$

5,035 

 

$

13,372 

 

$

24,953 

 

 

 

 

 

 

 

 

 

 

 Operating expenses 

 

 

 

 

 

 

 

 

 Bad Debt Expense 

- 

 

- 

 

- 

 

319,000 

 

 Depreciation 

237 

 

206 

 

35,287 

 

9,988 

 

 Dry Hole Cost 

- 

 

- 

 

- 

 

88,157 

 

 General and administrative 

3,052 

 

309 

 

218,930 

 

- 

 

 Intangible Drilling Costs 

- 

 

- 

 

- 

 

333,206 

 

 Officer Wages 

60,000 

 

60,000 

 

- 

 

1,287,000 

 

 Oil Well Operations Cost 

105,443 

 

- 

 

- 

 

233,527 

 

 Payroll Expenses 

4,590 

 

4,590 

 

213,228 

 

77,753 

 

 Professional Fees 

12,668 

 

1,435 

 

711,228 

 

- 

 

 Rent 

- 

 

- 

 

282,410 

 

- 

 

 Stock Based Compensation 

1,829 

 

- 

 

156,825 

 

360,959 

 

 Travel & Entertainment 

5,450 

 

88 

 

128,687 

 

41,868 

 

 

 Total operating expenses 

193,268 

 

66,627 

 

1,746,595 

 

2,991,460 

 

 

 

 

 

 

 

 

 

- 

 

 

 Loss from operations 

(184,368)

 

(66,627)

 

(1,733,223)

 

(2,966,508)

 

 

 

 

 

 

 

 

 

 

 Other income (expenses): 

 

 

 

 

 

 

 

 

 Other income 

- 

 

- 

 

120,605 

 

76,118 

 

 Forgiveness of Debt 

- 

 

- 

 

(122,765)

 

- 

 

 Impairment Loss on Asset 

- 

 

- 

 

(442,800)

 

(328,970)

 

 Interest Expense 

(14,437)

 

(13,865)

 

(23,379)

 

(329,376)

 

 Lawsuit Judgment 

- 

 

- 

 

- 

 

(110,000)

 

 

 Total other income (expenses) 

(14,437)

 

(13,865)

 

(468,339)

 

(692,228)

 

 

 

 

 

 

 

 

 

- 

 

 

 Loss before provision for income taxes 

(198,805)

 

(80,492)

 

(2,201,562)

 

(3,658,736)

 Provision for income taxes 

- 

 

- 

 

- 

 

- 

 

 

 

 

 

 

 

 

 

- 

 

 

 Net loss 

$

(198,805)

 

$

(80,492)

 

$

(2,201,562)

 

$

(3,658,736)

 

 

 

 

 

 

 

 

 

 

 Basic and diluted loss per common share 

$

(0.004)

 

$

(0.01)

 

$

(0.28)

 

$

(0.29)

 Basic and diluted weighted average  

 

 

 

 

 

 

 

 

 common shares outstanding 

52,568,790 

 

7,583,608 

 

7,762,659 

 

12,655,802 

6

**FRIENDLY ENERGY EXPLORATION**

**(An Exploration Stage Company)**

**STATEMENT OF STOCKHOLDERS DEFICIT**

 

 

 

 

 

 

 Accumulated 

 Accumulated 

 

 

 

 

 

 

 Additional 

 Deficit Devel- 

 Deficit Explor- 

 Total 

 

 Common Stock 

 Preferred Stock 

 Paid-in 

 opment Stage 

 ation Stage 

 Stockholders' 

 

 Shares 

 Amount 

 Shares 

 Amount 

Capital

Prior to 2-11-05

From 2-11-05

Deficit

Balance at January 7, 1993 (Date of inception)

  - 

$0 

 - 

$0 

$0 

$0 

$0 

$0 

Common shares issued to officers & directors for cash, $0.016 per share

  2,550 

  3 

 - 

- 

  997 

- 

 

 1,000 

Net loss 

  - 

- 

 - 

- 

  - 

  (1,000)

 

  (1,000)

Balance at December 31, 1993, 1994, and 1995

  2,550 

  3 

 - 

- 

  997 

  (1,000)

 

- 

 

 

 

 

 

 

 

 

 

Common shares cancelled

(2,550)

(3)

 - 

- 

 3 

- 

 

- 

Common shares issued for cash, $0.00 per share

 100,000 

 100 

 - 

- 

  (90)

- 

 

 10 

Conversion to preferred stock

(20,000)

 (20)

 50,000 

50 

  (30)

- 

 

- 

Net loss

  - 

- 

 - 

- 

  - 

  (10)

 

  (10)

Balance at December 31, 1996

  80,000 

80 

 50,000 

50 

  880 

(1,010)

 

- 

 

 

 

 

 

 

 

 

 

Common shares issued relating to spin-out

  609 

1 

 - 

- 

(1)

- 

 

- 

Common shares issued for cash, $0.80 per share

1,500 

1 

 - 

- 

  29,999 

- 

 

30,000 

Common shares issued to officers and directors for cash, $0.685 per share

1,750 

  2 

 - 

- 

  29,998 

- 

 

30,000 

Preferred shares issued to officers and directors for services, $0.04 per share

  - 

- 

  750,000 

750 

  29,250 

- 

 

30,000 

Net loss

  - 

- 

 - 

- 

  - 

 (63,266)

 

 (63,266)

Balance at December 31, 1997

  83,859 

84 

  800,000 

800 

90,126 

 (64,276)

 

26,734 

 

 

 

 

 

 

 

 

 

Common shares issued for cash, $1.74 per share

  390 

  0 

 - 

- 

17,000 

- 

 

 17,000 

Common shares issued to officers and directors for services, $0.004

 105,000 

 105 

 - 

- 

10,395 

 

 

 10,500 

Conversion of preferred stock

320,000 

320 

(800,000)

 (800)

  480 

- 

 

- 

Net loss

  - 

- 

 - 

- 

  - 

 (33,234)

 

 (33,234)

Balance at December 31, 1998

509,249 

509 

 - 

- 

  118,001 

  (97,510)

 

 21,000 

 

 

 

 

 

 

 

 

 

Cancellation of common stock

 (1,850)

(2)

 - 

- 

 2 

- 

 

- 

Preferred shares issued for debt settlement, $3.69 per share

  - 

- 

146,883 

 147 

541,853 

- 

 

 542,000 

Preferred shares issued for services, $3.69 per share

-

- 

 5,000 

  5 

18,445 

- 

 

 18,450 

Net loss

  - 

- 

 - 

- 

  - 

  (556,309)

 

  (556,309)

Balance at December 31, 1999

507,399 

507 

 151,883 

 152 

678,301 

(653,819)

 

  25,141 

 

 

 

 

 

 

 

 

 

Preferred shares issued for debt settlement, $3.69 per share

-

- 

174,798 

 175 

  644,825 

- 

 

 645,000 

Issuance of stock related to merger with Friendly Energy Services, Inc., $3.69 per share

-

- 

120,000 

 120 

  442,680 

- 

 

 442,800 

Preferred shares issued for services, $3.69 per share

-

- 

 37,500 

37 

138,338 

- 

 

  138,375 

Net loss

  - 

- 

 - 

- 

  - 

  (914,511)

 

  (914,511)

Balance at December 31, 2000

507,399 

507 

 484,181 

484 

 1,904,144 

  (1,568,330)

 

 336,805 

 

 

 

 

 

 

 

 

 

Net loss

  - 

- 

 - 

- 

  - 

(584,851)

 

(584,851)

Balance at December 31, 2001

507,399 

507 

 484,181 

484 

 1,904,144 

 (2,153,181)

 

  (248,046)

 

 

 

 

 

 

 

 

 

Preferred shares issued for debt settlement, $3.69 per share

0 

0 

2,973,080 

2,973 

145,681 

0 

 

148,654 

Net loss

  - 

- 

 - 

- 

  - 

(12,371)

 

(12,371)

Balance at December 31, 2002

507,399 

507 

3,457,261 

3,457 

2,049,825 

(2,165,552)

 

(111,763)

 

 

 

 

 

 

 

 

 

7

Net loss

  - 

- 

 - 

- 

  - 

  (24,215)

 

  (24,215)

Balance, December 31, 2003

507,399 

507 

3,457,261 

3,457 

2,049,825 

(2,189,767)

 

(135,978)

Net loss

  - 

- 

 - 

- 

  - 

(11,794)

 

(11,794)

Balance, December 31, 2004

507,399 

507 

3,457,261 

3,457 

2,049,825 

(2,201,561)

 

(147,772)

 

 

 

 

 

 

 

 

 

Common shares issued for cash, $0.025

16,000 

 16 

 - 

- 

 9,984 

- 

- 

 10,000 

Common shares issued for services, $0.05 per share

10,000 

 10 

 - 

- 

12,490 

- 

- 

 12,500 

Common shares issued to officers and directors for services, $0.04 per share

  20,000 

20 

 - 

- 

19,980 

- 

- 

20,000 

Preferred shares issued to officers and directors for services, $0.40 per share

-

- 

  450,000 

450 

179,550 

- 

- 

  180,000 

Conversion of preferred stock

789,680 

790 

(1,974,200)

  (1,974)

1,185 

- 

- 

- 

Issuance of stock options to two officers

-

- 

 - 

- 

  24,929 

- 

- 

24,929 

Net loss

  - 

- 

 - 

- 

  - 

- 

 (691,271)

 (691,271)

Balance, December 31, 2005

1,343,079 

1,343 

1,933,061 

1,933 

2,297,942 

(2,201,561)

(691,271)

(591,615)

 

 

 

 

 

 

 

 

 

Common shares issued for cash, $0.05

20,000 

20 

 - 

- 

24,980 

 

 

25,000 

Conversion of preferred stock

380,677 

 381 

 (951,692)

 (952)

571 

- 

- 

- 

Issuance of stock options to 2 officers (2nd half vested)

  - 

- 

 - 

- 

  24,929 

- 

- 

24,929 

Preferred shares issued for debt settlement, $0.195 per share

  - 

- 

  278,554 

279 

  54,039 

- 

- 

 54,318 

Net Loss

  - 

- 

 - 

- 

  - 

- 

  (824,586)

  (824,586)

Balance, December 31, 2006

1,743,756 

1,744 

1,259,923 

1,260 

2,402,461 

(2,201,561)

(1,515,857)

(1,311,954)

 

 

 

 

 

 

 

 

 

Preferred shares issued for debt settlement, $0.090 per share

  - 

- 

 5,222,222 

5,222 

  464,778 

- 

- 

 470,000 

Common shares issued for notes $0.020

732,000 

732 

 - 

- 

318,268 

 

 

  319,000 

Issuance of stock options to 2 officers (vested)

  - 

- 

 - 

- 

  93,484 

- 

- 

93,484 

Common shares issued for cash, $0.05

20,000 

20 

 - 

- 

  24,980 

 

 

25,000 

Common shares issued for cash, $0.025

16,000 

 16 

 - 

- 

 9,964 

 

 

9,980 

Preferred shares issued to officers and directors for services, $0.10 per share

  - 

- 

 3,740,000 

3,740 

  370,260 

- 

- 

 374,000 

Conversion of preferred stock

270,516 

 271 

(676,289)

 (676)

  406 

- 

- 

- 

Net Loss

  - 

- 

 - 

- 

  - 

- 

  (484,269)

  (484,269)

Balance, December 31, 2007

2,782,271 

2,782 

9,545,856 

9,546 

3,684,601 

(2,201,561)

(2,000,126)

(504,759)

 

 

 

 

 

 

 

 

 

Common shares issued relating to reverse stock split (shareholders with less than 25 old shares)

  979 

1 

 - 

- 

(1)

- 

 

- 

Conversion of preferred stock

18,785,540 

 18,786 

(1,878,554)

  (1,879)

 (16,907)

- 

 

- 

Net Loss

  - 

- 

 - 

- 

  - 

- 

  (365,473)

  (365,472)

Balance, December 31, 2008 

21,568,790 

21,569 

7,667,302 

7,667 

3,667,693 

(2,201,561)

(2,365,599)

(870,231)

 

 

 

 

 

 

 

 

 

Common shares issued for cash, $0.002

1,000,000 

 1,000 

 - 

- 

  1,000 

 

 

2,000 

Preferred shares issued for cash, $0.075 per share

-

 -

  200,000 

200 

14,800 

- 

- 

 15,000 

Preferred shares issued for cash, $0.182 per share

-

 -

  275,000 

275 

  49,725 

 

 

50,000 

Preferred shares issued for debt settlement, $0.056 per share

-

 -

 2,500,000 

2,500 

137,500 

- 

- 

  140,000 

Preferred shares issued for debt settlement, $0.21 per share

-

 -

  1,200,000 

 1,200 

  250,800 

 

 

 252,000 

Conversion of preferred stock

30,000,000 

30,000 

  (3,000,000)

 (3,000)

(27,000)

- 

- 

- 

Stock-based compensation expense on stock options

-

-

-

-

3,288

-

-

3,288

Net Loss

  - 

- 

 - 

- 

  - 

- 

  (1,094,332)

  (1,094,332)

Balance, December 31, 2009 

52,568,790 

$52,569 

 8,842,302 

$8,842 

$4,097,805 

($2,201,561)

($3,459,931)

($1,502,276)

Preferred shares issued for cash, $0.20 per share

-

 -

  25,000 

25 

 4,975 

- 

- 

5,000 

Preferred shares issued for cash, $0.20 per share

-

 -

  75,000 

75 

14,925 

 

 

 15,000 

Preferred Shares Repurchased

-

- 

(4,200,000)

 (4,200)

(437,800)

- 

- 

  (442,000)

Stock-based compensation expense on stock options

-

- 

  - 

- 

  1,829 

- 

- 

 1,829 

8

Net Loss for 3 months ended Mar. 31, 2010

-

- 

  - 

- 

  - 

- 

(198,805)

(198,805)

Balance, Mar. 31, 2010

52,568,790 

$52,569 

  4,742,302 

$4,742 

$3,681,734 

($2,201,560)

($3,658,736)

($2,121,252)

9

**FRIENDLY ENERGY EXPLORATION**

**(An Exploration Stage Company)**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

 

 

 

 

 

 

 

 From Inception  

 

 From Inception  

 

 

 

 

 

 

 

 

 

 Development Stage 

 

 Exploration Stage 

 

 

 

 

 

 For the 

 

 For the 

 

 (Jan. 7, 1993) 

 

 (Feb. 11, 2005) 

 

 

 

 

 

 Three Months Ended 

 

 Three Months Ended 

 

 through 

 

 through 

 

 

 

 

 

Mar. 31, 2010

 

Mar. 31, 2009

 

 Feb. 10, 2005 

 

Mar. 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 Cash flows from operating activities: 

 

 

 

 

 

 

 

 

 Net loss 

$

(198,805)

 

$

(80,492)

 

$

(2,202,562)

 

$

(3,658,736)

 

 Adjustments to reconcile net loss to 

 

 

 

 

 

 

 

 

  net cash used by operating activities: 

 

 

 

 

 

 

 

 

 

 Depreciation 

237 

 

206 

 

35,287 

 

9,987 

 

 

 Stock Based Compensation 

1,829 

 

- 

 

(61,635)

 

579,419 

 

 

 Impairment Loss 

- 

 

- 

 

442,800 

 

452,090 

 

 

 Bad Debt Expense 

- 

 

- 

 

 

 

319,000 

 

 Changes in operating assets and liabilities: 

 

 

 

 

 

 

- 

 

 

 Accounts Payable  

(1,097)

 

- 

 

74,857 

 

(58,367)

 

 

 Advances 

- 

 

- 

 

- 

 

- 

 

 

 Judgment payable 

6,032 

 

5,460 

 

- 

 

245,318 

 

 

 Interest Payable 

8,405 

 

8,405 

 

23,079 

 

174,692 

 

 

 Payroll Liabilities 

4,590 

 

4,590 

 

37,268 

 

77,753 

 

 

 Deferred Salaries 

60,000 

 

60,000 

 

- 

 

888,000 

 

 

 

 Net cash used by operating activities 

(118,809)

 

(1,832)

 

(1,650,906)

 

(970,844)

 

 

 

 

 

 

 

 

 

 

 

 

 Cash flows from investing activities: 

 

 

 

 

 

 

 

 

 Purchase of property and equipment 

- 

 

- 

 

(41,718)

 

(4,737)

 

 Issuance of promissory notes 

- 

 

- 

 

- 

 

(326,500)

 

 Investment in oil and gas properties 

(67,500)

 

(15,000)

 

- 

 

(580,639)

 

 

 

 Net cash used by investing activities 

(67,500)

 

(15,000)

 

(41,718)

 

(911,876)

 

 

 

 

 

 

 

 

 

 

 

 

 Cash flows from financing activities: 

 

 

 

 

 

 

 

 

 Proceeds from issuance of notes payable 

510,416 

 

- 

 

- 

 

991,151 

 

 Proceeds from issuance of common stock 

- 

 

- 

 

112,970 

 

366,520 

 

 Proceeds from issuance of preferred stock 

(422,000)

 

15,000 

 

1,559,654 

 

347,318 

 

 Proceeds on borrowings from related parties 

110,302 

 

1,931 

 

20,000 

 

205,178 

 

 

 

 Net cash provided by financing activities  

198,718 

 

16,931 

 

1,692,624 

 

1,910,167 

 

 

 

 

 

 

 

 

 

 

 

 

 Net increase in cash 

12,409 

 

99 

 

- 

 

27,447 

 

 

 

 

 

 

 

 

 

 

 

 

 Cash, beginning of period 

15,038 

 

115 

 

- 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 Cash, end of period 

$

27,447 

 

$

214 

 

$

- 

 

$

27,447 

10

FRIENDLY ENERGY EXPLORATION

 (AN EXPLORATION STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS – March 31, 2010

1.

DESCRIPTION OF BUSINESS AND HISTORY

Friendly Energy Corp., Nevada corporation, (hereinafter referred to as the “Company” or “Friendly Energy”) was incorporated in the State of Nevada on January 7, 1993 under the name Eco-Systems Marketing.  The company was originally in the business of selling electric power and related services to small and medium sized businesses in a newly deregulated California market.  The Company is now in the business of oil and gas exploration and operations.  In 2009, the Company acquired four oil and gas leases in central Texas totaling 1,036 acres with twenty-five wells.  In the first quarter of 2010, the Company acquired a fifth oil and gas lease in Central Texas totally 1,000 acres with twenty-four wells  

The Company is considered an exploration stage company in accordance with by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915, Development Stage Entities.  The Company entered the oil and gas exploration business in February 2005, so the cumulative columns in the financial statements include activities for the development stage prior to February 2005 and for the exploration stage beginning February 2005.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going concern – The Company incurred net losses of $3,658,736 from the period of February 1, 2005 (date of entering the oil and gas exploration business) through March 31, 2010 and has commenced its operations on a limited basis. The Company is still in the exploration stage, raising substantial doubt about the Company’s ability to continue as a going concern.  The Company may seek additional sources of capital through the issuance of debt or equity financing, but there can be no assurance the Company will be successful in accomplishing its objectives.

The ability of the Company to continue as a going concern is dependent on additional sources of capital and the success of the Company’s plan.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Year end – The Company’s yearend is December 31.

Principles of consolidation – The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany transactions and balances have been eliminated.

Use of estimates – The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Oil and Gas Properties – The Company utilizes the full-cost method of accounting for petroleum and natural gas properties. Under this method, the Company capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. When the Company obtains proven oil and gas 

11

reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such determination is made the Company assesses annually whether impairment has occurred, and includes in the amortization base drilling exploratory dry holes associated with unproved properties.

The Company applies a ceiling test to the capitalized cost in the full cost pool. The ceiling test limits such cost to the estimated present value, using a ten percent discount rate, of the future net revenue from proved reserves, based on current economic and operating conditions. Specifically, the Company computes the ceiling test so that capitalized cost, less accumulated depletion and related deferred income tax, do not exceed an amount (the ceiling) equal to the sum of: (A) The present value of estimated future net revenue computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current cost) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus (B) the cost of property not being amortized; plus (C) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the property. 

For unproven properties, the Company excludes from capitalized costs subject to depletion, all costs directly associated with the acquisition and evaluation of the unproved property until it is determined whether or not proved reserves can be assigned to the property. Until such a determination is made, the Company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment the Company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. The Company adds the amount of impairment assessed to the cost to be amortized subject to the ceiling test.

Asset Retirement Obligations – The Company follows the provisions of ASC 410, Asset Retirement and Environmental Obligations, which establishes standards for the initial measurement and subsequent accounting for obligations associated with the sale, abandonment or other disposal of long-lived tangible assets arising from the acquisition, construction or development and for normal operations of such assets.

Property and equipment – Property and equipment are stated at cost less accumulated depreciation.  Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are generally 3 to 27 years.  The amounts of depreciation provided are sufficient to charge the cost of the related assets to operations over their estimated useful lives.  

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

Income taxes – Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted ASC 740, *Accounting for Income Taxes,* as of its inception. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years. 

12

Net loss per common share – The Company computes net income (loss) per share in accordance with ASC 260, *Earning per Share*.  ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive.

Stock-Based Compensation -- The Company records stock-based compensation in accordance with ASC 718, *Share-Based Payments*, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

Concentration of risk – A significant amount of the Company’s assets and resources are currently dependent on the financial support of Douglas Tallant and Donald Trapp.  Should they determine to no longer finance the operations of the company before new capital is raised, it may be unlikely for the company to continue.

Revenue recognition – The Company has had revenues of $24,953 to date from its operations.  Revenue is recognized as it is received.

Financial Instruments - Pursuant to ASC 820, *Fair Value Measurements and Disclosures*and ASC 825, *Financial Instruments*, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 and 825 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 and 825 prioritizes the inputs into three levels that may be used to measure fair value:

*Level 1*

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

*Level 2*

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

*Level 3*

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company’s financial instruments consist principally of cash, notes receivable, investment, accounts payable, payroll tax liabilities, judgment payable, deferred salaries, interest payable, loans payables, and amounts due to related parties.   Pursuant to ASC 820 and 825, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all 

13

other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

Recent accounting pronouncements – In January 2010, the FASB issued an amendment to ASC 820, Fair Value Measurements and Disclosure, to require reporting entities to separately disclose the amounts and business rationale for significant transfers in and out of Level 1 and Level 2 fair value measurements and separately present information regarding purchase, sale, issuance, and settlement of Level 3 fair value measures on a gross basis.  This standard, for which the Company is currently assessing the impact, is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of disclosures regarding the purchase, sale, issuance, and settlement of Level 3 fair value measures which are effective for fiscal years beginning after December 15, 2010. 

 

In January 2010, the FASB issued an amendment to ASC 505, Equity, where entities that declare dividends to shareholders that may be paid in cash or shares at the election of the shareholders are considered to be a share issuance that is reflected prospectively in EPS, and is not accounted for as a stock dividend.  This standard is effective for interim and annual periods ending on or after December 15, 2009 and is to be applied on a retrospective basis.  The adoption of this standard is not expected to have a significant impact on the Company’s financial statements.

  

In October 2009, the FASB issued an amendment to the accounting standards related to certain revenue arrangements that include software elements. This standard clarifies the existing accounting guidance such that tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality, shall be excluded from the scope of the software revenue recognition accounting standards. Accordingly, sales of these products may fall within the scope of other revenue recognition standards or may now be within the scope of this standard and may require an allocation of the arrangement consideration for each element of the arrangement. This standard, for which the Company is currently assessing the impact, will become effective on January 1, 2011.

In October 2009, FASB issued an amendment to the accounting standards related to the accounting for revenue in arrangements with multiple deliverables including how the arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the amendments, this standard eliminated the use of the residual method for allocating arrangement considerations and requires an entity to allocate the overall consideration to each deliverable based on an estimated selling price of each individual deliverable in the arrangement in the absence of having vendor-specific objective evidence or other third party evidence of fair value of the undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in a multiple-deliverable revenue arrangement and expands the disclosure requirements about the judgments made in applying the estimated selling price method and how those judgments affect the timing or amount of revenue recognition. This standard, for which the Company is currently assessing the impact, will become effective on January 1, 2011.

In August 2009, FASB issued an amendment to the accounting standards related to the measurement of liabilities that are recognized or disclosed at fair value on a recurring basis. This standard clarifies how a company should measure the fair value of liabilities and that restrictions preventing the transfer of a liability should not be considered as a factor in the measurement of liabilities within the scope of this standard. This standard is effective for the Company on October 1, 2009. The adoption of this amendment did not have a material effect on the Company’s financial statements.

In June 2009, the FASB issued guidance now codified as ASC 105, Generally Accepted Accounting Principles as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP, aside from those issued by the SEC. ASC 105 does not change current U.S. GAAP, but is intended to simplify user access 

14

to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place.  The adoption of ASC 105 did not have a material impact on the Company’s financial statements, but did eliminate all references to pre-codification standards.

The Company has implemented all new accounting pronouncements that are in effect.  These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements.

3.

 OIL & GAS PROPERTIES

 

 

 

 

March 31,

2010

$

 

December 31,

2009

$

 Oil & Gas Properties - Unproved 

 

 

 

 

 Panther Lease 

15,000 

 

15,000 

 

 Byler Lease 

33,650 

 

33,650 

 

 Mud Creek Lease 

10,000 

 

10,000 

 

 Hutchins Lease 

2,400 

 

2,400 

 

South Thrifty Lease

67,500 

 

- 

 

 Red Oak Project 

242,000 

 

242,000 

 

 Talpa Project 

50,000 

 

50,000 

 

 West Peach Project 

36,970 

 

36,970 

 

 

457,520 

 

390,020 

 

 Impairment 

(328,970)

 

(328,970)

 

 

 Total oil & gas properties 

128,550 

 

61,050 

Byler Lease – In 2009, the Company purchased, through its wholly-owned subsidiary, a 100% interest in oil and gas properties in central Texas for $33,650.  The property totals 372 acres and consists of 17 wells.  The Company remits a 22% royalty payment.  As at March 31, 2010, there was production on the property from two wells.  

Hutchins Lease - In 2009, the Company purchased, through its wholly-owned subsidiary, a 100% interest in oil and gas properties in central Texas for $2,400.  The property totals 194 acres.  Upon production, the Company will remit a 15.125% royalty payment.  As at March 31, 2010, there was no production on the property.  

Mud Creek Lease - In 2009, the Company purchased, through its wholly-owned subsidiary, a 100% interest in oil and gas properties in central Texas for $10,000.  The property totals 355 acres.  Upon production, the Company will remit a 22% royalty payment with production expected to commence by July 2010.  As at March 31, 2010, there was no production on the property.    

Panther Creek Lease - In 2009, the Company purchased, through its wholly-owned subsidiary, a 100% interest in oil and gas properties in central Texas for $15,000.  The property totals 155 acres.  The Company remits a 22% royalty payment.  As at March 31, 2010, there was production on the property from four wells.  

South Thrifty Lease - In the first quarter of 2010, the Company purchased, through its wholly-owned subsidiary, a 50% interest in oil and gas properties in central Texas for $67,500.  The property totals 1,000 acres.  The Company remits approximately a 22% royalty payment (the royalty payment varies for the wells).  As at March 31, 2010, there was production on the property from fourteen wells.  

15

Note that the Red Oak Project, Talpa Project and West Peach Project were impaired in 2009.  These projects were not generating income and are unlikely to generate future revenues.

4.

PROPERTY & EQUIPMENT

Property and equipment consist of the following as of March 31, 2010 and 2009:

 

March 31,

2010

$

 

March 31,

2009

$

Furniture and fixtures

20,102 

 

20,102 

Computers and equipment

 26,353 

 

25,726 

 

46,455 

 

45,828 

Less: accumulated depreciation

  (45,274)

 

 (44,389)

Net Furniture, fixtures, computers & equipment

1,181 

 

1,439 

5.

RELATED PARTY TRANSACTIONS

In the first quarter of 2010, the officers agreed with the Company to defer their salaries totaling $60,000, see note 7.

 

As of March 31, 2010 and 2009, loans payable from related parties consists of the following:

 

March 31,

2010

$

 

March 31,

2009

$

Notes payable  from officers of 

 

 

 

the Company bearing interest at 8% 

 

 

 

unsecured and due on demand

134,179 

 

30,279 

6.

OTHER CURRENT LIABILITIES

The company has accrued for unpaid federal payroll taxes in the amounts of $115,021 and $101,199 for the quarters ended March 31, 2010 and 2009, respectively.  $37,268 is owed from 2000 and 2001 unpaid federal payroll taxes; the Company has filed the payroll taxes with the Internal Revenue Service.  $73,163 is owed for accrued payroll taxes on deferred salaries; the Company has yet to file the payroll tax forms with the Internal Revenue Service or related state taxing authorities.

The company has accrued deferred salaries owed to three officers in the amount of $888,000 and 648,000 for the quarters ended March 31, 2010 and 2009, respectively.  

The company has accrued interest in the amount of $197,771 and $153,102 for the quarters ended March 31, 2010 and 2009, respectively.  The accrued interest includes interest on unpaid payroll taxes and related party loans. 

The company increased its borrowings from another company and from a related party in the first quarter of 2010 through the repurchase of preferred shares.  

  

16

7.

COMMON SHARES

Common Shares:  During the quarter ended March 31, 2010, the Company did not issue any common shares.  

Preferred Shares: Each share of preferred stock is convertible into ten shares of common stock and has voting rights equal to twenty shares of common stock.  The board of directors has not specified any other rights or privileges with respect to the preferred stock.

a)

On January 29, 2010, the Company issued 25,000 preferred shares for proceeds of $5,000.

b)

On February 16, 2010, the Company issued 75,000 preferred shares to a related party for proceeds of $15,000.

c)

On March 31, 2010, the Company repurchased 4,200,000 preferred shares for promissory notes totally $422,000.

8.

STOCK OPTIONS

On July 24, 2009, the Company granted 1,500,000 options under the Company’s Stock Option Plan to management and directors of the Company, with an exercise price of $0.005 per option.  Under the terms of the issuance of the options, 750,000 options vest on January 24, 2010 (six months from the date of issuance) and 750,000 options vest on July 24, 2010 (one year from the date of issuance).  The fair value of the options was estimated at the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: risk-free interest rate of 3.50%, expected volatility of 353%, an expected option life of 10 years and no expected dividends. The weighted average fair value of options granted was $0.005 per option. During the quarter ended March 31, 2010, stock-based compensation expense of $1,829 was charged to operations. 

The following table summarizes stock option plan activities:

 

Number of Options

Weighted Average Exercise Price

$

Weighted Average Remaining Contractual Life (years)

Aggregate Intrinsic Value

$

 

 

 

 

 

Balance – December 31, 2007 and 2008

400,000

0.55

 

 

 

 

 

 

 

Granted

1,500,000

0.005

 

 

 

 

 

 

 

Balance – March 31, 2010

1,900,000

0.12

9.01

–

Additional information regarding stock options as of March 31, 2010, is as follows:

Number of

Options 

Exercise

Price

$

Expiry Date

 

 

 

40,000

1.25

April 20, 2015

60,000

1.56

September 28, 2016

300,000

0.25

December 27, 2017

1,500,000

0.005

July 23, 2019

 

 

 

1,900,000

 

 

A summary of the status of the Company’s non-vested stock options as of March 31, 2010 are presented below:

17

 

Stock Options

#

Weighted Average

Grant Date

Fair Value

$

 

 

 

Non-vested, December 31, 2007 and 2008

–

–

Granted

1,500,000

0.005

 

 

 

Non-vested, March 31, 2010

750,000

0.005

As of March 31, 2010, the Company had $2,382 of unrecognized compensation expense relating to unvested options.  

9.

COMMITMENTS AND CONTINGENCIES

Employment contracts –

Douglas Tallant - The Company entered into an employment agreement with Douglas Tallant effective January 1, 2007.  Pursuant to the terms of the agreement, Mr. Tallant is to be paid an annual salary of $180,000 in consideration of which Mr. Tallant agreed to act as the Company’s  President.  The term of the agreement is for an indefinite period, unless otherwise terminated pursuant to the terms of the agreement.

Donald Trapp - The Company entered into an employment agreement with Donald Trapp effective February 1, 2005.  Pursuant to the terms of the agreement, Mr. Trapp is to be paid an annual salary of $60,000 in consideration of which Mr. Trapp agreed to act as the Company’s Corporate Secretary and Treasurer.  The term of the agreement is for an indefinite period, unless otherwise terminated pursuant to the terms of the agreement.  

10.

LITIGATION

In 2005, an employee received a defaulted judgment against the Company concerning the case Bowers v. Friendly Energy Corporation, San Diego Superior Court Case No. 775084.  The default judgment in the principle sum of $434,211.50 was reduced to a principal amount of $110,000, with interest from October 13, 2000.  The transaction has been recorded on the financial statements along with accrued interest of $135,318.  The total of $245,318 is reported in the liability section of the balance sheet. 

11.

SUBSEQUENT EVENTS

In accordance with ASC 855, we have evaluated subsequent events through our audit issuance date, and did not have any material recognizable subsequent events.

18

**ITEM 2. 
**MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION**

**FORWARD-LOOKING STATEMENTS**

 *This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the*Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934,*as amended (the “Exchange Act”). These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections. We may use words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “foresee,” “estimate” and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted. You should read this report completely and with the understanding that actual future results may be materially different from what we expect. The forward looking statements included in this report are made as of the date of this report and should be evaluated with consideration of any changes occurring after the date of this Report. We will not update forward-looking statements even though our situation may change in the future and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.*

**BUSINESS**

***History***

Friendly Energy Exploration was formed under the laws of the State of Nevada on January 7, 1993, under the name Eco-Systems Marketing. Eco-Systems subsequently changed its name to Rama Financial Corporation. An amendment to the Articles of Incorporation was filed changing the corporate name to Friendly Energy Corporation and then to Friendly Energy Exploration in April 2008.

Friendly Energy Exploration was originally incorporated to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Nevada. Friendly Energy Exploration, from its inception in 1993 to 2005, was engaged primarily in establishing itself as an electric service provider.

***Overview***

Our primary focus is on acquiring leases and wells in established oil fields to minimize risk. We expect to build share value through revenue from oil & gas wells.  The Company has acquired five oil & gas leases on 2,036 acres in Central Texas, including 48 producing and shut-in wells.  There are also 13 plugged wells that are candidates for reentry.  Approximately 1,100 acres are in defined oil & gas fields.  These fields have several proven oil and gas zones, which enhances our potential production.  There are many opportunities for in-fill drilling.  The Company has leased a pulling rig to do its own work over on its wells.  The Company plans to acquire additional leases.   

***Mission***

Friendly Energy Exploration engages in the acquisition, exploration, development and operation of oil and gas properties in the United States. Our primary focus is on acquiring leases and wells in established oil fields to minimize risk. The Company expects to build share value through revenue from oil and gas wells.  

The Company was founded in 1993. It was originally an Energy Service Provider (ESP) for electricity in California after the State deregulated power. A few years later California reversed course and put ESPs out of business. It then began marketing cogeneration equipment to companies concerned about high electricity prices and brownouts. For several years the Company was dormant and then in 2005 began investing in oil and gas joint ventures.

19

The Company has recently found a niche market acquiring leases in established, low risk oil fields which have been poorly operated and shut-in.  During 2009, the acquisition program was very successful.  Four leases were acquired in Central Texas totaling 1,036 acres, including 25 producing and shut-in wells.  There are also 13 plugged wells that are candidates for reentry.  Approximately 560 acres are in defined oil & gas fields.  These fields have several proven oil and gas zones, which enhances our potential production.  There are many opportunities for in-fill drilling.  Allowed well spacing is 5 acres for shallow wells (approximately 1,200 feet) and 10 acre spacing for deeper wells (approximately 2,600 feet).  Then, in the first quarter of 2010, the Company acquired a fifth lease totaling approximately 1,000 acres.  The Company is a registered, “bonded” operator in Texas (Operator No. 286572). Therefore, we are in full control of all operations.

The Company is a fully reporting public company. It is currently listed on Pink Sheets with symbol “FEGR”. It was listed on the Bulletin Board before it became dormant. All SEC filings have been submitted and all SEC comments have been answered. 

***Our Oil and Gas Property***

There are several oil & gas zones underlying the five leases in Central Texas.  The wells are mostly completed as Fry or Gray Sands wells at a depth of approximately 1,200 feet.  Four wells are completed in the Marble Falls sands at a depth of approximately 2,700 feet.  None of the wells on the leases were completed in the Caddo gas zone, which is approximately 300 feet below the Fry Sands; we may want to recomplete some of the Fry wells as Caddo wells.  About one-half mile from our Panther Creek lease, a Caddo well was completed last year with an initial potential of 14 BBL/day and 150 MCF/day.  And, none of our wells have been completed in the Barnett Shale gas zone, which lies a little below the Marble Falls zone; this zone has not been explored much in Brown County. 

Spacing for Fry and Gray wells has been reduced to 5 acres and spacing for Marble Falls and Chappel Reef wells has been reduced to 10 acres—half of the old spacing.  Many in-fill wells could be drilled on the leases.

***Panther Creek Lease***: The Panther Creek lease totals 115 acres of which approximately 70% is in a defined Fry Sand oil field. Of the 13 wells, one is a water supply well, three are water injection wells and nine are Fry wells. The water supply well is 2,885 feet deep; we expect to recomplete as a Marble Falls well or possibly a Barnett Shale well. The original Fry well is 2, 860 feet deep; we expect to recomplete as a Marble Falls well or possibly a Barnett Shale well. It may be feasible to recomplete some of the other Fry wells in the Caddo or Marble Falls. Panther Creek has a 630 barrel tank farm and infrastructure work is completed.

***Byler Lease***: The Byler lease totals 372 acres of which approximately 57% is in a defined Fry Sand oil field. Of the 17 wells, two are water injection wells, 11 are Fry wells and four are Marble Falls wells. Of the Fry wells, we expect to rework only six, because the others will probably be uneconomic to rework. Of the Marble Falls wells, we expect to rework three, because one had a tool dropped down the hole and will probably be uneconomic to rework. It may be feasible to drill some of the Fry wells deeper and recomplete in the Caddo or Marble Falls. Two new tank farms and other infrastructure are needed on the Byler lease.
***Mud Creek Lease:***The Mud Creek lease totals 355 acres of which approximately 56% is in a defined Fry Sand oil field. Eight wells that had been producing were plugged several years ago at the mineral owners request to get rid of a fraudulent operator. We expect to reenter all eight wells, but for planning purposes we have assumed reentry of five wells. It may be feasible to recomplete some of these Fry wells in the Caddo or Marble Falls. A new tank farm and other infrastructure are needed on the Mud Creek lease.

***Hutchins Lease*:**The Hutchins lease totals 194 acres of which approximately 30% is in defined oil fields.  There are four Fry Sand wells and one Chappel Reef well.  The latter well was the discovery well for the Chappel Reef and has 300 feet of sands.  There were good oil shows, which were estimated could produce 35 to 40 BOPD, but the gas was even better—maximum open flow potential was 2,500 MCF per day.  In production it did 500 MCF per day with gradual decline.  These wells were plugged in 2001 when the operator had financial problems and oil and gas prices were very low.  We expect to reenter the Chappel Reef well and one of the Fry Sand wells. There is still very good potential for oil and gas production from these wells.  There is very good potential for in-field drilling.  A new tank farm and other infrastructure are needed on the Hutchins lease.

20

***South Thrifty Lease:***The South Thrifty lease totals 1,000 acres of which approximately 54% is in defined oil fields.  There are five Chappel Reef and Ellenberger oil wells and 18 Chappel Reef gas wells.  There is also a water injection well.  Eighteen of the wells are currently producing.  The other six wells need some work.  One of the wells had an initial potential of 792 barrels per day.  Because cheap, used casing was installed, the casing developed a hole after a short time and production was reduced to 50 barrels per day.  There is very good potential for in-field drilling.  The South Thrifty lease has five tank farms.

***Quarterly Developments***

During the first quarter of 2010, the Company acquired a fifth oil & gas lease on 1,000 acres in Central Texas, including 23 producing and shut-in wells.  Approximately 540 acres are in defined oil & gas fields.  As with our other leases, this lease has several proven oil and gas zones and has many opportunities for in-fill drilling. All five of our leases are within five miles of each other in Brown County, Texas.

Also during the first quarter of 2010, the Company leased a pulling rig so that we can work-over our wells more efficiently.  The pulling rig is capable of working on wells up to 5,000 feet deep.  Currently our deepest wells are less than 3,000 feet.

With the help of the leased pulling rig, we were able to bring twenty of our 48 wells back into production by the end of the first quarter.      

 

***Future Plans***

During the remainder of 2010, we plan to rework the remaining wells.  We are estimating that nine of the wells will be uneconomic, and that we will have a total of 39 productive wells by the end of the year.  Also, we will be doing further work on a number of wells to increase production.  For example, we plan to acidize a number of the wells under pressure.  We have already done this with one of our wells and had a significant increase in production. 

Also in the remainder of 2010, we plan to drill at least two “in-fill” wells on the leases. Drilling and completing a Fry well will cost $170,000 to $200,000. Drilling and completing a Marble Falls or Chappel Reef well will cost $280,000 to $330,000.  And, the Company plans to acquire additional leases.

***Governmental Regulations and the Cost of Compliance***

 

We are an independent crude oil and natural gas exploration company. Federal, state and local laws and regulations have been enacted regulating the industry which creates liability for certain environmental contamination. Environmental laws regulate, among other things, the transportation, storage, and handling of oil and gas products. Governmental regulations govern matters such as the protection of fresh water sources, both surface and subsurface, remediation of soil and water contamination resulting from business operations or accidents, disposal of residual chemical wastes, operating procedures, waste water discharges, air emissions, fire protection, worker and community right-to-know and emergency response plans. Moreover, so-called “toxic tort” litigation has increased markedly in recent years as persons allegedly injured by chemical contamination seek recovery for personal injuries or property damage. These legal developments present a risk of liability should we be deemed to be responsible for contamination or pollution caused or increased by any activities we undertake, or for an accident which occurs in the course of such activities. There can be no assurance that we will establish policies and implement the proper procedures for complying with environmental regulations will be effective at preventing us from incurring a substantial environmental liability. If we were to incur a substantial uninsured liability for environmental damage, our financial condition could be materially adversely affected.

 

***Environmental Laws and Regulations***

Our anticipated operations will be subject to numerous federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and 

21

production activities, limit or prohibit drilling activities on specified lands within wilderness, wetlands and other protected areas, require remedial measures to mitigate pollution from former operations, such as pit closure and plugging abandoned wells, and impose substantial liabilities for pollution resulting from production and drilling operations. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly waste handling, disposal and cleanup requirements, our business and prospects could be adversely affected. At this time, we have no plans to make any material capital expenditures for environmental control facilities.

***Employees; Identification of Certain Significant Employees***

As of March 31, 2010, we have no significant employees other than Douglas Tallant, our President and Director, and Donald Trapp, our Secretary, Treasurer and Director.  We also frequently use third party consultants to assist in the completion of various projects. Third parties are instrumental to keep the development of projects on time and on budget.

***Cash Requirements***

Our cash on hand as of March 31, 2010 is $27,447. We do not have sufficient cash on hand to pay the costs of our operations as projected to twelve (12) months or less or to fund our operations for that same period of time. We will require additional financing in order to proceed with some or all of our goals as projected over the next twelve (12) months. We presently do not have any arrangements for additional financing, and no potential lines of credit or sources of financing are currently available for the purpose of proceeding with any of our goals projected over the next twelve (12) months and beyond.

 

Any additional growth of the Company will require additional cash infusions. We may face expenses or other circumstances such that we will have additional financing requirements. In such event, the amount of additional capital we may need to raise will depend on a number of factors. These factors primarily include the extent to which we can achieve revenue growth, the profitability of such revenues, operating expenses, research and development expenses, and capital expenditures. Given the number of programs that we have ongoing and not complete, it is not possible to predict the extent or cost of these additional financing requirements.

        

Notwithstanding the numerous factors that our cash requirements depend on, and the uncertainties associated with each of the major revenue opportunities that we have, we believe that our plan of operation can build long-term value if we are able to demonstrate clear progress toward our objectives.

Progress in the development of our business plan will likely lend credibility to our plan to achieve profitability. 

The failure to secure any necessary outside funding could have an adverse affect on our development and results there from and a corresponding negative impact on shareholder liquidity.

***Results of Operations for the Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008***

We realized $8,900 in revenue from operations in the first quarter of 2010.  In the first quarter of 2009, we received $5,035 in revenue.  During the first quarter of 2010, the loss from operations is $184,368 (2009 - $66,627). This increase in loss was due primarily to oil well operations costs for reworking oil wells of the Central Texas leases and for upgrading and repairing infrastructure on the leases.  From February 11, 2005 (inception of oil and gas exploration operations) to March 31, 2010, Friendly Energy Exploration has incurred cumulative net operating losses of $2,966,508.

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***Liquidity and Capital Resources***

***Overview***

For the quarter ended March 31, 2010, we had total assets of $165,677, compared to $86,005 total assets for the period ending December 31, 2009.  The increase in assets was due to the investment in the South Thrifty lease.  We believe these assets, which include 48 producing or shut-in oil wells, are worth substantially more than we paid for them.  We have brought twenty of the wells back into production by the end of the first quarter of 2010, and have started rework on the remaining wells.  

For the quarter ended March 31, 2010, we had current liabilities of $2,286,929, which was represented by accounts payable, payroll liabilities, judgment payable, deferred salaries, interest payable and loans payable. At December 31, 2009 we had current liabilities of $1,588,281.  The main reason for the increase was the repurchase of 4,200,000 preferred shares by the Company for promissory notes.  The repurchase was agreed to by the owners of the preferred shares in order to reduce the total number of shares outstanding, which will make the Company’s shares more attractive to investors.  The increase in liabilities was also due to deferred salaries.

***Going Concern***

 

We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive activities. For these reasons, our auditors stated in their report on our audited financial statements that they have substantial doubt that we will be able to continue as a going concern without further financing.

 

***Future Financings***

 

We will continue to rely on equity sales of our common or preferred shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund planned acquisitions and exploration activities.

 ***Off-Balance Sheet Arrangements***

 

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

**ITEM 3.**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

**ITEM 4.**

**CONTROLS AND PROCEDURES**

***Management’s Quarterly Evaluation of Disclosure Controls and Procedures***

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act").  Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls 

23

and procedures were not effective as of March 31, 2010, due to the material weaknesses resulting from not having an independent Audit Committee, not maintaining appropriate cash conterols, and not implementing appropriate information technology controls. Please refer to our Annual Report on Form 10-K/A as filed with the SEC on June 17, 2010, for a complete discussion relating to the foregoing evaluation of Disclosures and Procedures. 

***Changes in Internal Control Over Financial Reporting***

 

There were no changes in internal controls over financial reporting that occurred during the three months ended March 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

**PART II - OTHER INFORMATION**

**ITEM 1.**

**LEGAL PROCEEDINGS.**

We are not a party to any pending legal proceeding. No federal, state or local governmental agency is presently contemplating any proceeding against the Company. No director, executive officer or affiliate of the Company or owner of record or beneficially of more than five percent of the Company's common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.

**ITEM 1A.**

**RISK FACTORS.**

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

**ITEM 2.**

**UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

**1.**

**Issuance of Equity Securities in exchange for services:**

None. 

**2.**

**Convertible Securities:**

100,000 preferred shares were sold for $20,000 cash during the first quarter of 2010. 

**3.**

**Outstanding Warrants:**

None. 

**4.**

**Sales of Equity Securities for Cash:**

None.

**ITEM 3.**

** DEFAULTS UPON SENIOR SECURITIES.**

None

**ITEM 4.**

**SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

None

**ITEM 5.**

** OTHER INFORMATION.**

 

None

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**ITEM 6.**

**EXHIBITS**

**Exhibit**

**Number**

**Description of Exhibit**

**Filing**

3.01 

Articles of Incorporation

Filed with the SEC on August 31, 2000 as part of our Registration Statement on Form 10-SB.

3.01a 

Restated Articles of Incorporation

Filed with the SEC on April 14, 2008 as part of our Current Report on Form 8-K.

3.02

Bylaws

Filed with the SEC on August 31, 2000 as part of our Registration Statement on Form 10-SB.

10.01

Stock Repurchase Agreement dated March 31, 2010 between the Registrant and Douglas B. Tallant

Filed with the SEC on April 5, 2010 as part of our Current Report on Form 8-K.

10.02

Stock Repurchase Agreement dated March 31, 2010 between the Registrant and Donald Trapp

Filed with the SEC on April 5, 2010 as part of our Current Report on Form 8-K.

10.03

Stock Repurchase Agreement dated March 31, 2010 between the Registrant and Merus Energy Corp.

Filed with the SEC on April 5, 2010 as part of our Current Report on Form 8-K.

10.04

Promissory Note dated March 31, 2010 between the Registrant and Douglas B. Tallant

Filed with the SEC on April 5, 2010 as part of our Current Report on Form 8-K.

10.05

Promissory Note dated March 31, 2010 between the Registrant and Donald L. Trapp

Filed with the SEC on April 5, 2010 as part of our Current Report on Form 8-K.

10.06

Promissory Note dated March 31, 2010 between the Registrant and Merus Energy Corp.

Filed with the SEC on April 5, 2010 as part of our Current Report on Form 8-K.

31.01

Certification of Principal Executive Officer Pursuant to Rule 13a-14

Filed herewith.

31.02

Certification of Principal Financial Officer Pursuant to Rule 13a-14

Filed herewith.

32.01

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

Filed herewith.

32.02

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

Filed herewith.

**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

**FRIENDLY ENERGY EXPLORATION**

Dated: June 17, 2010

By:

 */s/ Douglas Tallant*

**Douglas Tallant**

President and CEO

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