1.         Organization and Significant Accounting Policies

 

Business

Eagle Environmental Technologies, Ltd. was originally incorporated in the State of Utah on February 28, 1978 under the name of Boshir Uranium and Development Company.  The Company was originally incorporated to engage mainly in the acquisition, development, mining, milling, leasing and sale of mining properties.  The Company was originally authorized to issue 50,000 shares of common stock with a par value of $1.00 per share.

 

On December 17, 1984, the stockholders approved an amendment to the Articles of Incorporation, which changed the authorized capitalization to 50,000,000 shares with a par value of $0.001 per share.  On February 21, 1986, the Company’s Articles of Incorporation were amended to change the name of the corporation to The College of Physicians and Surgeons and to increase the authorized shares to 100,000,000, with a par value of $0.001 per share.  On or about February 11, 1988 by Amendment to the Articles of Incorporation the name of the corporation was changed Cholla Precious Metals, Inc.

 

On July 12, 1991, Cholla Precious Metals, Inc. merged with Eagle Environmental Technologies, Inc., (“Eagle”) a Nevada corporation, which was organized on June 15, 1990.  Prior to the merger, Cholla Precious Metals, Inc. liquidated its’ assets and liabilities under Chapter 7 of the U.S. Bankruptcy laws.  As part of the merger, the outstanding shares of Cholla were reduced through a 3 for 1 reverse stock split and three million shares of the Company’s stock were issued to the shareholders of Eagle.  Cholla subsequently changed its name to Eagle Environmental Technologies, Inc.  The successor company’s capitalization consisted of 100,000,000 shares, par value $0.001 per share, divided into two classes:  (1) Ten Million (10,000,000) shares of Convertible Preferred stock, with no voting rights; and Ninety Million (90,000,000) shares of voting common stock.

 

In November of 1997, the Company’s shares of common stock underwent a 10 to1 reverse split.  Accordingly, the number of the Company’s issuance and outstanding shares was reduced to 1,776,462.

 

The Company had one subsidiary, Lone Eagle Technology Site, Inc. (“LETSI”).  LETSI was a Nevada corporation incorporated on December 1, 1995.  The Company organized LETSI for the purpose of establishing a technology development center for research, development and commercialization of technologies to process hazardous waste.  Effective December 1, 2002 LETSI was dissolved and no longer exists.

 

On October 21, 2002, the Company amended the Articles of Incorporation to increase the authorized shares to 100,000,000 shares of common stock at par value of $0.01 per share and 2,000 shares of convertible preferred stock at par value of $0.01 per share.  Each share of convertible preferred stock may be converted into 50,000 shares of common stock 180 days or more from the date of issuance.  Voting rights equal to 50,000 shares of common stock is available to the owner of each share of convertible preferred stock on all matters that come before shareholders’ meeting. 

 

On December 31, 2004, the Company amended the Articles of Incorporation to increase the authorized shares to 200,000,000 shares of common stock. 

 

On May 16, 2006, the Company amended the Articles of Incorporation to increase the authorized shares to 300,000,000 shares of common stock, par value of one cent ($.01).

 

Use of Estimates in the Preparation of Financial Statements

The preparation of 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates. 

 

Cash and Cash Equivalents

 

For the purpose of the statements of cash flows, all highly liquid investments with maturities of three months or less are considered to be cash equivalents.  There were no cash equivalents as of December 31, 2006.

 

Oil and Gas Properties

Investments in oil and gas properties are accounted for using the successful-efforts method of accounting.  Under the successful-efforts method, costs such as geological and geophysical, exploratory dry holes and delay rentals are expensed as incurred.  The successful-efforts method follows the guidance provided in Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, where the first measurement for impairment is to compare the net book value of the related asset to undiscounted cash flows using commodity prices consistent with management expectations. 

 

All drilling and completion costs that directly lead to the extraction and production of oil and gas reserves and all development dry holes are capitalized.  Capitalized costs are accumulated by cost centers.  For amortization purposes, the cost center is the individual property or an aggregation of properties in the same field or reservoir.  The Company has one cost center, the Siler lease property located in East Texas. 

 

Under the successful-efforts method, Costs associated with the capitalization of leases are capitalized as incurred.  These consist of costs incurred in obtaining a mineral interest in a property, such as the costs of lease bonuses and options to lease, brokers’ fees, recording fees, legal cost, and other similar costs in acquiring property interests. 

 

Oil and gas properties are amortized using the units-of –production method using estimates of proved reserve quantities. 

 

Other Property and Equipment

 

Depreciation of other office furniture and equipment and computer hardware and software is provided using the straight-line method based on estimated useful lives ranging from three to seven years.

 

Rights to Technology

The Company amortizes intangible assets over the estimated useful period of benefit of the asset or the legal life, whichever is shorter.  The Company evaluates the recoverability of intangible assets periodically, taking into account events or circumstances that warrant revised estimates of useful lives or that indicate possible impairment.   Impairment losses are recognized in the period when impairment has occurred. 

 

Fair Value of Financial Instruments

                                                                                                                   The carrying amount of financial instruments held by the Company, which include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short duration.  The carrying amount of the Company’s notes payable approximate their fair value based on incremental borrowing rates for similar types of borrowing arrangements.

 

Income Taxes

The Company provides for income taxes under the provisions of Statements of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes”. SFAS No. 109 requires an asset and liability based approach in accounting for income taxes.

 

Deferred income tax assets and liabilities are recorded to reflect the tax consequences in future years of temporary differences between revenue and expense items for financial statement and income tax purposes. Valuation allowances are provided against assets that are not likely to be realized.  Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 

 

Loss Per Share

 

The computation of basic and diluted earnings per common share is based on the weighted average number of shares outstanding during the year, plus the common stock equivalents.  Common stock equivalents are not included in the diluted loss per share calculation when their effect is antidilutive.  

 

Revenue Recognition

 

The Company recognizes oil revenue from its interest in producing wells as oil is produced and sold from those wells.  Oil sold is not significantly different from the company’s share of production.

 

Principles of Consolidation

 

The Company has adopted the provisions of FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”.  The accompanying Consolidated Financial Statements include the accounts of Hohle Oil Services, Co. (a Nevada Corporation), a Variable Interest Entity, where we are deemed the primary beneficiary, regardless of our ownership percentage.  All significant intercompany balances and transactions with the consolidated entity have been eliminated. 

 

New Accounting Pronouncements

In April 2003 the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement, which amends and clarifies existing accounting pronouncements, addresses financial accounting and reporting for derivative or other hybrid instruments. This Statement requires that contracts with comparable characteristics be accounted for similarly. It is effective for contracts entered into or modified after September 30, 2003. The Company does not expect the adoption of SFAS 149 to have any impact on the financial statements.

 

In May 2003 the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which is effective at the beginning of the first interim period beginning after March 15, 2003. This statement establishes standards for the Company’s classification of liabilities in the financial statements that have characteristics of both liabilities and equity. The Company believes the adoption of SFAS 150 will have no effect on the Company’s financial position or results of operations.

 

In December 2003 the FASB issued SFAS 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of SFAS 87, 88, and 106”. This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS 87, “Employers’ Accounting for Pensions”, SFAS 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. This Statement retains the disclosure requirements contained in SFAS 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, which it replaces. It requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information is required to be provided separately for pension plans and for other postretirement benefit plans. The Company has no Pension or Other Postretirement Benefits.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment to Accounting Research Bulletin (“ARB”) No. 43, Chapter 4”.  The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges.  In addition, SFAS No. 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities.  SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  Earlier application of SFAS No. 151 is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004.  The Company does not expect the adoption of SFAS No. 151 to have a material impact on the Company’s future financial position, cash flows or results of operations.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004, or “R”), “Share-Based Payment — a revision of FASB Statement No. 123 Accounting for Stock-Based Compensation”.  SFAS No. 123 supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”.  SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an alternative. The Company recognized stock option compensation expense in the amount of $240,000 during the year ended December 31, 2005.

 

                                                                                                                                                                       

1.                  Acquisition of Oil & Gas Rights

 

Siler Lease Property

In December 2004, The Company entered into an agreement with B&B Oil, Inc., a Texas corporation.  The Company offered 3,500,000 treasury 144 shares, 1,500,000 shares free trading common stock, and paid $57,000 in property taxes owed by the previous operator to obtain the oil rights and oil production equipment, located on the Siler Lease properties in Rusk County Texas.  The transaction was valued at $469,500.  The Company pro rata allocated the purchase price to the assets acquired, based on the estimated fair market value of the assets acquired.  The table below shows the allocation of the purchase price to the assets.

 

Allocation of Siler Purchase
Oil & gas rights	$   419,950
Drilling and production  equipment	37,079
Wells	12,471
Total Acquisition Cost	$   469,500

 

The transaction closed in January of 2005.  At December 31, 2004, the Company had recorded a deposit in the amount of $244,500 for the value of a note payable and shares issued as of December 31, 2004.

 

Oilton & Hirsch Properties

In February 2005, the Company signed a Letter of Agreement with Omni Minerals, LLC, a Texas Limited Liability Company, for the purchase of oil and gas leases and equipment.  In March 2005, the Company issued 2,500,000 shares of treasury 144 stock to Omni Minerals Inc. In July of 2005, the Company rescinded the agreement.  At Which time Omni Minerals returned the 2,500,000 shares issued, to Buzzard Bait Transfer Co. 

 

Energy 2000

In July of 2004, ZawTech International Inc. (“ZawTech”), a related Company, entered into an exchange agreement with Energy 2000 (“E2000”) to obtain oil producing land and equipment located in Texas.  Buzzard Bait Transfer Co. (“Buzzard Bait”), a related party, distributed 20,000,000 shares of Eagle Environmental common stock to E2000 shareholders.  The deal subsequently fell through.  The Company never received the assets from E2000, and in December of 2004, the 20,000,000 shares issued were returned to the Company and cancelled.  (See Note 7)

 

Gordon Brothers Oil

In November 2004, the Company made a purchase offer in the amount of $5,500,000 to Gordon Brothers Oil, Inc. for the purchase of oil producing land and equipment in Oklahoma.  Per terms of the offer, the Company issued 2,000,000 shares of non-restricted, non-treasury common stock as “good faith deposit or liquidated damages”.  The Company obtained the 2,000,000 trading shares by offering 3,000,000 shares of Treasury 144 stock to shareholder Carl Dunn in a Stock Exchange Agreement, dated November 16, 2004.  (See Note 8)  In addition, the Company made a non-refundable cash deposit of $17,500 payable to Gordon Brothers Oil, Inc.  In January 2005, the Company failed to fund the remaining purchase price, and the purchase offer was voided.  The cash deposit and stock issuance were forfeited by the Company.  At December 31, 2004, the Company had determined it was unlikely the purchase would be funded, resulting in a forfeiture of the stock and cash, so an investment loss in the amount of $177,500 was recorded at December 31, 2004.  

 

Rights to Technology

 

The Company had previously capitalized amounts related to the acquisition of a license for the Zawcad technology.  During the year ended December 31, 2004, management determined the Company no longer had rights under the previous licensing agreement.  The Company recognized an impairment loss of $220,000 during the year ended December 31, 2004, to write-off the value of the asset.  

 

 

2.               Variable Interest Entity

 

In February 2005, Hohle Oil Services Co. (“Hohle”), a related party (See note 8), was formed to become the future field operator at the Company’s Siler well site.  Also in February of 2005, the Company entered into an operating agreement with Hohle, whereby the Company agrees to provide cash deposits as required to maintain operations at the Siler well site.  As the Company is the sole source of capital for Hohle, management determined the Company is primary beneficiary, under FIN 46, which requires the Company to consolidate the Variable Interest Entity, under such circumstances. 

 

3.               Property and Equipment

 

The following is a summary of property and equipment at December 31, 2006, and 2005.:

 

 

4.               Prepaid Expenses

 

Texas Railroad Commission Bond

During the year ended December 31, 2005, the Company issued 1,000,000 shares of treasury 144 stock to B&B Oil, Inc. as consideration to B&B Oil for renewing its’ $250,000 Texas operating bond. The Company recorded a prepaid expense in the amount of $25,000.  As of December 31, 2005, the Company had amortized $12,500 of the prepaid and the remaining prepaid balance was $12,500.  During the year ended December 31, 2004, the Company issued 1,000,000 shares to B&B Oil to be held as collateral for payment of B&B’s $250,000 Texas operating bond.  The Company was unable to pay B&B for the bond and subsequently forfeited the shares to B&B during 2005.  The Company recorded a Prepaid in the amount of $12,500 at December 31, 2004, and amortized $12,500 during the year ended December 31, 2005.  During 2006, the bonding agreement remained in place with no additional costs or stock issuance. The bond is due for replacement in 2007.

 

SOFIE Contingent Shares

During the year ended December 31, 2005, the Company recorded a prepaid expense and contingent liability (see Note  ) in the amount of $150,000, for 1,000,000 shares payable to SOFIE, Inc., under a contract agreement (See note 8).  The shares are contingent upon the employees placed by SOFIE performing one year of service with the Eagle.  In June 2006, the employee completed the one year of service and the shares became payable.   During the year ended December 31, 2005, the Company amortized $87,500 in prepaid expense, related to the shares.  The balance of the prepaid was $62,500 at December 31, 2005.

 

5.               Notes Payable

 

The Company’s notes payable consist of the following at December 31, 2006 and 2005:

Notes Payable	2006	2005
Note payable to a financial institution: non-interest bearing note; monthly principal payments of $1,958; note matures July 2009	$      21,537	$             62,653
Note payable to an individual, non interest bearing; principal due January 2007	100,000	-0-
Note Payable to a corporation.; non interest bearing; principal due 2007	48,495	-0-
Total Notes Payable	170,032	62,653
Less:  current portion	(148,495	(-0-)
Total long-term portion	$     21,537	$            62,653

 

All notes payable are classified as current, as amounts are due within a year. 

7.               Settlement Liability

In September 2002, the Company entered into a “Settlement Agreement” with Carl Dunn, a shareholder.  The agreement settled prior litigation involving the Company and Carl Dunn, regarding the original Zawcad license agreement.  Per terms of the agreement, the Company was to issue 12 convertible preferred shares (convertible to 600,000 common shares) to Carl Dunn, and a $650,000 promissory note, payable to Carl Dunn.  The Company issued the convertible shares to Carl Dunn on January 14, 2003.  The transaction was valued at $.05 per common share, for a total value of $30,000.  The note, issued on September 25, 2002 carries interest at 7.25% per annum, with principal and interest payable on demand, subject to the restructuring of Eagle Environmental stock that is being coordinated by Rutledge Securities.  At this time management is unable to determine when the restructuring will be completed. 

 

The Company recorded interest expense, on the note, in the amount $47,125 for the year ended December 31, 2005, and $47,125 for the year ended December 31, 2004.  No amounts were paid on the note during 2005, or 2004.  Principal and interest due on the note was $803,899 at December 31, 2005, and $756,774 at December 31, 2004.    

 

In January of 2006, a shareholder paid the obligation owing under the settlement agreement.  At which time the Company issued 8,000,000 shares to the shareholder as reimbursement plus compensation for making the payment. (See note)   

 

The full value of the note including interest, has been cleared from the Company and no debt is carried forward.     (See note 12)

 

8.               Related Party Transactions

 

Since its inception, the Company has done a number of significant transactions with Buzzard Transfer Co., JAB Enterprises, Plasma Energy Processes, Inc. (“PEPI”), Zawtech International, and Company CEO Brian Wilmot. 

 

The following table summarizes amounts owed to the respective related parties at December 31, 2006, and 2005. 

 

Due To  Related Parties	2006	2005
Buzzard Bait Transfer Company, Inc	$           144,750	$    -0-
JAB Enterprises, Inc.	-0-	-0-
Plasma Energy Processes, Inc.	35,151	29,751
Company Officer	-0-	-0-
Due To / (From) related parties	$     179,901	$    697,370

 

The following table summarizes amounts due from the respective related parties at December 31, 2006, and 2005.

 

Due From  Related Parties	2006	2005
Buzzard Bait Transfer Company, Inc	$     -0-	$           226,890
JAB Enterprises, Inc.	-0-	-0-
Company Officer	-0-	-0-
Due To / (From) related parties	$     -0-	$     226,890

 

Buzzard Bait Transfer Company, Inc.

Company CEO Brian Wilmot is Vice President of Buzzard Bait Transfer Co, and Company Secretary Judy Wilmot is the assistant Secretary of Buzzard Bait Transfer Co. The Company has conducted numerous transactions with Buzzard Bait Transfer Co.  Transactions are recorded in related party liability accounts.  From time to time liabilities are settled via cash payments or the issuance of the Company’s common stock, dependent upon the Company’s liquidity position.  The following table summarizes amounts owed to (receivable from) Buzzard Bait Transfer Co. at December 31, 2006, and 2005. 

 

Due To / (From) Buzzard Bait	2006	2005
Eagle expenses paid	$            20,135	$     -0-
Contract expenses	144,750	-0-
Shares receivable	-0-	(242,429)
Note payable	23,495	-0-
Interest payable	-0-	-0-
Total Due to (from) Buzzard Bait	$     188,380	$(242,429)

 

Buzzard Bait Share Transfers

In March 2005, the Company issued to Buzzard Bait Transfer Co. Company shares as reimbursement for previous contract expenses owed to Buzzard Bait, and for Company expenses paid by Buzzard Bait.  The transaction was valued at $304,936, based on the share price at the date of issuance, and the value of the liability was $259,317 the date the shares were issued.  The value of the shares issued exceeded the liabilities owed to Buzzard Bait on the date the shares were issued by $45,619.  The Company recorded the excess amount as a receivable from Buzzard Bait.. 

 

In December 2005, the Company issued to Buzzard Bait Transfer 173 convertible preferred shares (convertible to 8,650,000 common shares) as reimbursement for shares exchanged and for satisfaction of other related party liabilities..  The transaction was valued at $1,168,793, based on the share price of the common shares at the date of issuance.  The value of the liabilities at the date of issuance was $987,522.  The value of the shares issued exceeded the net liabilities owed to the related parties by $181,271.  The Company recorded the excess amount as a receivable from Buzzard Bait.

 

During the year ended December 31, 2005, The Company issued 353 convertible preferred shares to Buzzard Bait as reimbursement for various common stock transactions.  Buzzard Bait converted 159 of those shares into 7,950,000 shares of common stock and returned the common shares to Eagle.  Eagle then issued the shares to investors.   During 2004, Buzzard Bait converted 328 shares of Eagle Environmental convertible preferred stock into 16,400,000 shares of Eagle Environmental common stock.

 

During 2006, the company issued no additional stock to Buzzard Bait.

 

Eagle Expenses paid by Buzzard Bait

Buzzard Bait Transfer Co. paid $6,573 on behalf of the Company for expenses incurred during 2005, and $55,394 for expenses incurred during 2004.  During 2005, the Company paid cash reimbursements in the amount of $15,000 to Buzzard Bait.  In addition, $109,769 of the various Buzzard Bait share reimbursement were offset against current and previous Company expenses by Buzzard Bait, which reduced the liability to $0 at December 31, 2005.  No amounts were repaid to Buzzard Bait for expenses incurred during the year ended December 31, 2004. The balance due for Company expenses paid by Buzzard Bait was $118,195 at December 31, 2004.  

 

Buzzard Bait Management Contract

The Company maintains an agreement with Buzzard Bait Transfer Co., for the services of Company CEO Brian Wilmot, and Company Secretary Judy Wilmot.  Under this agreement, the Company accrued $216,667 in contract expenses during the year ended December 31, 2005, and $153,750 in contract expenses during the year ended December 31, 2004.  The Company will accrue the expense to a related party liability account.  From time to time the Company will make cash payments or issue stock to Buzzard Bait Transfer Co, to satisfy the contract liability.  The Company made cash payments in the amount of $165,000 in 2005, and $117,025 in 2004 to Buzzard Bait Transfer Co., as payment for contract liabilities.  As noted above, in March 2005, the Company issued 5,082,271 common shares, valued at $304,936 as satisfaction of previous contract liabilities and expenses paid by Buzzard Bait.  Of this amount, $152,775 was allocated to accrued contract expenses.  This reduced the contract liability to $0 at that date.  In December 2005, the Company issued 6 convertible preferred shares (convertible to 300,000 common shares), valued at $37,500 as satisfaction of contract liabilities.  In July of 2004, the Company issued 75 convertible preferred shares (convertible to 3,750,000 common shares) valued at $150,000 during 2004, to Buzzard Bait Transfer Co., as payment of contract liabilities. The table below reconciles contract activity for the years ended December 31, 2005, and 2004. 

 

Buzzard Bait Transfer – Contract payable	2006	2005
Balance December 31, 2004, and 2003	$     -0-	$    135,525
Accrued contract expenses 2006 and 2005	400,000	216,667
Cash payments on contract expenses	(255,250)	(165,000)
Common shares issued 2006 and March 2005	-0-	(152,775)
Preferred shares issued 2006 and December 27, 2005	-0-	(37,500)
Preferred shares issued December 28, 2005	-0-	3,083
Balance December 31, 2006, and 2005	$144,750	$-0-

 

Buzzard Bait Note and Interest Payable

On November 10, 2003 the Company issued a note payable to Buzzard Bait Transfer Co., in the amount of $300,000  as reimbursement for 60 Eagle Convertible Preferred shares (convertible into 3,000,000 common shares) Buzzard Bait transferred to a third party.  The Company did not make cash payments on the note during 2005 or 2004.  The note was satisfied at December 31, 2005 with a preferred share issuance.   The balance of the note was $300,000 at December 31, 2004.  (See note 5)

 

The Company accrued interest in the amount $36,000 for the year ended December 31, 2005, and $36,000 for the year ended December 31, 2004.  At December 31, 2005, the Company satisfied the balance of interest payable with the preferred share issuance, valued at $77,129.  The balance of the interest payable was $41,129 at December 31, 2004.

 

Other Buzzard Bait Transactions

In October 2005, the Company issued to Buzzard Bait Transfer Co. 1,000,000 shares as a signing bonus on the new management contract.  The Company recorded a contract expense in the amount of $175,000. 

 

In March 2005, the Company issued 600,000 treasury 144 shares to Buzzard Bait Transfer Co as reimbursement for the 500,000 Eagle trading shares Buzzard Bait issued to B&B Oil for acquisition of the Siler Lease properties. (See Note 3)

 

JAB Enterprises, Inc.

Company CEO Brian Wilmot is President of JAB Enterprises, inc., and Company secretary Judy Wilmot is the secretary and treasurer.  During the year ended December 31, 2005, the Company received cash payments for a water unit sold by JAB Enterprises totaling $1,742, which the Company recorded as liability.  During 2004, The Company received cash payments totaling $11,596 for a water units sold by JAB Enterprises, which the Company recorded as a liability.  The Company recorded a liability for expenses paid by JAB Enterprises, Inc. in the amount of $517 for the year ended December 31, 2004.  The Company made $0 in cash payments to JAB for the years ended December 31, 2005, and 2004, respectively.  At December 31, 2005 the Company satisfied the liability to JAB, in the amount of $62,208 with a preferred share issuance.   The balance payable to JAB was $60,466 at December 31, 2004. 

 

The Company paid expenses on behalf of JAB Enterprises Inc, in the amount of $3,595 for the year ended December 31, 2005, and $2,255 for the year ended December 31, 2004, which the Company recorded as a receivable.  At December 31, 2005 the Company satisfied the receivable from JAB, in the amount of $9,975 with the preferred share issuance.  The balance receivable from JAB was $6,380 at December 31, 2004.     

 

Plasma Energy Processes, Inc. 

Company CEO Brian Wilmot is the CEO of Plasma Energy Processes, Inc. (“PEPI”), and Company secretary Judy Wilmot is the secretary of PEPI.  The Company leases two offices, both of which are located on the property of the primary residence of Brian and Judith Wilmot from PEPI, in the amount of $1,800 a month.  The Company recorded $21,600 in rent expense payable to PEPI in 2006, and $21,600 in 2005.  During 2004, PEPI advanced $1,400 to the Company.  The Company made payments to PEPI in the amount of $16,200 for the year ended December 31, 2006, and $21,600 for the year ended December 31, 2005.  The balance payable to PEPI was $35,151 at December 31, 2006.

 

Company Officer

Until August 31, 2004 when the contract expired, the Company had maintained an employment contract with Company CEO Brian Wilmot, which paid him $200 a month. Under this contract, the Company recorded $1,600 in consulting expense for the year ended December 31, 2004.  In addition Brian Wilmot personally paid $1,000 in expenses on behalf of the Company, during the year ended December 31, 2004.  The Company satisfied the payable to CEO Brian Wilmot, in the amount of $12,304, with a preferred share issuance in December of 2005. No cash payments were made for the years ended December 31, 2005, or 2004.  The balance payable was $0 at December 31, 2005, and $12,304 at December 31, 2004.

 

The Company paid expenses on behalf of Company CEO Brian Wilmot in the amount of $3,695 for the year ended December 31, 2005, and $5,822 for the year ended December 31, 2004.  The Company eliminated the balance receivable, in the amount of $12,580, with the preferred share issuance in December of 2005.  The balance receivable was $0 at December 31, 2005, and $8,886 at December 31, 2004. 

 

Zawtech International, Inc.

Company CEO Brian Wilmot is the president of Zawtech International, Inc.  (“Zawtech”), and Company Secretary Judy Wilmot is the secretary of Zawtech. Zawtech is the sole shareholder of Hohle Oil Services, Inc.  The Company made disbursements to Zawtech in the amount of $11,000 and $5,050, respectively for the years ended December 31, 2005, and 2004.  The payments were for reimbursement of travel expenses, which Zawtch paid on behalf of the Company.  The balance payable to Zawtech was $0 at December 31, 2005, and 2004.

 

During 2004, Buzzard Bait Transfer Co. transferred 20,000,000 shares of Eagle Environmental stock to E2000 for the Zawtech purchase of oil assets related to the E2000 agreement. As reimbursement for the shares transferred, the Company issued 440 shares of convertible preferred stock (convertible into 22,000,000 shares of common stock) to Buzzard Bait Transfer Co.  The E2000 agreement never materialized.  The 20,000,000 shares transferred from Buzzard Bait to E2000 were returned to Eagle Environmental, and were cancelled.  (See Note 3)

 

SOFIE

In June of 2005, the Company entered into a management contract with SOFIE Inc., a Nevada Corporation to perform the functions of president and vice-president of Eagle.  One of the employees provided by SOFIE is also a member of Eagle’s board of directors.  The monthly contract expense is $17,500 per month.  During the year ended December 31, 2005, the Company accrued contract expense in the amount of $122,500, under this agreement.  In December 2005, the Company issued 18 preferred shares and 40,000 common shares as satisfaction of 2005 contract liabilities.  There were no cash payments made to SOFIE during the year ended December 31, 2005.  The balance payable to SOFIE was $0 at December 31, 2005.

 

The SOFIE contract also has a 1,000,000 common share bonus contingent upon the employee performing one year of service.  In June 2005, the Company recorded a liability and a prepaid asset in the amount of $150,000.  The Company is amortizing the prepaid asset ratably until the service period has been completed.  At December 31, 2005, the Company had amortized $87,500 of the prepaid, and the balance of the prepaid asset was $62,500 (See note 5).  In June of 2006, the employee had completed the year of service, at which time the shares became payable. (See note 9 and note12) On July 1, 2006, the SOFIE contract was terminated by mutual agreement between the parties and no further debt was accumulated from the contract.

 

Hohle Oil Services Co.

Company CEO Brian Wilmot is the President and Secretary of Hohle, and Company Secretary Judy Wilmot is Treasure of Hohle.  Hohle is wholly owned by Zawtech International, Inc.  Under the guidance of FIN 46, the Company consolidated the account balances of Hohle as a Variable Interest Entity, and all intercompany transactions were eliminated. (See Note 3)

 

9.               Commitments and Contingencies

In June 2005, the Company entered a consulting contract with SOFIE for the positions of president and vice-president of the Company.   One of the contract’s provisions included a 1,000,000 share bonus for each position, contingent upon the person placed by SOFIE remains in the position for a year.  In June 2006, one of the original employees completed the required year of service, and $1,000,000 share bonus became payable at that time.  In June of 2005, when the contract was signed, the Company recorded a prepaid asset (See note 5) and an accrued expense in the amount of 150,000, which was based on the market value of the stock on the contract signing date.  The balance of the accrued expense was 150,000 at December 31, 2005. (See note 8 and note 12)

 

The Stock Exchange agreement between the Company and Carl Dunn (See note 3), dated November 16, 2003, included a provision where upon obtaining financing for the Gordon Bros. purchase, the Company would pay Carl Dunn $100,000 to pay down principal and interest on the $650,000 Settlement Note (See Note 6).  Per the agreement, if the Company was unable to make the payment, the Company would issue Carl Dunn 1,500,000 shares of stock.  At December 31, 2004, Company management determined that it was probable that the Company would be unable to obtain the financing.  A contingent loss in the amount $100,000 was recorded at December 31, 2004.   In January of 2005, the Gordon Bros. purchase offer was voided, and Buzzard Bait issued the 1,500,000 shares to Carl Dunn. 

 

 

 

10.              Income Taxes

 

The significant components of the Company’s deferred tax assets are as follows:

 

 

As of December 31, 2004, the Company had a net operating loss carryforward for federal income tax purposes of $5,617,447. This net operating loss carryforward will begin to expire in 2007.  The valuation allowance has been estimated in an amount equal to the projected future benefit of the loss carryforward due to the current assumption the Company will not generate sufficient income to utilize the future tax benefit.

 

11.              Stock-Based Compensation

 

The Company has adopted the disclosure provision for stock-based compensation of SFAS No. 123R, “Accounting for Stock-Based Compensation” as revised in December of 2004.    The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate.

 

The Company grants stock options to its directors, officers, and consultants. All options vest immediately upon granting.

 

The following tables summarize information about stock options.

 

	2005				2004
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning	8,300,000		$      .13		7,150,000		$      .14
Options exercised	-		-		-		-
Options forfeited	(200,000)		.14		(150,000)		.18
Options granted	1,600,000		.13		1,300,000		.22
Outstanding Ending	9,700,000		$      .11		8,300,000		$      .13

 

 

 

Range of Exercise Price	Number of Options Outstanding	Weighted Average Exercise Price	Weighted Average years to Expiration	Number of Options Exercisable	Weighted Average Exercise Price
$.01 - $.10	7,100,000	$  .08	1.81	7,100,000	$  .08
$.11 - $.20	1,600,000	$  .13	6.00	1,600,000	$  .13
$.21 - $.30	1,000,000	$  .29	3.14	1,000,000	$  .29
	9,700,000	$  .11	2.76	9,700,000	$  .11

 

 

The weighted average fair market value of options granted during the year ended December 31, 2005 is $.15 per option.  Using the fair value method, the Company recognized compensation expense in the amount $240,000, and $ for the years ended December 31, 2005, and 2004, respectively.  The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions.

 

	2005	2004
Risk-free interest rate	4.39%
Estimated holding period prior to exercise (years)	5
Estimated volatility in the price of the Company’s commons shares	617%
Dividend yield	0%	0%

 

No stock options were issued in 2006.

 

12.              Settlement Events

 

In January 2006, Dunn Industrial assigned the rights to receive principal and interest from the Settlement Note to Global Cash Flow Inc, a Nevada Corporation wholly owned by a Company shareholder, in exchange for $150,000 in cash and issuance of a note payable in the amount of $250,000.  In March 2006, the Company issued 8,000,000 treasury shares to Global Cash Flow Inc, as total satisfaction of principal and accrued interest payable on the Settlement Note. 

 

In June 2006, the employee under the SOFIE contract agreement completed the required year of service for 1,000,000 share signing bonus.  The shares became payable at that time, and were subsequently issued in July of 2006.

 

 

13.              Going Concern

The financial statements of the Company have been prepared assuming the Company will continue as a going concern.  Although the Company is currently an Operating Company, with continuous oil field production since February of 2007, and oil sales from 2006, the Company’s continued existence is dependant upon its ability to resolve its liquidity problems, by increasing the oil field production to profitable levels or by obtaining an infusion of capital from other sources outside the entity or the management that currently funds its operations.  This situation raises substantial doubt about the Company’s ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.