Calibre Energy, Inc. 10-QSB/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-QSB/A
Amendment No. 1
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2006
 
OR
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF     
THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 000-50830
 
CALIBRE ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
  
88-0343804
(State or other jurisdiction
  
(I.R.S. Employer
of incorporation or organization)
  
Identification No.)
 
1667 K Street NW, Suite 1230
Washington, DC 20006
(Address of principal executive offices)
 
(Zip Code)
 
(202) 223-4401
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether 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.
Yes _X_ No  _
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  _ No X_
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  _ No X_
 
As of August 14, 2006, 56,600,806 shares of common stock were outstanding.
 

CALIBRE ENERGY, INC. QUARTERLY REPORT ON FORM 10-QSB
 
FOR THE QUARTERLY PERIOD ENDED
 
June 30, 2006
 
TABLE OF CONTENTS
 
 
PAGE
       
   
   
 
 
   
 
 
 
       
   
       
 
 
 
 
 
 
   
   
 
i
 
PART I - FINANCIAL INFORMATION
 
Calibre Energy, Inc.
(unaudited)
   
 June 30,
  
December 31,
  
   
 2006
  
2005
  
   
 
      
Assets
           
Current Assets
           
Cash
  
$
4,649,432
  
$
2,105,749
  
Accounts receivable - Oil and gas sales
    
97,406
    
33,960
  
Note receivable - related party
     -    
300,000
  
Prepaid expenses and other
    
20,621
    
104,100
  
               
Total current assets
    
4,767,459
    
2,543,809
  
               
Noncurrent Assets
              
Oil and gas properties, using full cost method
              
Properties subject to amortization
    
7,325,495
    
830,646
  
Properties not subject to amortization
    
5,653,718
    
4,478,235
  
Furniture and office equipment
    
361,101
    
121,778
  
Less: Accumulated depreciation, depletion, amortization and impairment
    
(121,079
)
  
(35,599
)
Net property, furniture and office equipment
    
13,219,235
    
5,395,060
  
Advances to operator-related party    
784,649
     -  
Other assets
    
22,662
    
-
  
               
Total assets
    
$18,794,006
    
$7,938,869
  
               
Liabilities and Shareholders’ Equity
              
Current Liabilities
              
Accounts payable - trade
    
1.447,435
    
946,852
  
Accounts payable - related party     1,031,650     -  
Accounts payable - employees
    
-
    
98,630
  
Accrued expenses
    
52,751
    
20,482
  
Total liabilities
    
2,531,836
    
1,065,964
  
               
Shareholders’ Equity
              
Preferred stock; $.001 par value; 10,000,000 authorized; none issued
    
-
    
-
  
Common stock; $.001 par value; 100,000,000 authorized; 56,600,806 and 47,000,000 issued and outstanding at June 30, 2006, and December 31, 2005, respectively
    
56,601
    
47,000
  
Additional paid-in capital
    
19,367,853
    
8,727,556
  
Accumulated deficit
    
(3,162,285
)
  
(1,901,651
)
Total shareholders’ equity
    
16,262,169
    
6,872,905
  
               
Total liabilities and shareholders’ equity
  
$
18,794,006
  
$
7,938,869
  
 
1
 
Calibre Energy, Inc.
For the Three Months and Six Months Ended June 30, 2006
(unaudited)
   
Three Months
Ended
June 30,
2006
  
Six Months
Ended
June 30,
2006
  
   
 
  
 
  
Revenue
          
Oil & Gas Sales
  
$
90,761
  
$
129,899
  
Total revenue
    
90,761
    
129,899
  
               
Operating expenses
              
Lease operating expense
    
19,969
    
16,430
  
Severance and ad valorem taxes
    
6,846
    
10,063
  
Depletion expense
    
53,448
    
85,479
  
Compensation expense
    
250,729
    
610,280
  
Professional fees
    
219,245
    
420,810
  
General and administrative (excluding compensation expense and professional fees)
    
171,086
    
315,132
  
Total operating expense
    
721,323
    
1,458,194
  
               
Loss from operations
    
(630,562
)
  
(1,328,295
)
               
Interest income
    
43,542
    
67,663
  
               
               
Net loss
  
$
(587,020
)
$
(1,260,633
)
               
               
Earnings per share:
              
Basic and diluted
   $
(0.01
)
 $
(0.01
)
               
Weighted average shares outstanding
    
56,705,704
    
49,755,558
  
               
2
 
Calibre Energy, Inc.
For the Six Months Ended June 30, 2006
(unaudited)
                   
   
Common Stock
  
Additional
          
           
Paid-in
  
Accumulated
      
   
Shares
  
Amount
  
Capital
  
Deficit
  
Total
  
Balance, December 31, 2005
    
47,000,000
  
$
47,000
  
$
8,727,556
  
$
(1,901,651
)
$
6,872,905
  
                                 
Issuance of common stock for reverse merger
    
3,525,000
    
3,525
    
(3,525
)
        
-
  
                                 
Issuance of common stock for cash, net of offering costs
    
3,160,000
    
3,160
    
5,811,434
          
5,814,594
  
                                 
Cashless exercise of warrants
    
295,806
    
296
    
(296
)
        
-
  
                                 
Option expense
                
10,253
          
10,253
  
                                 
Net loss
                      
(673,612
)
  
(673,612
)
                                 
Balance, March 31, 2005
    
53,980,806
  
$
53,981
  
$
14,545,422
  
$
(2,575,263
)
$
12,024,140
  
                                 
Issuance of common stock for cash, net of offering costs
    
2,620,000
    
2,620
    
4,812,180
          
4,814,800
  
                                 
Option expense
                
10,251
          
10,251
  
                                 
Net loss
                      
(587,020
)
  
(587,020
)
                                 
Balance, June 30, 2006
    
56,600,806
  
$
56,601
  
$
19,367,853
  
$
(3,162,283
)
$
16,262,171
  
 
3
 
Calibre Energy, Inc.
For the Six Months Ended June 30, 2006
(unaudited)
        
        
Cash Flows from Operating Activities
       
Net loss
  
$
(1,260,633
)
Adjustments to reconcile net loss to net cash provided by operating activities:
        
Noncash recapitalization expense
    
100,000
  
Accretion of stock option expense
    
20,504
  
Depreciation and depletion expense
    
85,479
  
Changes in working capital components:
        
(Increase) in accounts receivable
    
(63,446
)
(Increase) in other current assets
    
(16,521
)
(Increase) in other assets
    
(22,662
)
Increase in accounts payable
    
1,433,603
  
Increase in accrued expense
    
32,269
  
Net cash (used in) operating activities
    
308,594
  
         
Cash Flows from Investing Activities
        
Additions to oil and gas properties
    
(8,454,980
)
Additions to furniture, office equipment, other assets and leasehold improvements
    
(239,325
)
Receipts on notes receivable
    
650,000
  
Disbursements on note receivable
     (350,000 ) 
Net cash (used in) investing activities
    
(8,394,305
)
         
Cash Flows from Financing Activities
        
Proceeds from sale of common stock
    
10,629,394
  
Net cash provided by financing activities
    
10,629,394
  
         
Net increase in cash
  
$
2,543,683
  
         
Cash
        
Beginning of period
  
$
2,105,749
  
End of period
  
$
4,649,432
  
         
Supplemental cash flow information:
        
Interest paid
    
-
  
Income taxes paid
    
-
  
 
4

CALIBRE ENERGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)

Note 1.  Basis of Presentation

The accompanying unaudited interim financial statements of Calibre Energy, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Calibre’s annual report filed with the SEC on Form 10K-SB/A for the period ending December 31, 2005. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year 2005 as reported in Form 10K-SB/A, have been omitted. 
 
Certain reclassifications have been made to amounts in prior periods to conform with the current period presentation.
 
Note 2. Organization and Business Operations
 
Calibre Energy, Inc. is an exploration and production company focused on the acquisition, exploitation and development of high quality, long-lived producing and non-producing fractured gas and oil shale properties in selected producing basins in North America. Headquartered in Washington, DC and Houston, Texas, Calibre is a Nevada corporation that was formed on August 17, 2005.
 
Calibre intends to expand and develop our exploration and production business and its reserves by initially emphasizing the identification and development of shale gas opportunities in the Barnett Shale and the Fayetteville Shale. Calibre has identified that the Mississippian developments of the Barnett Shale in the Ft. Worth Basin and the Fayetteville Shale development in the Arkoma Basin provide the greatest near term economic value. Calibre is currently participating in three projects with Kerogen Resources, Inc., a privately held exploration and production company located in Houston, Texas, the Reichmann Petroleum project, South Ft. Worth Basin project and Williston Basin project.
 
Note 3. Summary of Significant Accounting Policies
 
Stock Based Compensation
 
Calibre adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment, effective January 1, 2006. Accordingly, Calibre began recording compensation expense associated with stock options and other forms of equity compensation in accordance with SFAS No. 123R, as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to January 1, 2006, Calibre had accounted for stock options according to the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and therefore no related compensation expense was recorded for awards granted with no intrinsic value. Calibre adopted the modified prospective transition method provided for under SFAS No. 123R, and, consequently, has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with the issuance of stock options will be recognized as a quarterly amortization based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. See Note 6.
 
5
 
Note 4. Going Concern
 
As shown in the accompanying financial statements, Calibre has incurred operating losses since inception and expects to continue to incur losses through 2006. Calibre’s business plan requires substantial capital investment prior to achieving sufficient positive cash flow to sustain its operations. Future profitability is dependent on the success of our exploration programs. These factors raise substantial doubt about our ability to continue as a going concern. Calibre’s ability to achieve and maintain profitability and positive cash flow is dependent upon Calibre’s ability to locate profitable properties, generate revenue from their planned business operations, and control exploration cost. Management plans to fund its future operations from additional financings and commercial production of its exploration programs. However, there is no assurance that we will be able to obtain additional financing from investors or private lenders and, if available, such financing may not be on commercial terms acceptable to Calibre or its shareholders or that our exploration programs will be successful.

Note 5. Related Party Transactions
 
Calibre is party to a letter agreement with Kerogen Resources pursuant to which we are participating in the Reichmann project. During the six month period ending June 30, 2006, pursuant to such agreement we have paid $3,068,182 to Kerogen, including $1,706,539 in the three month period ending June 30, 2006. Kerogen then paid such amount to Reichmann Petroleum Corporation as reimbursement of capital and operating expenses.
 
Calibre has entered into a Participation Agreement with Kerogen Resources for the exploration and development of prospects in the South Ft. Worth Basin. Pursuant to this agreement we are obligated to pay Kerogen Resources $597,000 for its identification of prospects; we have paid Kerogen Resources $500,000 of such amount to date, although no payments were made in the period ending June 30, 2006 under this agreement. Additionally, we have advanced $1,184,154 to Kerogen for participation in leases in the Hill County area of Texas, including $517,517 in the three months ending June 30, 2006. 
 
We have entered into a Participation Agreement with Kerogen Resources for the exploration and development of prospects in the Williston Basin. Pursuant to this agreement we are obligated to pay Kerogen Resources $638,600 for its identification of prospects; we have paid Kerogen Resources $550,000 of such amount to date. However, we made no payments to Kerogen during the period ending June 30, 2006 in respect to this agreement.
 
We believe all of the transactions with related parties have been on terms no less favorable to us than those terms which may have been obtained from unrelated third parties.
 
Note 6.
2005 Stock Incentive Plan
 
Calibre adopted the 2005 Stock Incentive Plan (the “Plan”) in October 2005. Under the Plan, options may be granted to key employees and other persons who contribute to the success of Calibre. Calibre has reserved 9,000,000 shares of common stock for the plan. Option awards are generally granted with an exercise price equal to the market price of Calibre’s stock at the date of grant. No options were granted or exercised during the three month period ended June 30, 2006.
 
We granted a total of 650,000 nonvested options including options to purchase 50,000 shares of common stock at an exercise price of $.12 per share, and options to purchase 600,000 shares of common stock at an exercise price of $.24 per share. All nonvested options vest over a four year service period and expire 10 years after the date of grant. For the three month period ended June 30, 2006, Calibre recorded compensation expense of $10,251 to amortize the cost of nonvested options over the service period of the options.
 
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield 0%, expected volatility of 57.99%, risk-free interest rate of 5.0%, and expected lives of 10 years. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
 
6
 
A summary of Calibre’s nonvested shares as of June 30, 2006, and changes during the six months ended June 30, 2006, is presented below:
 
 
 
Nonvested Shares
  
 
 
Shares
  
Weighted-
Average
Grant-Date
Fair Value
  
Nonvested at January 1, 2006
    
650,000
  
$
162,629
  
Granted
    
-
        
Vested
    
-
    
-
  
Forfeited
    
-
        
Nonvested at June 30, 2006
    
650,000
  
$
162,629
  
 
As of June 30, 2006, there was $142,125 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.5 years. No shares vested or were exercisable during the six month period ended June 30, 2006.

Note 7. Warrants

Calibre’s warrants outstanding and exercisable as of June 30, 2006 are:
 
               
Exercise Price
  
Number of shares
  
Remaining life
  
Exercisable
Number of Shares
Remaining
  
               
$0.40
    
2,000,000
    
1.25 years
    
2,000,000
  
$0.75
    
10,000,000
    
1.25 years
    
9,600,000
  
$2.00
    
577,500
    
1.75 years
    
577,500
  
$2.75
    
5,780,000
    
1.75 years
    
5,780,000
  
     
18,357,500
          
17,957,500
  
 
During the first quarter of 2006, 400,000 warrants were exercised on a cashless basis resulting in the issuance of 295,806 shares of common stock.
7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this report. The terms “Calibre Energy,” “Calibre,” “we,” “us” and “our” refer to Calibre Energy, Inc.
 
Overview
 
Cautionary Statement Regarding Forward-Looking Statements
 
This report contains certain “forward-looking statements”. Statements included in this report that are not historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including things such as plans for growth of the business, future capital expenditures, competitive strengths, goals, references to future goals or intentions or other such references are forward-looking statements. These statements can be identified by the use of forward-looking terminology, including “may,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” or similar words. These statements are made by us based on our past experience and our perception of historical trends, current conditions and expected future developments as well as other considerations we believe are appropriate under the circumstances. Whether actual results and developments in the future will conform to our expectation is subject to numerous risks and uncertainties, many of which are beyond our control. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors, including, but not limited to:
 
·  
a decline in or substantial volatility of crude oil and natural gas commodity prices;
 
·  
the incurrence of significant costs and liabilities in the future resulting from our failure to comply with new or existing environmental regulations or an accidental release of hazardous substances into the environment; and
 
·  
other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.
 
All forward-looking statements included in this report and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made, other than as required by law, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
Overview - Plan of Operation
 
We are engaged in oil and natural gas exploration and exploitation activities in the Barnett Shale development in the Ft. Worth Basin located northern Texas and the Fayetteville Shale development in the Arkoma Basin located in Arkansas. We have a limited operating history as our predecessor company for financial reporting purposes was formed on August 17, 2005. We are engaged in the acquisition, exploitation and development of producing and non-producing oil and gas-shale (source rock) properties in selected producing basins in North America. Our oil and gas business commenced in August 2005. Our current activities are in the Barnett Shale development in Northern Texas and the Fayetteville Shale development in Arkansas.
 
Our goal is to expand and develop our exploration and production business and our reserves by initially emphasizing the identification and development of shale gas opportunities in the Barnett Shale and the Fayetteville Shale. We believe both the Mississippian development of the Barnett Shale in the Ft. Worth Basin and the Fayetteville Shale development in the Arkoma Basin provides the greatest near term economic value to us. We believe these developments have the most promising economics of any shale gas wells compared to the various producing basins in the United States.
 
8
 
Results of Operations for Six Months Period Ending June 30, 2006
 
We commenced our oil and gas operations in August 2005. Prior to that time we did not have any significant activities or assets. Consequently, we are not able to compare results of operations for the six months ended June 30, 2006 to any earlier period.
 
Net Sales.
 
For the six months ended June 30, 2006, our oil and gas net sales were $129,899. During the majority of the period we had only two wells on production. However, at the end of the period, three new wells started commercial production. We are still in the operational development stage of our exploration program. Accordingly, we do not expect to generate substantial revenues during the majority of 2006 until the completion of the initial stages of our drilling program.
 
General and Administrative Expenses.
 
For the six months ended June 30, 2006, general and administrative expenses were $1,346,222. A total of $315,132 was for costs associated with our general and administrative expenses, $420,810 was for professional fees principally associated with capital raising activities, and $610,280 was for compensation expense.
 
Net Loss.
 
For the six months ended June 30, 2006, we had a net loss of $1,260,633. The net loss is primarily attributable to minimal operating revenues to support general and administrative costs until such time as we achieve operating results from our drilling program.
 
Results of Operations for Three Months Period Ending June 30, 2006
 
We commenced our oil and gas operations in August 2005. Prior to that time we did not have any significant activities or assets. Consequently, we are not able to compare results of operations for the three months ended June 30, 2006 to any earlier period.
 
Net Sales.
 
For the three months ended June 30, 2006, our oil and gas net sales were $90,761. Three additional wells began producing at the end of period which resulted in an increased revenue rate in the three month period ending June 30, 2006. We are still in the operational development stage of our exploration program. Accordingly, we do not expect to generate substantial revenues during the majority of 2006 until the completion of the initial stages of our drilling program.
 
General and Administrative Expenses.
 
For the three months ended June 30, 2006, general and administrative expenses were $641,060. A total of $171,086 was for costs associated with our continuing general and administrative expense, $219,245 was for professional fees principally associated with capital raising activities, and $250,729 was for compensation expense for employees. During the period, we incurred higher professional expenses as a result of higher third party investor relation fees and higher legal and accounting fees due to the preparation and filing of our registration statement on Form SB-2 with the Securities and Exchange Commission.
 
Net Loss.
 
For the three months ended June 30, 2006, we had a net loss $587,020. Lower compensation expense and a slight improvement in revenues reduced the loss rate versus the prior period. The net loss is primarily attributable to minimal operating revenues to support general and administrative costs until such time as we achieve operating results from our drilling program.
 
9
 
Liquidity and Capital Resources
 
As of June 30, 2006, we had cash of $4,649,432 and working capital of $3,043,135. We expect to have monthly overhead costs of approximately $200,000 per month for the next twelve months. Since our inception, our primary sources of liquidity have been generated by the sale of equity securities (including the issuance of securities in exchange for goods and services to third parties and to pay costs of employees). To date, the net proceeds from the sales of securities have been used to fund our exploration programs and our general and administrative costs including substantial costs for the registration of our securities. Our future liquidity and our liquidity in the next twelve months depends on the success of our exploration programs and our continued ability to obtain sources of capital to fund our continuing development.
 
On October 31, 2005, we raised an aggregate of $8,000,000 ($7,243,056 net of offering costs) through the sale of 20,000,000 shares of common stock and warrants to purchase 10,000,000 shares of common stock at an exercise price of $0.75 and a term of 2 years. As of June 30, 2006, 400,000 warrants to purchase our common stock have been exercised on a cashless basis.
 
In March and April 2006, we raised an aggregate of $11,560,000 ($10,629,394 net of offering costs) through the sale of 5,780,000 shares of common stock and warrants to purchase 5,780,000 shares of common stock at an exercise price of $2.75 and a term of 2 years.
 
Cash flow from operating activities
 
For the six month period ending June 30, 2006, cash flow from operating activities was $308,594 primarily attributed to a net loss of $1,260,633 in the period offset by an increase in accounts payable of $1,433,603.
 
Cash flow from investing activities
 
For the six month period ending June 30, 2006, net cash used in investing activities was $8,394,305, driven primarily by our investment in oil and gas properties in the Ft. Worth Basin and an initial investment in properties in the Arkhoma Basin.
 
Cash flow from financing activities
 
For the six month period ending June 30, 2006, net cash provided by financing activities was $10,629,394, which was attributed to our sale of common stock and purchase warrants. At June 30, 2006, Calibre had received net proceeds from stock issuances of $10,629,394 (gross proceeds of $11,560,000 less $930,606 of offering costs).
 
Hedging
 
We did not hedge any of our oil or natural gas production during 2005 and have not entered into any such hedges from January 1, 2006 through the date of this filing.
 
Contractual Commitments
 
 
    
Payments Due By Period
  
   
Total
  
Less Than 1
Year
  
1-3 Years
  
3-5 Years
      
Contractual Obligations
                      
Operating Lease
                      
Contract Obligations
  
$
522,817
  
$
190,257
  
$
195,253
  
$
137,307
        
Drilling Wells in Progress
  
$
3,490,000
  
$
3,490,000
        
 
        
Total
  
$
4,012,817
  
$
3,680,257
  
$
195,253
  
$
137,307
        
 
10
 
As of August 1, 2006, all of our drilling well obligations are associated with the Reichmann Petroleum project. Our contract obligations are associated with our office leases in Washington, D.C. and Houston, TX.
 
Off-Balance Sheet Arrangements
 
As of June 30, 2006, we had no off-balance sheet arrangements.
 
Related Party Transactions
 
We are party to a letter agreement with Kerogen Resources pursuant to which we are participating in the Reichmann project. During the six month period ending June 30, 2006, pursuant to such agreement we have paid $3,068,182 to Kerogen, including $1,706,539 in the three month period ending June 30, 2006. Kerogen then paid such amount to Reichmann Petroleum Corporation as reimbursement of operating expenses.
 
We have entered into a Participation Agreement with Kerogen Resources for the exploration and development of prospects in the South Fort Worth Basin. Pursuant to this agreement we are obligated to pay Kerogen Resources $597,000 for its identification of prospects; we have paid Kerogen Resources $500,000 of such amount to date, although no payments were made in the six months ending June 30, 2006 under this agreement. Additionally, during the six month period, we have advanced $1,184,154 to Kerogen for participation in leases in the Hill County area of Texas, including $517,517 in the three months ending June 30, 2006. 
 
We have entered into a Participation Agreement with Kerogen Resources for the exploration and development of prospects in the Williston Basin. Pursuant to this agreement we are obligated to pay Kerogen Resources $638,600 for its identification of prospects; we have paid Kerogen Resources $550,000 of such amount to date. However, we made no payments to Kerogen during the six months ending June 30, 2006 in respect to this agreement.
 
We believe all of the transactions with related parties have been on terms no less favorable to us than those terms which may have been obtained from unrelated third parties.
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our most significant judgments and estimates used in preparation of our consolidated financial statements.
 
Employee Stock Plan. In December 2004, the FASB issued SFAS No.123R, "Accounting for Stock-Based Compensation" (“SFAS No. 123R”). SFAS No.123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No.123R requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to SFAS No.123R, only certain pro forma disclosures of fair value were required. SFAS No.123R shall be effective for small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. Calibre adopted SFAS No. 123R as of January 1, 2006.
 
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We have a stock-based compensation plan, which is described more fully in Form 10-KSB/A for the period ended December 31, 2005 filed with the SEC. As permitted under generally accepted accounting principles, we accounted for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, stock-based employee compensation cost has been recognized, as all options granted under the plan had an exercise price less than the market value of the underlying common stock on the date of grant, see Form 10-KSB/A filed with the SEC for more information. The net loss at December 31, 2005 had compensation cost for the stock-based compensation plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123, Accounting for Stock-Based Compensation), would have increased $372,965 or $.01 per share.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
 
Market risk is the risk of loss arising from adverse changes in market rates and prices. We are exposed to risks related to increases in the prices of fuel and raw materials consumed in exploration, development and production. We do not engage in commodity price hedging activities.
 
Item 4. Controls and Procedures.
 
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2006. Based on this evaluation, our chief executive officer, Prentis B. Tomlinson, Jr. and chief financial officer, O. Oliver Pennington, III have concluded that, as of June 30, 2006, our disclosure controls and procedures were effective, in that they ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are (1) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

In the period ending December 31, 2005 and the quarter ending on March 31, 2006, our management concluded that our disclosure controls and procedures were not effective. Changes in the internal controls were initially identified in the fourth quarter 2005 that materially affected our internal control over financial reporting. During the previous periods, Calibre substantially increased its business activities. Over the last period ending June 30, 2006, Calibre improved its system of internal control over financial reporting during the fiscal quarter covered by this report by (1) initiating a plan to formalize accounting and disclosure procedures; (2) further developing our internal IT systems; (3) hiring additional personnel (4) engaging a third party provider of accounting, bookkeeping and IT services that specializes in oil and gas accounting; (5) performing additional reviews of our internal accounting information prior to review by our independent auditors to ensure that no items that would have a material affect or are reasonably likely to have a material affect on internal control over financial reporting will be identified prior to issuance of our reports.

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PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
Our management is not aware of any significant litigation, pending or threatened, that would have a significant adverse effect on our financial position or results of operations.
 
Item 2. Sales of Unregistered Securities and Use of Proceeds.
 
Recent Sales of Unregistered Securities. Set forth below is certain information concerning all issuances of securities by the Company during the fiscal quarter ended June 30, 2006 that were not registered under the Securities Act.
 
In March and April of 2006, Calibre completed a private placement to institutional and other accredited investors in which it sold 5,780,000 units. Each unit, composed of one share of common stock and a warrant to purchase a share of common stock, was sold at a price of $2.00. Aggregate gross proceeds to Calibre were $11,560,000. Offering costs were $930,606 and are reflected as a reduction in the proceeds. Calibre issued to the placement agents who assisted with the sale of the share and warrants, warrants to purchase 577,500 shares of Common Stock at a price of $2.00 per share. The shares of common stock and warrants were offered and sold pursuant to the exemption from registration afforded by Rule 506 under the Securities Act of 1933 (the “Securities Act”), Regulation S, and/or Section 4(2) of the Securities Act.
 
Item 3. Defaults upon Senior Securities.
 
None.
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
None.
 
Item 5. Other Information.
 
None.
 
Item 6. Exhibits.
 
 
Exhibit 31.1*
Chief Executive Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act
     
 
Exhibit 31.2*
Chief Financial Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act
     
 
Exhibit 32.1*
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
 
Exhibit 32.2*
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Filed herewith
 
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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.
 

   
CALIBRE ENERGY, INC.
 
  
Registrant
  
       
       
       
       
Dated: October 3, 2006
  
By:
S/Prentis B. Tomlinson, Jr.
     
Prentis B. Tomlinson, Jr.
     
President and Chairman of the Board of Directors
       
       
Dated: October 3, 2006
  
By:
S/O. Oliver Pennington, III
     
O. Oliver Pennington, III
     
Chief Financial Officer
 
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INDEX TO EXHIBITS
 
OF
 
CALIBRE ENERGY, INC.
 
 
Exhibit 31.1 *
Chief Executive Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act
 
Exhibit 31.2 *
Chief Financial Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act
 
Exhibit 32.1 *
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Exhibit 32.2 *
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
 
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