form20f.htm
 


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F
(Mark One)
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended April 30, 2011
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of even requiring this shell report ………

For the transition period from _____________ to ____________
Commission file number 000-49760

GRAVIS OIL CORPORATION 

(Exact name of the Registrant as specified in its charter)

N/A 

(Translation of Registrant’s name into English)
 
Alberta, Canada
(Jurisdiction of incorporation or organization)

Suite 902, #105, 150 Crowfoot Crescent N.W.
Calgary, Alberta, Canada T3G 3T2
 (Address of principal executive offices)

Tim L. Morrison
Suite 902, #105, 150 Crowfoot Crescent N.W.
Calgary, Alberta, Canada T3G 3T2
Tel: (403) 984-6342
Fax: (403) 984-6343
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of each exchange 
on which registered
None
 
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.

Common Shares, no par value per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 140,789,470 common shares, no par value per share, as of April 30, 2011.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes  x No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. x Yes o No
 
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
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 o    No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o    Yes o  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
o  Large Accelerated filer o  Accelerated filer x  Non-accelerated filer
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP x
 
International Financial reporting Standards as issued
 
Other o
 
 
by the International Accounting Standards Board o
 
 
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 o Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No





 
 

 

Table of Contents

 
     
Page
PART I
   
1
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
1
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
1
ITEM 3.
KEY INFORMATION
 
1
ITEM 4.
INFORMATION ON THE COMPANY
 
9
ITEM 4A.
UNRESOLVED STAFF COMMENTS
 
19
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS OVERVIEW
 
19
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
26
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
34
ITEM 8.
FINANCIAL INFORMATION
 
34
ITEM 9.
THE OFFER AND LISTING
 
36
ITEM 10.
ADDITIONAL INFORMATION
 
37
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
47
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
47
       
PART II
   
48
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
48
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
48
ITEM 15.
CONTROLS AND PROCEDURES
 
48
ITEM 16.
[RESERVED]
 
49
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
 
49
ITEM 16B.
CODE OF ETHICS
 
49
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
49
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
50
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
50
ITEM 16F.
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
 
50
ITEM 16G.
CORPORATE GOVERNANCE
 
50
       
PART III
   
51
ITEM 17.
FINANCIAL STATEMENTS
 
51
ITEM 18.
FINANCIAL STATEMENTS
 
51
ITEM 19.
EXHIBITS
 
51

 



 
 

 

 
 
INTRODUCTION
 
We are a corporation organized under the laws of the Province of Alberta, Canada. Since December 2006, our primary business activity has been the acquisition, exploration and development of a number of unproven heavy oil properties in the United States. To date, we have been assigned an immaterial amount of proved reserves based on the anticipated total reserves in the Missouri area; however, we still believe we are an exploration stage company. Our activities to date have included analysis and evaluation of technical data, preparation of geological models, acquisition of mineral rights, exploration and development drilling, conceptual engineering, construction and operation of thermal demonstration projects. Our common shares trade in the United States on the Over-the-Counter Bulletin Board exchange (OTC) under the symbol "GRAVF." As used in this annual report, the terms “issuer” and Gravis means Gravis Oil Corporation individually, the terms "we", "us", "our" and "company" mean Gravis Oil Corporation together with its subsidiaries and "MegaWest USA" means our directly-owned subsidiary MegaWest Energy (USA) Corp.

This annual report contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933, as amended and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors" that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to a wide range of known and unknown risks and uncertainties, and although we believe that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will be realized. Any number of important factors could cause actual results, future actions, conditions or events to differ materially from those in the forward-looking statements, including, but not limited to, the volatility of oil and gas prices, the ability to implement corporate strategies, the state of domestic capital markets, the ability to obtain financing, changes in oil and gas acquisition and drilling programs, operating risks, production rates, reserve estimates, changes in general economic conditions, and other factors. Undue reliance should not be placed on forward-looking statements as we can give no assurance that they will prove to be correct. The forward-looking statements contained in this annual report are made as of the date hereof. While we acknowledge that subsequent events and developments may cause the views expressed herein to change, we have no intention and undertake no obligation to update, revise or correct such forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable securities law.
 
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms.

 
 

 

 
 
PART I
 
Item 1. Identity of Directors, Senior Management and Advisers

Not required.

Item 2. Offer Statistics and Expected Timetable

Not required.

Item 3. Key Information

A.
Selected Financial Data

The following table summarizes selected financial data for and as of the five years ended April 30, 2011 are derived from our audited financial statements, which have been prepared in accordance with U.S. GAAP and audited by our independent registered public accountants. The selected financial data as of April 30, 2011 and 2010 and for the years ended April 30, 2011, 2010 and 2009 have been derived from our audited financial statements and related notes included elsewhere in this annual report. The selected financial data as of April 30, 2009, 2008 and 2007 and for the years ended April 30, 2008 and 2007 have been derived from audited financial statements not included in this annual report, adjusted for differences between Canadian and U.S. GAAP. The selected financial data should be read in conjunction with our audited financial statements and related notes included in this annual report and with the information appearing under the heading "Item 5 - Operating and Financial Review and Prospects" below.

Effective May 1, 2010, we changed our accounting policies from Canadian GAAP to U.S. GAAP, which has been reflected retrospectively in this report. Effective July 30, 2010, we changed the presentation currency of our consolidated financial statements from the Canadian dollar to the U.S. dollar, reflecting the primary source of funding and spending. We believe that this change provides greater alignment of our presentation currency with our most significant operating currency and underlying financial performance. Unless otherwise specified, all financial information included in this Form 20-F has been stated in U.S. dollars.

Selected Financial Data
 
 
Year Ended April 30,
2011
2010
2009
2008
2007
Revenues
$1,582,176
$1,581,223
$135,190
$644,731
$231,261
Expenses
$31,291,562
$9,531,582
$60,082,461
$40,734,966
$15,899,246
Net Loss
($29,709,386)
($7,950,359)
($59,947,271)
($40,090,235)
($15,667,985)
Foreign Exchange Translation
($283,771)
$4,984,026
($13,832,144)
$8,505,150
$354,583
Total Comprehensive Loss
($29,993,157)
($2,966,333)
($73,779,415)
($31,585,085)
($15,313,402)
Net Income (Loss) per Share
($2.22)
($0.60)
($4.60)
($5.05)
($7.09)
Weighted Average Number of Common Shares
13,387,166
13,325,545
13,035,892
7,941,379
2,210,213
Total Assets
$20,818,512
$31,596,571
$30,502,369
$88,185,360
$87,987,736
Long-term liabilities
$20,061,550
$1,852,792
$858,286
$46,022,853
$1,900,432
Total Liabilities
$23,650,925
$2,842,857
$952,720
$49,807,354
$3,072,949
Accumulated Retained Earnings (Deficit) from the Development Stage
($135,474,141)
($105,144,948)
($96,975,794)
($37,472,384)
$2,551,300
Capital Stock(1)
$79,016,425
$80,717,433
$78,828,533
$57,217,824
$36,625,531
Stockholders (Deficit) Equity
$(2,832,413)
$28,753,714
$29,549,649
$38,378,006
$84,914,787
________________________
(1)
Includes share capital, preferred shares and exchange shares.
 
B.
Capitalization and Indebtedness

Not required.
 

 
1

 


C.
Reasons for the Offer and Use of Proceeds

Not required.

D.
Risk Factors

The common shares of our company are considered speculative. Investing in our common shares involves a high degree of risk and uncertainty. You should carefully consider the following risks and uncertainties in addition to other information in this annual report in evaluating our company and our business before purchasing our common shares. Our business, operating or financial condition could be harmed due to any of the following risks.

RISKS RELATING TO OUR BUSINESS
 
If we are unable to obtain additional funding our business operations will be harmed and if we do obtain additional financing our then existing shareholders may suffer substantial dilution.
 
    During September 2011 the Company was cease traded by the Alberta and British Columbia securities commissions for failure to file certain financial information – See Legal Proceedings below.  The Company has made the required filings and believes that the Alberta and British Columbia cease trade orders will be lifted.    However, as of the date of this report the cease trade orders have not been revoked and no assurances can be given as to when or if they will be lifted.   Until these cease trade orders are revoked the Company’s ability to raise capital is significantly restricted.
 
We expect that our current capital and our other existing resources will be sufficient only to provide a limited amount of working capital, and the revenues generated will not alone be sufficient to fund our operations or planned growth. We anticipate that we will require up to approximately $2 million for our anticipated operations for the next twelve months, depending on revenues. We believe that our currently available funds can sustain our current level of operations for approximately three months from the date of this report.  In addition when our Senior Notes and Junior Notes come due the Company currently lacks the resources to repay them.  While the Company plans on renegotiating the terms of the Senior Notes and Junior Notes there can be no assurance that the Company will be successful and the Senior Note and Junior Note holders may demand repayment and or force their security interests against our assets.  We will require additional capital to continue to operate our business and to further expand our exploration and development programs. We may be unable to obtain additional capital required. Furthermore, inability to maintain capital may damage our reputation and credibility with industry participants. Our inability to raise additional funds when required may have a negative impact on our consolidated results of operations and financial condition.
 
Future acquisitions and future exploration, development, production, leasing activities and marketing activities, as well as our administrative requirements (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) will require a substantial amount of additional capital and cash flow.
 
We plan to pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. We may not be successful in locating suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means.
 
Any additional capital raised through the sale of equity will likely dilute your ownership percentage. This could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, and issuances of incentive awards under equity employee incentive plans, which may have a further dilutive effect.
 
Our ability to obtain needed financing may be impaired by such factors as the capital markets (both generally and in the oil and gas industry in particular), our status as a new enterprise without a significant demonstrated operating history, the location of our oil and natural gas properties and prices of oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us) and/or the loss of key management. Further, if oil and/or natural gas prices on the commodities markets decrease, then our revenues will likely decrease, and such decreased revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we may be required to cease our operations.
 
We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which may adversely impact our consolidated financial results.

We have a history of losses which may continue, which may negatively impact our ability to achieve our business objectives.

We incurred net losses of $29,709,386, $7,950,359 and $59,947,271 for the years ended April 30, 2011, 2010 and 2009, respectively. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to continue expansion of our revenue. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us.

 
2

 



We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations.

We have received a limited amount of revenues from operations and have limited assets. We have yet to generate positive earnings and there can be no assurance that we will ever operate profitably. We have a limited operating history. Our success is significantly dependent on a successful acquisition, drilling, completion and production program. Our operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to locate recoverable reserves or operate on a profitable basis. We are in the exploration stage and potential investors should be aware of the difficulties normally encountered by enterprises in the exploration stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment.
 
Because we are small and do not have much capital, we may have to limit our exploration activity which may result in a loss of your investment.

Because we are small and do not have much capital, we must limit our exploration activity. As such we may not be able to complete an exploration program that is as thorough as we would like. In that event, existing reserves may go undiscovered. Without finding reserves, we cannot generate revenues and you will lose your investment.

Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct our operations.
 
Our ability to successfully acquire additional properties, to discover reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers will depend on developing and maintaining close working relationships with industry participants and on our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment. These realities are subject to change and may impair our ability to grow.
 
To develop our business, we will endeavor to use the business relationships of our management to enter into strategic relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other oil and gas companies, including those that supply equipment and other resources that we will use in our business. We may not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to in order to fulfill our obligations to these partners or maintain our relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.


Although our estimated natural gas and oil reserve data has been prepared by an independent third party, the estimates may prove to be inaccurate.
 
There are numerous uncertainties inherent in estimating quantities of oil and natural gas reserves and the future cash flows attributed to such reserves. In general, estimates of economically recoverable oil and natural gas reserves and the future net cash flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditure, marketability of oil and gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially from actual results. For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues associated with reserves prepared by different engineers, or by the same engineers at different times, may vary. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves will vary from estimates thereof and such variations could be material.

Our primary and most valuable assets are pledged as security against our indebtedness.
 
In order to finance our exploration activities with a view toward establishing commercial operations we pledged our assets in Missouri as a security against our Senior Notes and Junior Notes. If we default on the terms of any of these credit instruments, we could lose such assets, which would adversely impact our business.

Current global financial conditions have been characterized by increased volatility which could have a material adverse effect on our business, prospects, liquidity and financial condition.

Current global financial conditions and recent market events have been characterized by increased volatility and the resulting tightening of the credit and capital markets has reduced the amount of available liquidity and overall economic activity. There can be no assurance that debt or equity financing, the ability to borrow funds or cash generated by operations will be available or sufficient to meet or satisfy our initiatives, objectives or requirements. Our inability to access sufficient amounts of capital on terms acceptable to us for our operations could have a material adverse effect on our business, prospects, liquidity and financial condition.


 
3

 


Our results of operations as well as the carrying value of our oil and gas properties are substantially dependent upon the prices of oil and natural gas, which historically have been volatile and are likely to continue to be volatile.

Our results of operations and the ceiling on the carrying value of our oil and gas properties are dependent on the estimated present value of proved reserves, which depends on the prevailing prices for oil and gas, which are and are likely to continue to be volatile. Recent world events have significantly increased oil and gas prices, but we cannot assure that such prices will continue. Various factors beyond our control affect prices of oil and natural gas, including political and economic conditions; worldwide and domestic supplies of and demand for oil and gas; weather conditions; the ability of the members of the Organization of Petroleum Exporting Countries to agree on and maintain price and production controls; political instability or armed conflict in oil-producing regions; the price of foreign imports; the level of consumer demand; the price and availability of alternative fuels; and changes in existing federal and state regulations. Current prices for oil are at or near historical highs, and any significant decline in oil or gas prices could have a material adverse effect on our operations, financial condition, and level of development and exploration expenditures and could result in a reduction in the carrying value of our oil and gas properties. Any decline in prices would cause a reduction in the amount of any reserves and, in turn, in the amount that we might be able to borrow to fund development and acquisition activities. To date, we do not believe that the lack of reserves has hindered our efforts to obtain the capital we have sought.

RISKS RELATING TO OUR INDUSTRY

The oil and gas industry is highly competitive and we may not be able to compete with current and potential exploration companies.
 
The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staff for suitable business opportunities, desirable oil and gas properties for drilling operations, drilling equipment and funds. We may be unable to compete successfully with our existing competitors or with any new competitors. The competition from other companies with greater resources and reputations may result in our failure to maintain or expand our business.

We may not be able to develop oil and gas reserves on an economically viable basis.
 
To the extent that we succeed in discovering oil and/or natural gas reserves, we cannot assure that these reserves will be capable of production levels we project or in sufficient quantities to be commercially viable. Our viability depends on our ability to find or acquire, develop and commercially produce additional oil and natural gas reserves. Without the addition of reserves through acquisition, exploration or development activities, our reserves and production will decline over time as reserves are produced. Our future reserves will depend not only on our ability to develop then-existing properties, but also on our ability to identify and acquire additional suitable producing properties or prospects, to find markets for the oil and natural gas we develop and to effectively distribute our production into our markets. 
 
Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-downs of connected wells resulting from extreme weather conditions, problems in storage and distribution and adverse geological and mechanical conditions. While we will endeavor to effectively manage these conditions, we cannot be assured of doing so optimally, and we will not be able to eliminate them completely in any case. Therefore, these conditions could diminish our revenue and cash flow levels and result in the impairment of our oil and natural gas interests.
 
The potential profitability of oil and gas ventures depends upon factors beyond our control, any of which could have a material adverse effect on our business.
 
The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance. In addition, a productive well may become uneconomic in the event that water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. These factors cannot be accurately predicted and the combination of these factors may result in us not receiving an adequate return on invested capital.
 
The marketability of natural resources will be affected by numerous factors beyond our control.

The markets and prices for oil and gas depend on numerous factors beyond our control. These factors include demand for oil and gas, which fluctuate with changes in market and economic conditions, and other factors, including:

 
4

 



 
worldwide and domestic supplies of oil and gas;
 
actions taken by foreign oil and gas producing nations;
 
political conditions and events (including instability or armed conflict) in oil-producing or gas-producing regions;
 
the level of global and domestic oil and gas inventories;
 
the price and level of foreign imports;
 
the level of consumer demand;
 
the price and availability of alternative fuels;
 
the availability of pipeline or other takeaway capacity;
 
weather conditions;
 
domestic and foreign governmental regulations and taxes; and
 
the overall worldwide and domestic economic environment.

Significant declines in oil and gas prices for an extended period may have the following effects on our business:

 
adversely affect our financial condition, liquidity, ability to finance planned capital expenditures and results of operations;
 
cause us to delay or postpone some of our capital projects;
 
reduce our revenues, operating income and cash flow; and
 
limit our access to sources of capital.

We may have difficulty distributing our oil and gas production, which could harm our financial condition.

In order to sell the oil and gas that we are able to produce, we may have to make arrangements for storage and distribution to the market. We will rely on local infrastructure and the availability of transportation for storage and shipment of our products, but infrastructure development and storage and transportation facilities may be insufficient for our needs at commercially acceptable terms in the localities in which we operate. This situation could be particularly problematic to the extent that our operations are conducted in remote areas that are difficult to access, such as areas that are distant from shipping and/or pipeline facilities. These factors may affect our ability to explore and develop properties and to store and transport our oil and gas production and may increase our expenses.

Furthermore, weather conditions or natural disasters, actions by companies doing business in one or more of the areas in which we will operate, or labor disputes may impair the distribution of oil and/or gas and in turn diminish our financial condition or ability to maintain our operations.

We are subject to complex laws and regulations, including environmental regulations, which can adversely affect the cost, manner or feasibility of doing business.
 
Oil and gas operations in United States are subject to federal and state laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling and production operations to be conducted and we may not receive such permits. Oil and gas operations in the United States are also subject to federal and state laws and regulations relating to, among other things, the construction and operation of facilities, the use of water in industrial processes, the removal of natural resources from the ground, and the discharge/release of materials into the environment.
 
Environmental standards imposed by United States federal and state authorities are subject to change and any such changes could have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated. Additionally, we may be subject to liability for pollution or other environmental damages, which we may elect not to insure against due to prohibitive premium costs and other reasons. Our current and anticipated exploration and drilling activities are subject to the foregoing environment regulations and we would be become subject to additional regulations if we establish reserves or enter into production.
 
Exploratory drilling involves many risks and we may become liable for pollution or other liabilities which may have an adverse effect on our financial position.
 
Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labor, and other risks are involved. We may become subject to liability for pollution or hazards against which we cannot adequately insure or for which we may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations.
 
Any change in government regulation and/or administrative practices may have a negative impact on our ability to operate and on our profitability.

 
5

 



The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the U.S. or any other jurisdiction may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on our business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitability.

Our rights to drill on the leases owned by our company are only valid if we continue to pay contractual lease rental payments.
 
Continuation of existing undrilled leases owned by our company is dependent on the payment of lease rental payments. The majority of these lease payments are pre-paid at the inception of the individual lease agreement with an option for the pre-payment of a second term at the expiry of the initial term. We may not be in a financial position at the end of the primary lease term to pay the option payment for the second term, in which case the lease would expire at the end of its primary term.
 
Our rights to produce petroleum from the leases that we own are dependent on continuous production and the payment of shut-in royalty payments.
 
Our leases contain provisions that once commercial production has been established, continuous production must be maintained on a monthly basis (with normal maintenance shut-ins excepted). In order to maintain our leases in force and effect, the leases include provisions for the payment of shut-in royalties. Under our leases, we would be required to pay a shut-in royalty in certain circumstances when a well is shut-in due to lack of a suitable market, a lack of facilities to produce the product, or other reasons defined within the shut-in provisions contained in our leases. We may not be in a financial position to make such shut-in royalty payments, in which event our leases would terminate.
 
The real property associated with our projects for which we have leases may be subject to prior unregistered agreements or transfers that have not been recorded or detected through title searches.
 
The oil and gas leases with respect to the real property associated with our projects do not guarantee title against all possible claims. The real property may be subject to prior unregistered agreements or transfers that have not been recorded or detected through title research. If the oil and gas leases to the real property associated with our projects are challenged, we may have to expend funds defending any such claims and may ultimately lose our interest in such leases, which would have an adverse effect on revenues generated from such projects.

Operational hazards for which we do not maintain insurance are inherent in the exploration, drilling, and production of oil and gas.

Usual operational hazards incident to our industry include blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, pollution, releases of toxic gas, and other environmental hazards and risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage, and suspension of operations. We maintain insurance to cover operational hazards and rely on our agreements that require the operator of the properties in which we have an interest to maintain $1.0 million workers’ compensation, $1.0 employer’s and general liability, $2.0 million aggregate general liability, $5.0 million well control, and $5.0 million bodily injury and property damage insurance coverage. The insurance policies purchased under this covenant include us as the owner of a non-operating working interest as an insured under such policies. We cannot assure that we could obtain or that our contractors will be able to continue to obtain insurance coverage for current or future activities. Further, we cannot assure that any insurance obtained will provide coverage customary in the industry, be comparable to the insurance now maintained, or be on favorable terms or at premiums that are reasonable. The insurance maintained by our contractors does not cover all of the risks involved in oil and gas exploration, drilling, and production, and if coverage does exist, may not be sufficient to pay the full amount of such liabilities. We may not be insured against all losses or liabilities that may arise from all hazards because such insurance may not be available at economical rates, the respective insurance policies may have limited coverage, and other factors. For example, insurance against risks related to violations of environmental laws is not maintained. The occurrence of a significant adverse event that is not fully covered by insurance or for which the coverage is insufficient to cover aggregate losses could expose us to liability because we may be responsible for our working interest share of the damages in excess of any related insurance coverage. Further, we cannot assure that adequate levels of insurance will be maintained for our benefit in the future at rates we consider reasonable. The occurrence of any of these risks could lead to a reduction in our value and the loss of investments made by purchasers of our stock.

RISKS RELATING TO OUR COMMON SHARES

If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
 
Companies trading on the Over-The-Counter Bulletin Board must be reporting issuers under the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. The lack of resources to prepare and file our reports, including the inability to pay our independent registered public accounting firm, could result in our failure to remain current on our reporting requirements, which could result in our being removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. In addition, we may be unable to get re-approved for quotation on the OTC Bulletin Board, which may have an adverse material effect on our company.

 
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There has been a limited trading market for our common stock.

It is anticipated that there will be a limited trading market for our Common Stock on the NASD’s Over-the-Counter Bulletin Board for the foreseeable future. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using common stock as consideration.
 
You may have difficulty trading and obtaining quotations for our common stock.

Our common stock is not actively traded, and the bid and asked prices for our common stock on the NASD Over-the-Counter Bulletin Board may fluctuate widely. As a result, investors may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities. This severely limits the liquidity of the common stock, and would likely reduce the market price of our common stock and hamper our ability to raise additional capital.

Our common stock is not currently traded at high volume, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.

Our common stock is currently traded, but with very low, if any, volume, based on quotations on the “Over-the-Counter Bulletin Board”, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.

Shareholders should be aware that, according to Commission Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the future volatility of our share price.

The market price of our common stock may, and is likely to continue to be, highly volatile and subject to wide fluctuations.

The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:

 
dilution caused by our issuance of additional shares of Common Stock and other forms of equity securities, which we expect to make in connection with future capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships with other companies;
 
 
quarterly variations in our revenues and operating expenses;
 
 
changes in the valuation of similarly situated companies, both in our industry and in other industries;

 
changes in analysts’ estimates affecting our company, our competitors and/or our industry;

 
changes in the accounting methods used in or otherwise affecting our industry;

 
additions and departures of key personnel;

 
announcements of technological innovations or new products available to the personal protective equipment industry;

 
fluctuations in interest rates and the availability of capital in the capital markets; and

 
significant sales of our common stock.


 
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These and other factors are largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our Common Stock and/or our results of operations and financial condition.

We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
 
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the Board of Directors may consider relevant.
 
Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.

There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as proposed legislative initiatives following the Enron bankruptcy are likely to increase general and administrative costs and expenses. In addition, insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase our premiums for insurance policies. Further, there could be changes in certain accounting rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.

Our common stock is subject to the "penny stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.

The SEC has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
 
 
that a broker or dealer approve a person's account for transactions in penny stocks; and
 
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
 
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
 
 
obtain financial information and investment experience objectives of the person; and
 
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
 
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
 
 
sets forth the basis on which the broker or dealer made the suitability determination; and
 
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
 
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
 

 
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Future exercises or conversions of certain dilutive instruments, such as convertible Senior Notes, convertible Junior Notes and warrants, may result in substantial dilution and new concentrations in ownership.
 
In the event that the holders of our Senior Notes and Junior Notes exercise or convert all dilutive derivative instruments held by them, including warrants and accrued interest, they would receive a total of approximately 117,467,345 common shares or 86.3% (as of November 7, 2011) of our fully diluted common shares. Future exercises or conversions of such instruments may result in substantial dilution and new concentrations in ownership. Such shareholders could have the ability to control all matters submitted to our shareholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets) and to control our management and affairs. Accordingly, this potential concentration of ownership may have the effect of delaying, deferring or preventing a change in control of our company, impeding a merger, consolidation, takeover or other business combination involving our company or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, which in turn could have a material adverse effect on the market price of our common shares.
 
Shareholders' interests in our company will be diluted and investors may suffer dilution in their net book value per share if we issue additional shares or raise funds through the sale of equity securities.
 
We are authorized to issue an unlimited number of common shares, without par value, and an unlimited number of preferred shares, without par value. In the event that we issue additional common shares in the future, enter into private placements to raise financing through the sale of equity securities or acquire additional oil and gas property interests using common shares to acquire such interests, the interests of existing shareholders in our may be diluted and existing shareholders may suffer dilution in their net book value per share depending on the price at which such securities are sold. The issuance of common shares for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our common shares.

Certain of our directors and officers may have a conflict of interest
 
Some of our directors and officers serve or may serve as directors or officers of other oil and gas or mineral exploration companies or have interests in other oil and gas or mineral exploration companies or ventures. To the extent that we have dealings with such companies or ventures, certain of our directors and officers may have a conflict of interest in negotiating and concluding terms relating to the extent of such dealings.
 
Item 4.
Information on the Company

A.
History and Development of the Company

Gravis was originally incorporated under the Company Act (British Columbia) on February 8, 2000 under the name Brockton Capital Corp. Its name was then changed to MegaWest Energy Corp. effective February 27, 2007 before it became Gravis on June 20, 2011. At a meeting of the shareholders on October 29, 2007, the shareholders approved the continuance of Gravis from the Province of British Columbia into the Province of Alberta under the Business Corporations Act (Alberta). Effective February 12, 2008, Gravis was continued into the Province of Alberta as a company organized under the Business Corporations Act (Alberta) and ceased to be a company organized under the Business Corporations Act (British Columbia). Gravis is a reporting issuer under the Securities Act in Alberta and British Columbia and is a reporting issuer as that term is defined for United State purposes, as a company that has a class of securities, its common shares, registered under the Securities Exchange Act of 1934.

The Company was originally engaged in the consumer electronics market. However, due to our inability to generate revenues from this business, on November 1, 2006 new management was hired to pursue alternative business opportunities, namely non-conventional oil and gas resource exploration and development. In December 2006 we entered into several non-binding letters of intent with companies involved in the business of the exploration of oil and gas resources in Kansas, Missouri, Kentucky and Texas.

On March 26, 2007, we purchased (through our subsidiary, MegaWest Energy (USA) Corp.) all of the assets of Deerfield Energy Kansas Corp. The purchased assets included certain items of equipment and fixed assets and interests in two oil and gas leases covering 392 unproved acres in respect of the Chetopa project near Chetopa, Kansas. The consideration given for the assets was 25,000 shares of our common stock and the assumption of a promissory note in the amount of $500,000 payable to a private company, Agosto Corporation Limited. Pursuant to our assumption of the promissory note, we granted Agosto a conversion feature that enables the holder of the note to convert the principal amount of the loan plus accrued interest into shares of our common stock at a rate of US$2.50 per share. On maturity on June 20, 2008 these promissory notes were converted into common shares of our company.

 
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As part of the project, Gravis Oil is obligated to pay a net revenue interest up to a maximum of $750,000 on net revenues generated from the Chetopa project. The net revenue interest becomes payable after Gravis Oil recovers 100 percent of its capital and operating costs, and will be paid quarterly from 25 percent of the project's net revenues. As at September 30, 2010 no amount of net revenue interest has been earned.

On April 2, 2007, we acquired (in conjunction with MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Kentucky Reserves, LLC (Kentucky Reserves) in consideration for $3,000,000 cash and 500,000 shares of our common stock. Kentucky Reserve's assets included oil and gas leases covering 27,009 unproved acres in the Edmonson, Warren and Butler Counties in Kentucky. Pursuant to the membership unit purchase agreement, we acquired a 62.5 percent working interest in the shallow rights in certain tar sands and a 37.5 percent interest in the certain deep rights. Furthermore, pursuant to the purchase agreement, we were committed to undertake a $15,000,000 work program within the area covered by the leases, which work program was required to be completed by October 2009 for the purpose of determining the most effective way of extracting heavy oil/bitumen from the leases. The work program was to consist of field testing and evaluation, drilling, logging and coring of wells, formation and fluid testing, the construction of heavy oil pilot projects such as steam, water flooding, solvent injection, electro-thermal heating, or the like. If we had been unable to expend the work program commitment within the said period, we would have been subject to a 37.5 percent penalty on the unexpended amount of the work program commitment. However, pursuant to an amending agreement dated April 9, 2009 with Kentucky Reserves II, LLC (“KRII”), the said work program obligations and attendant penalty payment provisions were terminated in consideration for: (i) a reduction in our working interest in the shallow rights from 62.5 percent to 37.5 percent; (ii) a transfer of the ownership of the oil and gas leases to KRII; and (iii) our continuing obligation to pay, directly to the lessors of the lands which make up the Kentucky project, lease rentals for the 24-month period commending March 1, 2009 (estimated at $225,000).

On April 5, 2007, we acquired (through MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Deerfield Energy LLC (“Deerfield Missouri”) in consideration for US$925,000 cash, including a change in control fee, and 475,000 shares of our common stock. The assets of Deerfield Missouri include rights to oil development agreements in Vernon County, Missouri covering 7,620 unproved acres and all of the issued and outstanding units of Deerfield Kansas. At the closing of the transaction, we paid $625,000 of the purchase price. Owing to potential issues related to certain oil development agreements, the unpaid cash of $300,000 and 475,000 shares of our common stock were placed in an escrow account, set-up for our indemnification in respect of the said claims. Pursuant to the escrow agreement, the said cash and shares can be released on a pro-rata basis to the previous unit holders of Deerfield Missouri upon either the modification of certain oil development agreements into oil and gas leases or until 4,000 acres of replacement acreage have been leased. To rectify the escrow indemnifications, we engaged in a leasing program in Missouri and in October 2007, we surpassed the 4,000 acre threshold of replacement acreage. As a result, the $300,000 cash and 475,000 shares of our common stock held in escrow were released. Of the cash held in escrow, $100,000 plus interest was paid to us for reimbursement of our costs associated with leasing the replacement acreage.

On April 25, 2007, we acquired (in conjunction with MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Trinity Sands Energy LLC (Trinity) in consideration for $200,000 cash and 9,500 exchange shares of MegaWest Energy (USA) Corp. Each exchange share may be exchanged for US$10 in cash or 10 shares of our common stock during the period January 1, 2008 to July 31, 2008, after this time, we may compel the holders of the exchange shares to convert their exchange shares into shares of our common stock. The assets of Trinity consisted of a 50 percent working interest in approximately 14,948 unproved acres in Edwards County, Texas and an earn-in agreement to increase the said working interest to 66.67 percent and earn up to a 66.67 percent working interest in an additional 13,348 undeveloped acres in Edwards Country, Texas. As of February 28, 2008, all of the exchange shares were converted into 950,000 shares of our common stock.

In June 2007, we began oil production from the Chetopa project and have shipped approximately 11,500 barrels of oil from the project. To date this production has been incidental to the pilot project.

On October 24, 2007, we acquired (in conjunction with MegaWest Energy Montana Corp.) a 40 percent working interest in oil and gas leases covering approximately 37,400 unproved acres of land in Montana for consideration of $300,000 cash and 50,000 units, of which each unit consists of one share of our common stock and one-half of one share purchase warrant (each whole warrant entitles the holder to purchase an additional share of our common stock at an exercise price of US$25.00 per share until April 24, 2009). Pursuant to earn-in agreements, we can earn an additional 20 percent working interest in the lands by completing $2.5 million of work that includes additional leasing, seismic, geological studies, test wells and pilot project development and implementation. In addition, our company and the vendors have established a regional area of mutual interest (AMI) covering approximately 1,000,000 acres that will remain active for the next two years. The interest in the AMI will be divided 65 percent to our company and 35 percent to the vendors. We will pay for 100 percent of the lease acquisition, initial geological and geophysical activity, drilling and completing of all wells, if any, comprising an agreed upon initial work program for each new prospect within the AMI and we will receive 100 percent payout of all such costs and expenses incurred for each such prospect prior to vendor receiving its respective share.

In November 2007, we commenced construction of our first commercial project in Missouri called Marmaton River. Commissioning and start up of the facility was completed on March 16, 2008 when steam injection commenced and the first oil sales from the project occurred on August 4, 2008 (see "Business Overview" below in this annual report).

 
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On May 15, 2008, we completed a private placement of 2,675,000 shares of our common stock at US$6.00 per share for aggregate proceeds of US$16,050,000. The proceeds of the placement were used to fund our ongoing oil and gas exploration and development activities.

 In December 2008, due to low oil prices, we suspended all our capital projects, including operations at our two Missouri heavy oil projects (Grassy Creek and Marmaton River), pending a recovery in oil prices and financing.

On August 28, 2009, we entered into a strategic arrangement with the Iroquois Capital Opportunity Fund, L.P. (ICO Fund) aimed at recapitalizing our company and enabling the restart of production at our Missouri projects. The arrangement involved several transactions, all of which were completed on or about August 28, 2009, including:

 
the sale of a 10 percent working interest in our existing land and production projects on 15,313 acres of our oil and gas leases located in Missouri and Kansas (the Deerfield Area), which area includes our Grassy Creek and Marmaton River projects, to Mega Partners 1, LLC (MP 1), an affiliate of the ICO Fund for $2.0 million. In connection with the sale of the working interest, we granted MP 1 various options, including: (i) the option to acquire an additional 10 percent working interest in future development within the Deerfield Area; (ii) the option to acquire up to a 20 percent proportionate interest in any of our properties outside of the Deerfield Area by paying a proportionate 133 percent share of our costs-to-date in respect of such property until the later of the full redemption or conversion of the Series A or Series B preferred shares (issued pursuant to the arrangement with the ICO Fund) and August 27, 2011; and (iii) the option to participate with our company in any future oil and gas property acquisitions for a proportionate 20 percent share of the cost of any such acquisition until the later of the full redemption or conversion of the Series A or Series B preferred shares and August 27, 2011; and
 
an offering to investors (led by the ICO Fund) of 22,000 Series A convertible preferred shares, each with a stated value of $100, for gross proceeds of $2.2 million. The Series A preferred shares are convertible into shares of our common stock at $0.70 per common share and have a quarterly cumulative dividend equal to either 5 percent, if paid in cash (15 percent upon the occurrence of certain events of default) or 7.5 percent, if paid in additional Series A preferred shares. In connection with the Series A preferred share offering, our company also issued to the subscribers thereunder: (i) 1,540,000 common stock purchase warrants, each entitling the holder thereof to purchase an additional common share at $2.50 per share until August 28, 2014; and (ii) additional investment rights consisting of the right to purchase convertible shares 20,000 Series B convertible preferred shares, each with a stated value of $100, convertible into common shares at $1.00 per common share attached to which would be 1,000,000 common share purchase warrants, each entitling the holder thereof to purchase an additional common share at $3.50 per common share for a period of five years from the date of issuance.

Following closing of the August 28, 2009 financing, Gravis Oil re-started its Deerfield, Missouri operations and the initial oil production response to steam injection on both the Marmaton River and Grassy Creek projects was positive.

On April 29, 2010 the Company secured a line of credit with a private lender for the sole purpose of buying natural gas to fuel the steam generators on its Marmaton River and Grassy Creek projects. The credit facility is available up to a maximum of U.S. $1.0 million at an interest rate of 2% per month calculated on the average daily outstanding principal balance. As security, the Company had signed a mortgage and a promissory note in the amount of $1.0 million granting security to the lender over certain Missouri properties. At the date of this report, there was no balance owing under this credit facility and it was terminated.

Working Interest Acquisition:

Effective July 1, 2010, Gravis Oil reacquired a 10% working interest in the Company’s Missouri Marmaton River and Grassy Creek projects from Mega Partners 1, LLC (“MP1”) in exchange for a 2.75% gross overriding royalty interest on the projects. Following this acquisition, Gravis Oil has a 100% working interest in both projects. A receivable owed to Gravis Oil by MP1 as at July 1, 2010, has been converted into a note receivable that is recoverable from 50% of the gross overriding royalty, with outstanding balances to bear interest at the U.S. bank prime rate plus three percent (3%). MP1 retains the option to acquire up to an additional 10% interest in future projects within the Deerfield Area, on a project by project basis, by paying up to a $300,000 equalization payment per project and thereafter its proportionate share of all future development and operating costs in respect of such project, including a proportionate share of facility costs.

In addition to its right to acquire additional interest in the Missouri Deerfield area MP1 also obtained certain rights to acquire additional property interests as follows:

 
For a period which is the latter of either the Series A or B Preferred Shares (or the underlying investment rights to buy Series B Preferred Shares) being outstanding or August 28, 2011 MP1 has the option to acquire up to a 20% proportionate interest in any of the Company’s properties outside of the Deerfield Area by paying a proportionate 133% of the Company’s costs-to-date in respect of such property; and
 
For a period which is the latter of either the Series A or B Preferred Shares (or the underlying investment rights to buy Series B Preferred Shares) being outstanding or August 28, 2011, MP1 has the option to participate with the Company in any future oil and gas property acquisitions for a proportionate 20% share of any such acquisition.

On July 30, 2010, the Company closed a $2.5 million financing with a group of its existing shareholders. The transactions included the issuance of $2.5 million in senior secured convertible notes (“Senior I Notes”), the conversion of the outstanding Preferred A Shares into junior secured convertible notes (“Junior Notes”) and the reacquisition by Gravis of a 10% working interest in the Marmaton River and Grassy Creek projects in exchange for a 2.75% overriding royalty interest on the same properties.

 
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A summary of the features and terms of the financing are as follows:

 
Issuance of Senior I Notes for proceeds of $2.5 million, maturing on January 30, 2012 with an annual coupon rate of 8% cash or 12% in additional Senior I Notes at the Company’s option until January 30, 2011 and at the holder’s option thereafter. Senior I Notes are redeemable in cash at any time or convertible into common shares at US$0.50 per common share at the Company’s option if the underlying shares are freely tradable and common shares trade at or above $2.50 per share for the previous 20 consecutive trading days and the daily average trading volume has been in excess of $750,000 per day for the same period. In the event of redemption before the end of the term, there will be a 5% premium due on the investment amount. Note holders may elect to receive the redemption in common shares at the conversion price. Senior I Note holders received one warrant for each $0.50 principal amount of the Senior I Notes for 5,000,000 warrants (“Senior I Warrants”). Senior I Warrants are exercisable at $0.50 per share until July 29, 2013.
 
Conversion of 22,000 Preferred A Shares plus accumulated dividends of $301,069 into $2,501,069 of Junior Notes maturing on July 30, 2013 with an annual coupon rate of 5% cash or 7.5% in additional Junior Notes, at the Company’s option and at the holder’s option thereafter. The Junior Notes are redeemable in cash at any time at the holder’s option at a conversion price of $0.50 per common share. The Junior Notes are also redeemable in cash at any time at the Company’s option or convertible into common shares at $0.50 per common share at the Company’s option provided: i) production from the Missouri Deerfield project is 15,000 barrels of oil in a 30 day period; ii) the common shares have traded at or above US $2.50 per share for the preceding 20 consecutive trading days; and iii) the daily average dollar trading volume has been in excess of US $750,000 per day for the same 20 day period.
 
Extension of the expiry date on the outstanding option to acquire Series B Preferred Shares to May 24, 2011 (further extended to June 7, 2011).
 
Re-acquisition of a 10% working interest in the Company’s Missouri Marmaton River and Grassy Creek projects from Mega Partners 1, LLC (“MP1”) in exchange for a 2.75% gross overriding royalty interest on the projects, effective July 1, 2010. Following this acquisition, Gravis has a 100% working interest in both projects. In addition:

 
MP1 retains the option to acquire up to an additional 10% interest in future projects within the Deerfield Area, on a project by project basis, by paying up to a US $300,000 equalization payment per project and thereafter its proportionate share of all future development and operating costs in respect of such project, including a proportionate share of facility costs.
 
For a period which is the latter of either the Series A or B Preferred Shares (or the underlying investment rights to buy Series B Preferred Shares) being outstanding on August 28, 2011, MP1 had the option to acquire up to a 20% proportionate interest in any of the Company’s properties outside of the Deerfield Area by paying a proportionate 133% of the Company’s costs-to-date in respect of such property and the option to participate with the Company in any future oil and gas property acquisitions for a proportionate 20% share of any such acquisition. This option expired.

On September 21, 2010, the Company and its working interest partner farmed out 5,100 net acres in the Little Muddy Area of the Company’s Kentucky project.

On December 28, 2010, January 31, 2011 and March 7, 2011, the Company issued a total of $4.6 million senior secured convertible notes (“Senior II Notes”).

A summary of the features and terms of the Senior II Notes are as follows:

 
Issuance of Senior II Notes for proceeds of $4.6 million, maturing 18 months after closing, with an annual coupon rate of 8% cash or 12% in additional Senior II Notes at the Company’s option for the first six months after closing and at the holder’s option thereafter. Senior II Notes are redeemable in cash at any time or convertible into common shares at $0.20 per common share at the Company’s option if the underlying shares are freely tradable and common shares trade at or above $2.50 for the previous 20 consecutive trading days and the daily average trading volume has been in excess of US $750,000 per day for the same period. Senior II Note holders received one warrant for each $0.50 principal amount of the Senior Notes for 9,200,000 warrants (Senior II Warrants). Senior II Warrants are exercisable at $0.25 per share for a period of 36 months after closing.

In the event the Company issues common shares or securities convertible into or exercisable for common shares at a price per share or conversion or exercise price less than the conversion or exercise prices agreed to for each note, the conversion price of the notes and the exercise price of the warrants is automatically reduced to such lower prices. The number of warrants outstanding will be increased such that the expected exercise proceeds remain unchanged.

 
On December 28, 2010, the conversion price of the Senior I Notes and Junior Notes was reduced from $0.50 to $0.20 per share and the exercise price of the Senior I Warrants was reduced from $0.50 to $0.25 per share.

 
12

 



During October 2011, as a result of the Company’s financial position, cost factors and market conditions it suspended operations on its Missouri oil and gas assets - See Business Overview below.

B.
Business Overview
 
Prior to November 2006, we were a technology company, whose business plan was to acquire the rights to market, sell and distribute a product line of consumer electronic technology products in Canada.
 
Since November 1, 2006, the primary business activity of Company has been the acquisition, exploration and development of a number of unproven heavy oil properties in the United States. Its activities to date have included analysis and evaluation of technical data, preparation of geological models, acquisition of mineral rights, exploration and development drilling, conceptual engineering, construction and operation of thermal demonstration projects, and securing capital to fund related expenditures.

In December 2008, the Company reduced its staff and suspended all its capital projects, including operations at its two Missouri heavy oil projects, pending a recovery in oil prices and obtaining financing.

During the spring and summer of 2009, to provide funding to re-start steam injection operations on its Deerfield Missouri acreage, the Company closed a 10% working interest disposition in its Deerfield Missouri project area for proceeds of $2,000,000 and closed the sale of 22,000 Series A Preferred Shares (“Preferred A Shares”) with a stated value of $100 each for proceeds of $2,200,000. Following closing of the transactions, Gravis re-started its Deerfield, Missouri project and the initial oil production response to steam injection on both the Marmaton River and Grassy Creek projects was positive.

On July 30, 2010, the Company closed a $2.5 million financing with a group of its existing shareholders. The transactions included the issuance of $2.5 million in senior secured convertible notes (“Senior I Notes”), the conversion of the outstanding Preferred A Shares into junior secured convertible notes (“Junior Notes”) and the reacquisition by Gravis of a 10% working interest in the Marmaton River and Grassy Creek projects in exchange for a 2.75% overriding royalty interest on the same properties.

On December 28, 2010, January 31, 2011 and March 7, 2011, the Company issued a total of $4.6 million senior secured convertible notes (“Senior II Notes”).

During the spring of 2011, the administration of the Company was moved to Houston, Texas.

As at April 30, 2011, the Company has a working capital deficiency of $1.4 million, recurring losses and net cash outflows from operating activities and an accumulated deficit during the development stage of $135.5 million.

As of the date of this report the Company has now completed a work-over of virtually all of its production wells in both of its Missouri projects. Pumps were upgraded or replaced and tubing re-landed. Thermal and pressure data acquisition equipment was installed in certain new well test patterns, and well logs were been run to identify the un-swept areas of the reservoir. Chemical surfactant and seismic stimulation technologies have been tested on the new pattern with varied results. However, due to the significant capital cost of steam injection, the volatility of oil prices, and the Company’s financial position, management elected to suspend operations on its Missouri oil and gas assets in October 2011.

During September 2011, the Company was cease traded by the Alberta and British Columbia securities commissions for failure to file certain financial information - See Legal Proceedings below.  The Company has made the required filings and believes that the Alberta and British Columbia cease trade orders will be lifted.    However, as of the date of this report the cease trade orders have not been revoked and no assurances can be given as to when or if they will be lifted.   Until these cease trade orders are revoked the Company’s ability to raise capital is significantly restricted.

We expect that our current capital and our other existing resources will be sufficient only to provide a limited amount of working capital, and the revenues generated will not alone be sufficient to fund our operations or planned growth. We anticipate that we will require up to approximately $2 million for our anticipated operations for the next twelve months, depending on revenues. In addition when our Senior Notes and Junior Notes come due the Company currently lacks the resources to repay them.  While the Company plans on renegotiating the terms of the Senior Notes and Junior Notes there can be no assurance that the Company will be successful and the Senior Note and Junior Note holders may demand repayment and or force their security interests against our assets. We will require additional capital to continue to operate our business and to further expand our exploration and development programs. We may be unable to obtain additional capital required. Furthermore, inability to maintain capital may damage our reputation and credibility with industry participants. Our inability to raise additional funds when required may have a negative impact on our consolidated results of operations and financial condition.

Operational and Project Review

The following table summarizes the costs incurred in oil and gas property acquisition, exploration, and development activities for our company for the years ended April 30, 2011, 2010 and 2009:

 
13

 



Cost
 
Missouri
   
Kentucky
   
Montana
   
Kansas
   
Texas
   
Other
   
Total
 
Balance, April 30, 2010
  $ 24,936,309     $ 3,215,682     $ 686,209     $ 94,613     $ -     $ 1,354,996     $ 30,287,809  
Additions
    1,516,465       102,364       -       4,745       -       -       1,623,574  
Depletion
    (720,740 )     -       -       -       -       -       (720,740 )
Impairment
    (9,066,590 )     (3,179,174 )     (602,913 )     -       -       -       (12,848,677 )
Foreign currency translation
    (301,444 )     (38,872 )     (8,296 )     (1,144 )     -       (16,380 )     (366,136 )
Balance, April 30, 2011
  $ 16,364,000     $ 100,000     $ 75,000     $ 98,214     $ -     $ 1,338,616     $ 17,975,830  


Cost
 
Missouri
   
Kentucky
   
Montana
   
Kansas
   
Texas
   
Other
   
Total
 
Balance, April 30, 2009
  $ 22,462,582     $ 2,695,991     $ 1,273,963     $ 83,803     $ 251,460     $ 1,529,053     $ 28,296,852  
Additions
    714,821       49,223       15,413       -       -       5,557       785,014  
Recoveries and transfers
    38,311       -       -       (3,200 )     (323 )     (4,719 )     30,069  
Disposition
    (2,011,529 )     -       -       -       -       (379,548 )     (2,391,077 )
Depletion
    (95,815 )     -       -       -       -       -       (95,815 )
Impairment
    -       -       (816,696 )     -       (290,237 )     (55,612 )     (1,162,545 )
Foreign currency translation
    3,827,939       470,468       213,529       14,010       39,100       260,265       4,825,311  
Balance, April 30, 2010
  $ 24,936,309     $ 3,215,682     $ 686,209     $ 94,613     $ -     $ 1,354,996     $ 30,287,809  

Cost
 
Missouri
   
Kentucky
   
Montana
   
Kansas
   
Texas
   
Other
   
Total
 
Balance, April 30, 2008
  $ 15,426,924     $ 43,241,600     $ 17,464,748     $ 3,912,739     $ 297,870     $ 1,567,335     $ 81,911,216  
Additions
    9,842,427       1,729,644       1,351,879       289,679       578,319       916,508       14,708,456  
Impairment
    -       (36,981,914 )     (15,396,845 )     (3,646,484 )     (578,319 )     (865,237 )     (57,468,799 )
Foreign currency translation
    (2,806,769 )     (5,293,339 )     (2,145,819 )     (472,131 )     (46,410 )     (89,553 )     (10,854,021 )
Balance, April 30, 2009
  $ 22,462,582     $ 2,695,991     $ 1,273,963     $ 83,803     $ 251,460     $ 1,529,053     $ 28,296,852  

Missouri

The Company’s Missouri lease holdings totaled 38,119 net mineral acres with a 98.3 % operating interest. On separate pilot projects at Deerfield, Gravis has built two 500 barrel of oil per day steam drive production facilities (Marmaton River and Grassy Creek) comprised of 116 development production wells, 39 steam injection wells and 14 service and observation wells. Throughout the Deerfield area, the Company has drilled 73 exploration/delineation wells with a 67% success rate.

Phases I and II of the Marmaton River steam drive project together occupy 20 acres of project land developed as a pre-commercial project, which includes a steam generation and oil treating plant with a throughput capacity of 500 barrels of oil per day, 23 steam injection wells, 64 producing wells, and 6 service and observation wells. All Phase II wells have been tied in with steam injection initiated in 3 of 10 patterns. As at April 30, 2011, cumulative production at Marmaton is 42,253 barrels of oil.

The Grassy Creek steam drive project has a steam injection and production treating plant similar to Marmaton River with a design capacity of 500 barrels of oil per day. Phase I of the project consists of 46 production wells, 15 steam injection wells, and 6 service and observation wells occupying approximately 20 acres of the project site. As at April 30, 2011, cumulative production at Grassy Creek to date is 26,406 barrels of oil. In April 2011, the Company drilled, completed and equipped the first of several phase 2 patterns utilizing improved technology and methods that leverage what has been learned by operating Phase 1. The pattern was put into operation in early May 2011. Temperature profiles have increased as planned and early oil production indications are positive.

The Company has now completed work-overs on all production wells in both projects. Pumps were upgraded or replaced and a number of surface equipment upgrades have been made. Thermal and pressure data acquisition equipment was installed, and well logs have been run to identify swept versus un-swept areas of the reservoir. Chemical, solvent and surfactant technologies are currently being tested.

Previous production operations achieved encouraging initial oil production rates of up to 300 bbls per day of clean sales oil. Gravis expects added efficiencies and potentials with its additional investment in technology, coupled with what we have learned from our initial production operations. It is anticipated that each of these projects could develop 250 to 300 acres of their respective 320 acres of leases over their 25 to 30 year project life. Additional drilling phases on each of these projects will be necessary to maintain the individual project 500 barrel per day target oil production rates. It is further anticipated that a number of additional projects of similar design and size may be drilled and constructed across Gravis’ Missouri lease holdings.

 
14

 



Gravis is selling all of its oil production for a field gate price equivalent to 80% of the NYMEX posted price for West Texas Intermediate oil sales. Gravis purchases natural gas to fuel its boilers for an "at the burner tip" price approximately equivalent to the NYMEX Henry Hub spot price for natural gas. Natural gas is the largest input cost for the Company's operations; therefore the current ratio of oil to natural gas prices has a very positive impact on project economics.

As at April 30, 2011, the Company recorded an impairment charge of $9,066,590 (2010 - $nil; 2009 - $nil) on the Missouri projects and now carries the value of the Missouri properties at the value of proved and probable reserves.

Subsequent to April 30, 2011, as a result of the Company’s financial position, cost factors and market conditions it suspended operations on its Missouri oil and gas assets. 


 
15

 


Kentucky

The Kentucky lease holdings include a 37.5 % working interest in 29,147 unproved net mineral acres (10,930 company net acres).

On September 21, 2010, the Company and its 62.5% working interest partner (together the “Farmor”) signed a farm-out agreement for their interest in 5,100 net acres in the Little Muddy Area of Butler County, Kentucky to a Houston-based independent exploration and production company (“Farmee”).

On December 4, 2010, this farm-out agreement was expanded to cover the full 29,147 unproved net mineral acres. All acreage leased in Kentucky by the Farmor and the Farmee in Butler, Warren, Edmonson and Muhlenberg counties shall be pooled and be subject to the new agreement. The Farmee currently owns about 1,000 net acres contiguous with Farmor’s leases which will be included in the joint lands.

During the year ended April 30, 2011, the Company recorded an impairment charge of $3,179,174 (2010 - $nil; 2009 - $36,981,914) on the Kentucky project as a result of the lack of development activity by the Farmee and the curtailment of Company plans to continue exploration on the project due to a lack of available capital. As a result of these factors and to help raise capital for other purposes the Company is seeking to depose of its interest in this property. To date no offers have been received on the property and the amount that may be ultimately realized is unknown.

Montana

The Montana leases total 3,982 gross acres (2,019 net) divided amongst two prospects: Devils Basin and Teton. The leasehold in the Devils Basin prospect totals 1,175 gross acres (881 net). Gravis currently owns a 75% working interest in this prospect. There are two active leases in the Teton Prospect totaling 2,807 gross acres (1137 net). Gravis currently owns a 53.69% working interest in this prospect.

Trade seismic was purchased on the Devils Basin prospect to identify one or more prospective drill locations targeting light oil from the Heath Shale. The Company has no near-term plans to proceed with the project.

During the year ended April 30, 2011 the Company recorded an impairment charge of $602,913 (2010 - $816,696, 2009 - $15,396,845) on the Montana project. The impairment was recorded due to the expiry of leases and the continued curtailment of plans to continue exploration on the lands in the near term because of the lack of capital available for this project. The remaining costs represent the Company’s estimate of the fair value of the leases as determined by sales in the area for long term leases with farmout potential and related seismic value.

Kansas

The Chetopa project is a pre-commercial heavy oil demonstration project located two miles south of Chetopa, Kansas. The project is currently suspended, and includes certain oil and gas equipment and a 100% interest in two oil and gas leases covering 385 net mineral acres. The Company has no near-term plans to proceed with the project. During the year ended April 30, 2011 the Company recorded an impairment charge of $nil (2010 - $nil, 2009 - $3,646,484). The carrying value of the Chetopa project represents the estimated salvage value of the equipment.

Other

Other costs consist primarily of five used steam generators and related equipment that will be assigned to future projects.

Principal Markets
 
The principal market that we compete in is the North American energy market, specifically the North American oil market.
 
Extraction Processes and Technology
 
Our business model is dependent on the use of thermal recovery technologies to recover previously uneconomic oil and gas reserves that have now been made economically viable by increases in the price of oil and the development of new technologies in Canada. Our operational and head office is in Calgary, Alberta, where we have access to technical experts in the recovery of heavy oil using various methods of primary and thermal heavy oil recovery, including CSS, SAGD, steam drive, in situ combustion, ET-DSP (a form of electro-thermal heating) and solvent processes.
 
Heavy Oil
 
North America's heavy oil and bitumen deposits are estimated to contain more than 3 trillion barrels of resource, rivaling the oil reserves of Saudi Arabia. Crude oil is considered "heavy" if its American Petroleum Institute, or API, gravity is lower than 20 degrees and its viscosity is higher than 1,000 centipoise. Natural bitumens are even poorer raw materials, with API gravities lower than 10 degrees and viscosities greater than 10,000 centipoise. Heavy oil and bitumen are highly viscous requiring heat or dilution to enable significant production and recovery of reserves.
 

 
16

 



Numerous large oil sands projects, both mining and in situ have been announced and are being actively pursued to exploit this resource. The well-established North American heavy oil deposits offer world-class exploitation opportunities. We believe that the need for North American energy self-sufficiency combined with the encouraging outlook for heavy oil demand, and easy access to refineries make this an ideal time for the re-optimization of non-conventional heavy oil supplies.
 
Similar to other maturing resources, primary heavy oil production in the Canadian oil industry has peaked and is on decline. Encouraged by favorable economic terms and long term leases, thermal recovery is rapidly increasing and now exceeds 240,000 bopd. In Western Canada, there are multiple approved SAGD projects, six approved CSS projects and one approved in situ combustion project in the Province of Alberta. Projections on the future phased developments of these projects indicate that thermal production could reach 1,500,000 bopd by 2013 if investment proceeds as planned. There is a significant and well-established commercial enhanced recovery technology industry in Canada.
 
Large unconventional energy resources that are difficult to produce using today's conventional recovery methods are the focus of our company. These resources represent the key to easing energy supply concerns in the near term and the future.
 
In Situ Resource Recovery
 
Although most heavy oil or bitumen in Canada is currently produced by open pit mining, about 80% of the oil sands are buried too deep below the surface for this process to be applied. This oil must be recovered by in situ techniques, which heat or dilute the heavy oil, thereby lowering its viscosity and allowing it to migrate towards producing wells, where it is brought to the surface. A technical review of our prospects will identify the most suitable technology for each resource and may include proven technologies such as CSS, SAGD, steam drive, in situ combustion and CO2 injection or such emerging technologies as ET-DSP (a form of electro-thermal heating) or N-Solv (a solvent based technology).
 
We will be exploring synergistic technologies to improve capital efficiency, increase energy efficiency, reduce energy costs, reduce the requirement for water and increase the profitability of in situ processes. Production from in situ processes may well replace mining as the main source of heavy oil production from tar sands, contributing significantly to energy self-sufficiency in North America.

C.
Organizational Structure

We have one wholly-owned subsidiary MegaWest USA, which was incorporated in Nevada on January 9, 2007, and the following indirect wholly-owned subsidiaries that are directly owned by MegaWest USA:
 
Subsidiary
 
Jurisdiction of
Incorporation
 
Incorporation /
Acquisition Date
 
MegaWest Energy Kentucky Corp. (formerly Kentucky Reserves, LLC)
Ohio
 
April 2, 2007
 
MegaWest Energy Missouri Corp. (formerly Deerfield Energy LLC)
 
Delaware
 
April 5, 2007
 
MegaWest Energy Kansas Corp. (formerly Deerfield Energy Kansas Corp.)
 
Delaware
 
April 5, 2007
 
MegaWest Energy Texas Corp. (formerly Trinity Sands Energy LLC)
 
Delaware
 
April 25, 2007
 
MegaWest Energy Montana Corp.
 
Delaware
 
October 19, 2007
 


 
17

 


D.
Property, Plants and Equipment

The following table sets forth the number of oil wells in which we held a working interest as of April 30, 2011 and 2010.
 
 
Producing
Non-Producing
 
April 30, 2011
April 30, 2010
April 30, 2011
April 30, 2010
 
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Kansas
       
33
33.0
33
33.0
Missouri (1)
116
116
111
99.9
1
1
-
-
Kentucky
       
5
1.9
5
1.9
Montana
       
-
-
-
-
Texas
       
5
1.75
5
1.75
Total
116
116
111
99.9
44
37.65
43
36.65

(1)We drilled six production, one injection and two observation wells in the year ending April 30, 2011. These were drilled in the Grassy Creek Project in Missouri. As well, we increased our working interest in all Missouri producing wells to 100% in the year ending April 30, 2011.
 
Project Areas
 
The following table sets forth the lease areas we have an interest in, by area, as of April 30, 2010 and 2009:
 
Project Areas
 
April 30, 2011
   
April 30, 2010
 
 
 
Gross
   
Net
   
Gross
   
Net
 
Kansas (1)
   
385
     
385
     
385
     
385
 
Missouri
   
38,119
     
37,470
     
38,119
     
36,598
 
Kentucky (1)
   
29,147
     
10,930
     
29,147
     
10,930
 
Texas (1)
   
19,938
     
9,969
     
29,516
     
11,751
 
Montana (1)
   
3,982
     
2,019
     
15,688
     
8,673
 
Total
   
91,571
     
60,773
     
112,855
     
68,337
 
_____________
(1)
We have discontinued our plans for any further expenditure on these properties as a result of poor drilling results in prior years and a lack of resources. See Operational and Project Review above.
 
Oil and natural gas information is provided in accordance with the United States Financial Accounting Standards Board (“FASB”) Topic 932 - “Extractive Activities - Oil and Gas”.

The Company retains qualified independent reserves evaluators to evaluate the Company’s proved oil reserves. The Company does not have any natural gas reserves. For the years ended April 30, 2011, 2010 and 2009 the reports by GLJ Petroleum Consultants (“GLJ”) covered 100% of the Company’s oil reserves.

Proved oil and natural gas reserves, as defined within the SEC Rule 4-10(a)(22) of Regulation S-X, are those quantities of oil and gas, which, by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible from a given date forward from known reservoirs, and under existing economic conditions, operating methods and government regulations prior to the time of which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether determinable or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. Developed oil and natural gas reserves are reserves that can be expected to be recovered from existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and through installed extraction equipment and infrastructure operational at the time of the reserves estimate is the extraction is by means not involving a well. Estimates of the Company’s oil reserves are subject to uncertainty and will change as additional information regarding producing fields and technology becomes available and as future economic and operating conditions change.

The following table summarizes the Company’s proved developed and undeveloped reserves (all oil) within the United States, net of royalties, as at April 30, 2011, 2010 and 2009:
 


 
18

 


Oil (MBbls)
 
2011
   
2010
   
2009
 
                   
Proved reserves as at May 1
    445       79       45  
Extensions and discoveries
    46       -       43  
Dispositions
    -       (3 )     -  
Production
    (28 )     (32 )     (9 )
Revisions of prior estimates
    -       401       -  
Total Proved reserves as at April 30
    463       445       79  
                         
Oil (MBbls)
    2011       2010       2009  
                         
Proved developed producing
    191       191       -  
Non-producing
    -       -       34  
Proved undeveloped
    272       254       45  
Total Proved reserves as at April 30
    463       445       79  

Capitalized Costs Related to Oil and Gas Assets
 
2011
   
2010
   
2009
 
                   
Proved properties
  $ 10,474,051     $ 9,630,780     $ 2,958,979  
Unproved properties
    105,123,129       104,692,582       107,996,621  
      115,597,180       114,323,362       110,955,600  
Less: accumulated impairment
    (98,143,411 )     (85,294,734 )     (84,187,801 )
Less: accumulated depletion
    (816,555 )     (95,815 )     -  
    $ 16,637,214     $ 28,932,813     $ 26,767,799  
 

Costs incurred in Oil and Gas Activities:
 
2011
   
2010
   
2009
 
                   
Development
  $ 1,623,574     $ 779,457     $ 13,131,400  
Exploration
    -       -       -  
    $ 1,623,574     $ 779,457     $ 13,131,400  

Standardized Measure of Discounted Future Net Cash Flows From Proved Oil Reserves and Changes Therein:

The following standardized measure of discounted future net cash flows from proved oil reserves has been computed using the average first-day-of-the-month price during the previous 12-month period, costs as at the balance sheet date and year-end statutory income tax rates. A discount factor of 10% has been applied in determining the standardized measure of discounted future net cash flows. The Company does not believe that the standardized measure of discounted future net cash flows will be representative of actual future net cash flows and should not be considered to represent the fair value of the oil properties. Actual net cash flows will differ from the presented estimated future net cash flows due to several factors including:
 
 
Future production will include production not only from proved properties, but may also include production from probable and possible reserves;
 
Future production of oil and natural gas from proved properties may differ from reserves estimated;
 
Future production rates may vary from those estimated;
 
Future rather than average first-day-of-the-month prices during the previous 12-month period and costs as at the balance sheet date will apply;
 
Economic factors such as changes to interest rates, income tax rates, regulatory and fiscal environments and operating conditions cannot be determined with certainty;
 
Future estimated income taxes do not take into account the effects of future exploration expenditures; and
 
Future development and asset retirement obligations may differ from those estimated.

 
19

 



Future net revenues, development, production and restoration costs have been based upon the estimates referred to above. The following tables summarize the Company’s future net cash flows relating to proved oil reserves based on the standardized measure as prescribed in FASB Topic 932 - “Extractive Activities - Oil and Gas”:

Future cash flows relating to proved reserves:
 
2011
   
2010
   
2009
 
                   
Future cash inflows
  $ 26,338,000     $ 26,291,000     $ 3,425,000  
Future operating costs
    (9,686,000 )     (10,672,000 )     (2,004,000 )
Future development costs
    (3,345,000 )     (3,488,000 )     (889,000 )
Future asset retirement costs
    (141,000 )     (139,000 )     (60,000 )
Future income taxes
    -       -       -  
Future net cash flows
    13,166,000       11,992,000       472,000  
10% discount factor
    (3,225,000 )     (3,286,000 )     (139,000 )
Standardized measure
  $ 9,941,000     $ 8,706,000     $ 333,000  

Reconciliation of future cash flows relating to proved reserves:
 
2011
   
2010
   
2009
 
Undiscounted value as at May 1
  $ 11,992,000     $ 472,000     $ 256,000  
Extensions and discoveries
    1,239,600       -       1,075,000  
Dispositions
    -       (17,900 )     -  
Production
    (775,700 )     (481,100 )     (44,900 )
Revisions of prior volume estimates
    -       10,806,300       -  
Revisions of pricing
    710,100       1,212,700       (814,100 )
Undiscounted value as at April 30
    13,166,000       11,992,000       472,000  
10% discount factor
    (3,225,000 )     (3,286,000 )     (139,000 )
Standardized measure
  $ 9,941,000     $ 8,706,000     $ 333,000  

Item 4A. 
Unresolved Staff Comments

None.

Item 5. 
Operating and Financial Review and Prospects
 
A.
Operating Results
 
The following discussion of our financial condition and results of operations for the fiscal year ended April 30, 2011, should be read in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP and related notes included elsewhere in this annual report. The following discussion may contain forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s accounting policies are described in Note 5 to the annual consolidated financial statements for the year ended April 30, 2011. The consolidated financial statements are prepared in conformity with U.S. GAAP.
 
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts and other disclosures in these financial statements.  Actual results may differ from those estimates due to factors such as fluctuations in interest rates, currency exchange rates, inflation levels and commodity prices, changes in economic conditions and legislative and regulatory changes.
 
Significant estimates used in the preparation of these financial statements include estimates of oil and gas reserves and resources and the estimated value of the unproved properties, fair value of the Preferred A Shares at the date of their exchange, derivative fair values, stock-based compensation fair values and estimated cost and timing related to asset retirement obligations.

 
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Certain fair value estimates are based on expected volatility of the Company’s share price.  In 2011, the Company used a volatility rate based on peer entities rather than historical trading prices of its common shares as used in 2010 and prior years.  The volatility of peer entities is considered more representative for the Company due to the dilutive impact of financings completed in 2011 and the limited trading of the Company’s shares on the OTC Bulletin Board.

The preparation of the financial statements requires making estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis the Company evaluates the estimates, including those related to acquisitions, status of oil and gas projects (proved or unproved), asset impairment, tax valuation allowances, volatility and market value of our share price, the valuation of preferred shares and contingencies. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions and conditions.

The critical accounting policies used in the preparation of our  consolidated financial statements are described below.

Oil and Gas Operations

Gravis follows the full cost method to account for its oil and gas operations, whereby all costs of exploring for and developing oil and gas reserves are capitalized and accumulated in country-by-country cost centers. These capitalized costs will be depleted using the unit-of-production method based on estimates of proved reserves once the underlying property in considered proved. The costs related to unproved properties are not subject to depletion. Factors used to make this assessment included commercial production levels on demonstration projects for an extended period of time and the existence of proved reserves which are not yet considered commercially viable and which require additional capital to complete their ultimate development.

The capitalized costs in each unproved project are assessed to determine whether it is likely such costs will be recovered in the future. Costs which are not likely to be recovered in the future are written-off. We assess the carrying amounts of our unproved oil and gas assets for impairment by assessing the likelihood of recovering our costs through cash flow projections of future net proceeds.

Management prepared estimates of future net proceeds using internal and independent estimates of resource potential. The process of estimating quantities of resource potential is inherently uncertain and complex. It requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing exploration activities becomes available and as economic conditions impacting oil and gas prices and costs change. Our resource estimates are based on assumed exploration success, availability of future capital to finance development, future production forecasts, prices and economic conditions. Additional assumptions and estimates used in the future net proceeds calculations include:

 
estimates of production and recovery rates, which vary depending on the method of extraction used and the characteristics of the reservoir and resource estimates;
 
estimates of operating costs, which vary with equipment and facility efficiency, inflation;
 
estimates of the proceeds of the disposal of oil and gas assets and
 
estimates of future capital costs, which vary with inflation, equipment and facility performance.

Significant changes in these factors could reduce our estimates of future net proceeds and accordingly could result in an impairment of our oil and gas assets. Management will perform quarterly assessments of the carrying amounts of its oil and gas assets as additional data from ongoing exploration activities becomes available.

As a result of these procedures, the Company recorded a $12,848,677 impairment charge on its properties during the year ended April 30, 2011 (2010 - $1,162,545; 2009 - $57,468,799).

Fair Value of the Company’s Common Shares, Options and Warrants and Derivatives

Gravis used valuation techniques that rely on unobservable inputs for its derivatives to estimate their fair values such as expected volatility rates comparable to peer companies.

The fair value of options and warrants granted and the conversion feature of convertible notes were based on Black-Scholes and binomial pricing models, which use the common share fair value on the grant date as an input.

PENDING ACCOUNTING CHANGES

The FASB has issued ASU No. 2010-13, Compensation - Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This ASU codifies the consensus reached in EITF Issue No. 09-J, "Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades." The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This rule will not have a material impact on the Company’s financial position or results of operations. The Company has applied the principles from the update in its financial reporting.

 
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In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The ASU amends Subtopic 820-10 with new disclosure requirements and clarification of existing disclosure requirements. New disclosures required include the amount of significant transfers in and out of levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, the reconciliation for level 3 activity will be required on a gross rather than net basis. The ASU provides additional guidance related to the level of disaggregation in determining classes of assets and liabilities and disclosures about inputs and valuation techniques. The amendments are effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the reconciliation for level 3 activities on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The Company is currently assessing the impact of ASU 2010-6 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

The FASB has issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income, the requirements of which increase in the prominence of other comprehensive income in financial statements. The Company is currently assessing the impact of ASU 2011-05 and does not expect adoption of this guidance to have a material impact on its consolidated financial statements.

Results of Operations
 
Fiscal Year Ended April 30, 2011 Compared to Fiscal Year Ended April 30, 2010

   
Years ended April 30
 
   
2011
   
2010
 
Revenue and other income
           
Oil sales
  $ 1,565,963     $ 1,575,150  
Interest income
    16,213       6,073  
      1,582,176       1,581,223  
                 
Expenses
               
Operating
    3,470,746       3,955,084  
Impairment of oil and gas assets
    12,848,677       1,162,545  
General and administrative
    3,307,060       3,193,449  
Depreciation, depletion and accretion
    844,160       293,113  
Interest and accretion
    1,512,443       -  
Foreign exchange loss (gain)
    (86,959 )     98,225  
Change in fair value of derivatives
    9,395,435       829,166  
      31,291,562       9,531,582  
Net loss
  $ (29,709,386 )   $ (7,950,359 )
Net loss per share
  $ (2.22 )   $ (0.60 )
Weighted average number of shares - basic and diluted
    13,387,166       13,325,545  

Oil sales

During the year ended April 30, 2011, the Company’s Missouri properties produced 26,549 barrels of oil at an average price (net of royalties) of $59 per barrel as compared to 2010 production of 29,775 barrels at an average price (net of royalties) of $53 per barrel.

Production decreased due to 3 months of shut in for downhole repairs and then operations with restricted gas use to conserve operating funds.

Interest income

2011 interest income is mainly interest earned from July 2010 to April 2011 on the long-term receivable at U.S bank prime rate plus 3%. 2010 interest income was earned on bank balances.

Operating expenses

During the year ended April 30, 2011, the Company incurred $3,470,746 ($131 per barrel) of operating costs compared to $3,955,084 ($133 per barrel) in 2010.

Impairment of oil and gas assets

See Operational and Project Review section.

 
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General and administrative expenses

   
Year ended April 30
 
   
2011
   
2010
 
Stock-based compensation:
           
 Stock options
  $ 575,835     $ 500,293  
Compensation warrants
    152,010       -  
Consulting warrants
    166,810       -  
 Shares issued for services
    -       7,638  
 Less: capitalized portion
    (9,495 )     (50,846 )
      885,160       457,085  
Salaries and benefits
    1,063,706       1,401,257  
Professional fees
    1,104,290       460,101  
Investor relations
    64,818       45,177  
Office and administrative
    325,259       938,534  
Information technology
    44,364       52,754  
Less: capitalized portion
    (180,537 )     (161,459 )
      2,421,900       2,736,364  
    $ 3,307,060     $ 3,193,449  

The primary variances in general and administrative expenses for the 2011 periods as compared to the 2010 periods are as follows:

 
Stock-based compensation expense is higher in 2011 due to the granting of:
 
500,000 stock options in January 2011 and 802,000 stock options in April 2011;
 
480,000 compensation warrants in April 2011; and
 
720,000 consulting warrants in July 2010 and 2,000,000 consulting warrants in December 2010;
 
Salaries and benefit costs increased in the fourth quarter of 2011 due to the hiring of a new president in January 2011. Annual salaries and benefits costs are lower in 2011 due to reduced staffing levels for the majority of the year;
 
Professional fees, consisting of legal, audit, accounting and tax advisory fees, increased due to services related to financial reporting and regulatory compliance and the Company’s dispute with its landlord (see Contingency and Contractual Obligation section);
 
Investor relations expenses increased in 2011 related to the Company’s efforts to raise investor awareness of the Company;
 
Office and administrative costs decreased due to management’s efforts to reduce costs, the closing of a field office in Missouri and no Calgary office lease payments made since December 2009 (see Contingency and Contractual Obligation section); and
 
Information technology costs decreased in 2011 due to a reduction in the outsourcing of technology services.

Interest and accretion

Interest and accretion expense is related to the interest and accretion on the Junior and Senior notes.

Foreign exchange gain/loss

The 2011 net foreign exchange gain is comprised of gains on the translation of U.S. dollar denominated transactions and balances to Canadian dollars in the first quarter, partially offset by losses on the translation of Canadian dollar denominated transactions and balances to U.S dollars in the second, third and fourth quarters, both due to a weakening U.S. dollar.

The 2010 net foreign exchange loss is comprised of Canadian dollar foreign exchange losses on the translation of U.S. dollar denominated transactions and balances to Canadian dollars.

Change in fair value of derivatives

The increase in the fair value of the following derivative liabilities is recognized in the consolidated statement of operations as change in fair value of derivatives expense:

   
Preferred A
Warrants
   
Preferred B
Option
   
Conversion
feature derivative
   
Senior
warrants
   
Consulting
warrants
   
Total
 
Balance, April 30, 2010
  $ 740,269     $ 590,640     $ -     $ -     $ -     $ 1,330,909  
Fair value on date of issue
    -       -       1,883,200       1,808,070       166,810       3,858,080  
Conversion of Senior I Notes
    -       -       (84,530 )     -       -       (84,530 )
Change in fair value
    2,479,431       4,531,654       1,070,960       988,820       324,570       9,395,435  
Balance, April 30, 2011
  $ 3,219,700     $ 5,122,294     $ 2,869,630     $ 2,796,890     $ 491,380     $ 14,499,894  


 
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Fiscal Year Ended April 30, 2010 Compared to Fiscal Year Ended April 30, 2009

   
Years ended April 30
 
   
2010
   
2009
 
Revenue and other income
           
Oil sales
  $ 1,575,150     $ -  
Interest income
    6,073       135.190  
      1,581,223       135,190  
                 
Expenses
               
Operating
    3,955,084       -  
Impairment of oil and gas assets
    1,162,545       57,468,799  
General and administrative
    3,193,449       4,046,550  
Depreciation, depletion and accretion
    293,113       127,884  
Interest and accretion
    -       12,479  
Foreign exchange loss (gain)
    98,225       (1,573,251 )
Change in fair value of derivatives
    829,166       -  
      9,531,582       60,082,461  
Net loss
  $ (7,950,359 )   $ (59,947,271 )
Net loss per share
  $ (0.60 )   $ (4.60 )
Weighted average number of shares - basic and diluted
    13,325,545       13,035,892  

Oil Sales and Operation Costs  

During fiscal 2010 the Company began commercial production on its Missouri property and as such began recording oil sales and operating costs. Prior to the year ended April 30, 2010 any incidental oil sales and operating costs were capitalized see Operational and Project review section.

Impairment of Oil and Gas Assets

 See Operational and Project Review section.
 
General and administrative expenses.

   
Year ended April 30
 
   
2010
   
2009
 
Stock-based compensation:
           
 Stock options
  $ 500,293     $ 784,887  
Compensation warrants
    -          
Consulting warrants
    -          
 Shares issued for services
    7,638       222,533  
 Less: capitalized portion
    (50,846 )     (472,486 )
      457,085       534,934  
Salaries and benefits
    1,401,257       2,576,423  
Professional fees
    460,101       439,370  
Investor relations
    45,177       188,908  
Office and administrative
    938,534       1,136,719  
Information technology
    52,754       213,229  
Less: capitalized portion
    (161,459 )     (1,043,033 )
      2,736,364       3,511,616  
    $ 3,193,449     $ 4,046,550  
 
 
Stock-based compensation expense of $457,085 was recorded for the fiscal year ended April 30, 2010 (2009 - $534,934). The overall decrease in stock-based compensation from 2010 to 2009 is primarily due to the vesting of certain options granted in prior years for which stock-based compensation was recorded in 2009 but is no longer recognized in 2010.
 
Salary and benefit costs of $1,401,257 were recorded for the fiscal year ended April 30, 2010 (2009 - $2,576,423). The decrease in salaries and benefit costs in fiscal 2010 is due to a change in the mix of the employees with less senior staff in 2010 than in 2009.

 
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Professional fees totaled $460,101 for the fiscal year ended April 30, 2010 (2009 - $439,370), which consist of legal, audit, accounting and tax advisory fees. The decrease in the professional fees in fiscal 2010 is primarily due to the reduced audit and tax consulting fees compared to fiscal 2009.
 
Investor relations expenses of $45,177 were incurred for the fiscal year ended April 30, 2010 (2009 - $188,908) in an effort to raise investor awareness. The decrease in investor relations costs for fiscal year 2010 is due to fewer investor relations consultants engaged during the period compared to fiscal 2009.
 
Office and administrative costs totaled $938,534 for the fiscal year ended April 30, 2010 (2009 - $1,136,719) and are primarily comprised of office rent and supplies, license and maintenance costs, insurance, telephone and internet, travel and miscellaneous costs. The decrease is primarily due to a decrease in lease payments in fiscal 2010 due to re-negotiated lease terms on the Calgary office combined with no lease payments made for that office since December 2009 (See Item 8A. “Financial Information - Financial Statement and Other Information - Legal Proceedings”) and the closing of a field office in Missouri.
 
Information technology costs totaled $52,754 for the fiscal year ended April 30, 2010 (2009 - $213,229) and mainly consist of part-time information technology consulting, software license and maintenance fees. The decrease in information and technology costs is due to fewer information technology consultants engaged during fiscal 2010 compared to fiscal 2009.
 
 

 
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Foreign Exchange Gain (Loss).

We recorded a foreign exchange loss of $98,225 for the fiscal year ended April 30, 2010 compared to a foreign exchange gain of $1,573,251 for the fiscal year ended April 30, 2009. Foreign exchange gain (loss) reflects the impact of changes in the U.S. dollar/Canadian dollar exchange rate on our U.S. dollar denominated cash balances that we hold to pay costs associated with our U.S. dollar denominated projects. While the U.S. dollar depreciated against the Canadian dollar during fiscal 2010, the Canadian dollar depreciated against the U.S. dollar during fiscal 2009.
 
Change in fair value of derivatives.

The increase in the fair value of the following derivative liabilities is recognized in the consolidated statement of operations as change in fair value of derivatives expense:

   
Preferred A
Warrants
   
Preferred B
Option
   
Conversion feature
derivative
   
Senior
warrants
   
Consulting
warrants
   
Total
 
Balance, April 30, 2009
  $ -     $ -     $ -     $ -     $ -     $ -  
Fair value on date of issue
    323,564       138,671       -       -       -       462,235  
Foreign currency translation
    25,479       14,029       -       -       -       39,508  
Change in fair value
    391,226       437,940       -       -       -       829,166  
Balance, April 30, 2010
  $ 740,269     $ 590,640     $ -     $ -     $ -     $ 1,330,909  

B.
Liquidity and Capital Resources
 
As at April 30, 2011, the Company had a working capital deficiency of $1,428,025 compared to a working capital deficiency of $209,701 at April 30, 2010.

During June 2011 the Company raised $1.76 million raised on the exercise of 17,600 Preferred B Options.  However, due to the significant capital cost of steam injection, the volatility of oil prices, and the Company’s financial position, management elected to suspend operations on its Missouri oil and gas assets in October 2011.

During September 2011, the Company was cease traded by the Alberta and British Columbia securities commissions for failure to file certain financial information - See Legal Proceedings below.  The Company has made the required filings and believes that the Alberta and British Columbia cease trade orders will be lifted.    However, as of the date of this report the cease trade orders have not been revoked and no assurances can be given as to when or if they will be lifted.   Until these cease trade orders are revoked the Company’s ability to raise capital is significantly restricted.

We expect that our current capital and our other existing resources will be sufficient only to provide a limited amount of working capital, and the revenues generated will not alone be sufficient to fund our operations or planned growth. We anticipate that we will require up to approximately $2 million for our anticipated operations for the next twelve months, depending on revenues. In addition when our Senior Notes and Junior Notes come due the Company currently lacks the resources to repay them.  While the Company plans on renegotiating the terms of the Senior Notes and Junior Notes there can be no assurance that the Company will be successful and the Senior Note and Junior Note holders may demand repayment and or force their security interests against our assets. We believe that our currently available funds can sustain our current level of operations for approximately three months from the date of this report. We will require additional capital to continue to operate our business and to further expand our exploration and development programs. We may be unable to obtain additional capital required. Furthermore, inability to maintain capital may damage our reputation and credibility with industry participants. Our inability to raise additional funds when required may have a negative impact on our consolidated results of operations and financial condition.

Investing Activities

During the year ended April 30, 2011, the Company incurred $1,623,574 of expenditures on oil and gas assets compared to $785,014 in 2010.

On July 30, 2010, the Company and MP1 entered into an arrangement whereby the Company acquired MP1’s 10% working interest in the projects in exchange for a 2.75% gross overriding royalty interest effective July 1, 2010. Under this arrangement, the Company converted a receivable related to joint venture capital and operating costs owing by MPI on its Marmaton River and Grassy Creek projects in Missouri to a promissory note and the Company will recover the balance of the amount due from 50% of the gross overriding royalty payments to MP1. During the time the long term receivable is outstanding, the Company will receive interest on the outstanding balance at the U.S. bank prime rate plus three percent (3%). As at April 30, 2011, the balance of the long-term receivable was $294,862.

Financing Activities

On April 29, 2010, the Company secured a line of credit with a private lender for the sole purpose of buying natural gas to fuel the steam generators on its Marmaton River and Grassy Creek projects. The credit facility is available up to a maximum of $1.0 million at an interest rate of 2% per month calculated on the average daily outstanding principal balance. As security, the Company signed a mortgage and a promissory note in the amount of $1.0 million granting security to the lender over certain Missouri properties. The credit agreement can be terminated by the Company upon 30 days’ notice. During the first quarter, the Company drew $311,800 on the credit facility and repaid the amount in full in the second quarter.

 
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The April 29, 2010 line of credit was terminated and the Company subsequently entered into a similar one on the same terms. In the third quarter, the Company had drawn $74,900. The line of credit repaid in February 2011 and then terminated.

On July 30, 2010, the Company closed a financing with a group of its existing shareholders for $2.5 million of funding for net proceeds, after transaction costs, of $2,309,248. Details of the financing are described in the Overview section.

In December 2010, January 2011 and March 2011, the Company closed a financing with institutional and private investors for a total of US $4.6 million of funding for net proceeds, after transaction costs of $4,463,000. Details of the financing are described in the Overview section.

During 2011, the Company issued 2,720,000 warrants to a consultant for professional services. The warrants are exercisable at US$0.25 per common share. These warrants expire three years from the date of issuance. As at April 30, 2011, these warrants have a weighted average life remaining of 2.6 years.

During June 2011, the Company raised $1.76 million raised on the exercise of 17,600 Preferred B Options.

The number of outstanding shares and the number of shares that could be issued if all dilutive instruments are converted to shares is as follows:

As at
 
September 30
2011 (12)
   
April 30
2011
   
April 30
2010
 
Common shares (1)
    14,078,947       14,078,947       13,328,947  
Preferred A Shares (2)
    -       -       3,459,295  
Preferred A Warrants (3) (11)
    19,250,000       19,250,000       1,540,000  
Preferred B Shares (4) (11)
    8,799,500       10,000,000       2,000,000  
Preferred B Warrants (4) (11)
    15,399,125       17,500,000       1,000,000  
Senior I Notes (5) (11)
    11,750,000       11,750,000       -  
Senior I Warrants (5) (11)
    12,500,000       12,500,000       -  
Senior II Notes (6) (11)
    23,000,000       23,000,000          
Senior II Warrants (6) (11)
    9,200,000       9,200,000          
Junior Notes (2) (11)
    12,505,340       12,505,340       -  
Consulting Warrants (7)
    2,720,000       2,720,000       -  
Stock Options (1) (9)
    1,404,300       1,404,300       1,069,800  
Compensation Warrants (1) (9)
    480,000       480,000          
Accrued Senior I Notes (interest) (10)(11)
    1,620,657       1,105,068       -  
Accrued Senior II Notes (interest) (10)(11)
    1,862,466       705,534          
Accrued Junior Notes (interest) (10)(11)
    1,097,215       704,068       -  
      135,667,550       136,903,257       22,398,042  
(1)
As at September 30, 2011, senior management and directors held an aggregate of 120,000 common shares, 250,000 Preferred B shares, 250,000 Preferred B warrants and 1,192,500 stock options.
(2)
On July 30, 2010, the Company converted 22,000 Preferred A Shares plus $301,069 of accumulated dividends to $2,501,069 of Junior Notes. The Junior Notes are redeemable in cash at any time at the Company’s option or convertible into common shares at $0.20 per common share at the Company’s option under terms and conditions specified in the existing agreement for Preferred A Shares.
(3)
The Preferred A Warrants remain as issued on August 28, 2009. Each warrant allows the holder to purchase one common share at US $0.20 per share for a period of five years from issuance.
(4)
Pursuant to the agreements with MP1, until November 26, 2010 (extended to June 7, 2011), the Investors have the option to purchase up to 2,000 Series B convertible preferred shares with a stated value of $100 each (the “Preferred B Shares”), for up to US $2,000,000 on similar terms to the Preferred A Shares except the conversion price is US $1.00 per common share. After 12 months from the date of issue, the Company may force the conversion of the Preferred B Shares provided certain conditions are met. In conjunction with the Preferred B Share issuance, the Company will issue to the Investors up to 17,500,000 warrants (“Preferred B Warrants”). Each Preferred B Warrant allows the holder to purchase a common share at US $0.20 per share for a period of five years from issuance. After nine months from the date of issuance, a cashless conversion option is provided only with respect to Preferred B Warrant shares not included for unrestricted public resale in an effective registration statement on the date notice of exercise is given to the Company.
On June 7, 2011, the Company issued 17,600 Preferred B shares on the exercise of 17,600 Preferred B Options and issued 15,399,125 Preferred B Warrants exercisable at $0.20 until June 7, 2016. The remaining 2,400 Preferred B Options expired unexercised.
(5)
On July 30, 2010, the Company issued US $2,500,000 of Senior I Notes. The Senior I Notes, as adjusted, are redeemable in cash at any time at the Company’s option or convertible into common shares at US $0.20 per common share at the Company’s option under terms and conditions specified in the agreement.
One warrant (“Senior I Warrant”) has been issued to the holder for each $0.50 principal amount of the Senior I Notes for a total of 5,000,000 warrants exercisable at $0.20 per share.

 
27

 

(6)
In December 2010, January 2011 and March 2011, the Company issued US $4,600,000 of Senior II Notes. The Notes are redeemable in cash at any time at the Company’s option or convertible into common shares at US $0.20 per common share at the Company’s option under terms and conditions specified in the agreement.
One warrant (“Senior II Warrant”) has been issued to the holder for each $0.50 principal amount of the Senior II Notes for a total of 9,200,000 warrants exercisable at $0.20 per share.
(7)
The Company issued 720,000 warrants on July 30, 2010 and 2,000,000 warrants on December 28, 2010 as part of fee arrangements with an independent consultant for professional services. The warrants are exercisable at $0.25 per share.
(8)
During the year ended April 30, 2011, 1,302,000 options were granted, 213,500 options expired, 304,000 options were forfeited and 450,000 options were cancelled.
(9)
In January 2011, the Company granted 480,000 compensation warrants.
(10)
Interest accrued on the Junior Notes and the Senior Notes are payable in additional junior notes and senior notes. As at April 30, 2011, $502,934 (September 30, 2011 - $916,068) of accrued interest is convertible at $0.20 per share.
 (11)
As of September 30, 2011, the holders of the Senior I & II Notes and Junior Notes upon exercise or conversion of all dilutive derivative instruments held by them, would hold a total of approximately 116,984,303 common shares or 86.2% of the fully diluted common shares of Gravis, and could have the ability to control all matters submitted to Gravis' shareholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our Company's assets) and to control the Company's management and affairs. Accordingly, this potential concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company, impeding a merger, consolidation, takeover or other business combination involving the Company or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could have a material adverse effect on the market price of Gravis’ shares.
(12)
There have been no changes in the number of shares outstanding as at the date of this annual return. There are no significant changes in the number of potential shares outstanding as a result of dilutive instruments as at the date of this annual return.
 
C.
Research and Development
 
We do not currently, and did not previously, have any research and development policies in place. Over the past three fiscal years, no funds were expended by our company on research and development activities. 
 
D.
Trend Information
 
We are an exploration stage company engaged principally in the acquisition, exploration and development of oil and gas properties in the United States. As a result, our business is dependent on the worldwide prices of oil and gas. In the past, oil and gas prices have been volatile. Prices are subject to wide fluctuations in response to changes in supply of, and demand for, oil and gas, market uncertainty, and a variety of additional factors that are beyond our control.
  
E.
Off-Balance Sheet Arrangements
 
We do not have any 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 investors. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
 
F.
Tabular Disclosure of Contractual Obligations
 
The following table summarizes our minimum contractual obligations as of April 30, 2011.
 
Contractual Obligations
 
Payments due by period
 
 
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Lease payments (1)
    -       -       -       -       -  
Total
  $ -     $ -       -       -       -  
______________
 
(1)
We are in a dispute with our landlord over the termination of our office lease. We contend that the lease has terminated in accordance with its terms and accordingly, we are of the opinion that no amounts are due under the office lease. See Item 8A. “Financial Information - Financial Statement and Other Information - Legal Proceedings”

Item 6.
Directors, Senior Management and Employees

A.
Directors, Senior Management and Employees
 
Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:
 

 
28

 



Name and Age
Position
Tim L. Morrison (38)
Chief Executive Officer, Secretary and
Chairman of the Board of Directors
George Orr (i) (50)
Director
M. Elden Schorn (i) (72)
Director
Fred Zeidman (i) (65)
Director
Jeffrey Freedman (64)
Chief Financial Officer
Pat McCarron (60)
Vice President Operations
E. Wayne Sampson (60)
Vice President Land

(i) Member of the Audit Committee

Tim Morrison
 
Mr. Morrison was named President and Chief Executive Officer of Gravis Oil (formerly MegaWest Energy Corp.) on January 4, 2011, Secretary on March 10, 2011 and a director on April 29, 2011. Prior to joining Gravis Oil, he served as Chief Operating Officer of Cox Operating LLC and Cox Oil LLC, a Dallas-based oil and gas production company. Mr. Morrison played a key role in the $100 million dollar cleanup and rebuild of Cox's Oil and Gas properties in South Louisiana following Hurricane Katrina in 2005. Earlier in his career, Mr. Morrison spent five years with Halliburton Energy Services, where he served as District Manager of the San Juan and Raton Basin oil fields. He has strong operational experience with both onshore and offshore facilities, and has technical expertise in stimulation, sand control, completion tools, reservoir modeling, and production analysis. He holds a B.S. degree in Chemical Engineering from Texas Tech University. Mr. Morrison currently serves as a director for the Louisiana Oil & Gas Association.

George Orr
 
Mr. Orr has served as a director since December 2006. From December 2006 to October 2008 and again from February 14, 2011 to June 30, 2011 Mr. Orr served as our Chief Financial Officer . Mr. Orr is a Chartered Accountant and has several years experience dealing with public company reporting and administrative requirements. Mr. Orr provides advisory services to a number of other reporting issuers and private companies.
 
Elden Schorn
 
Mr. Schorn has served as a director since April 2011.  Mr. Schorn has substantial experience in business-government relations, developed through executive positions with trade organizations representing Canadian manufacturers and the Canadian government. He previously served as Vice President of the British Columbia Region for the Canadian Manufacturers and Exporters Association, which is one of Canada's leading business networks. Earlier in his career, Mr. Schorn served as Consul and Senior Investment Advisor for the Canadian Consulate in New York City. Mr. Schorn received his undergraduate degree from the University of British Columbia and did additional course work at the University of Alberta.  Mr. Schorn currently serves as a director for Smart Cool Systems and One World Financial Corp. both listed on the TSX. He also serves as a director for Mantra Venture Group and Global Green Solutions Inc. listed on the OTCBB.

Fred S. Zeidman
 
Mr. Zeidman has served as a director since November 2009.  Mr. Zeidman, Chairman Emeritus of the United States Holocaust Memorial Council, was appointed by President George W. Bush in March 2002 and served in that position from 2002 - 2010. A prominent Houston based business and civic leader, Mr. Zeidman also serves as Chairman of the University of Texas Health Science System Houston and is on the Board of Trustees of the Texas Heart Institute and the Institute for Rehabilitation and Research (TIRR). He further serves on the Board of Directors and Executive Committee of The University of Saint Thomas and chairs its Audit and Finance Committee.  Mr. Zeidman also serves on the Board of Hyperdynamics Corp.  He was formerly Chairman of the Board of SulphCo Inc., Chief Restructuring Officer of Transmeridian Exploration, Inc. and Bankruptcy Trustee of AremisSoft Corp. He has previously served as Chairman of the Board of Seitel Inc., Interim President of Nova Bio Fuels, Inc. and Senior Director Governmental Affairs Ogilvy Government Relations in Washington, DC. Mr. Zeidman also serves on the Board of Prosperity Bank in Houston.

Jeffrey Freedman
 
Mr. Freedman has been our Chief Financial Officer since July 2011. Between March 2011 and June 2011, Mr. Freedman served as a director of Global Investor Services, Inc., a publicly traded investor marketing company. Between 2009 and 2011, Mr. Freedman served as Vice President of Corporate Development for SulphCo Inc., a publicly traded crude oil field technology oil service company. Mr Freedman also served as a founding shareholder of Allis-Chalmers Energy Inc., serving on that company's Board of Directors from 2002 to April 2007. Earlier in his career, Mr. Freedman served as Managing Director for Oilfield Services and Equipment for Prudential Securities and Smith Barney. He holds a B.A. degree in Finance from Babson College and an M.B.A. from the Stern School of Business at New York University.
 

 
29

 



Pat McCarron
 
Mr. McCarron has served as our Vice President Operations since June 2008. Mr. McCarron has extensive experience in operations with over 25 years of experience with gas processing, SAGD and conventional oil operations. Specifically, Mr. McCarron has experience dealing with construction, commissioning and start-up of new facilities, production operations supervision, and management of environment, health and safety programs. Mr. McCarron holds a Power Engineers Certificate and has completed an Environmental Management program at the University of Calgary. Mr. McCarron served as the Operations Team Leader for Gulf Canada's Surmont SAGD pilot project from November 1996 to April 1998, and served as the Manager of Health and Safety for Harvest Energy Trust from February 2006 to August 2008.

Wayne Sampson
 
Mr. Sampson has served as our Vice President Land since January 2007.  Mr. Sampson studied Petroleum Land Management at Mount Royal College and Business Administration at the University of Tulsa.  He has over 35 years of land management experience, primarily in small to intermediate exploration and development companies in Canada and the United States.  Over the past 25 years, Mr. Sampson has held numerous senior management and executive positions in both countries.  Prior to joining our company, Mr. Sampson has held positions ranging from VP Land and Legal at Fall-Line Exploration in Denver (1983-1986); he served as an independent land consultant in Denver and Calgary (1987-1993); he served as Land Manager at CS Resources in Calgary (1994-1997), VP Land & Accounting at Van Horne Oil & Gas in Calgary (1998), VP Land at Petrovera Resources in Calgary (1999-2004) and Land Manager at Viking Trust/Harvest Trust in Calgary(2004-20007).  Mr. Sampson is a Professional Landman (Canadian Association of Petroleum Landmen) and a member of American Association of Professional Landmen.

There are no family relationships between any of the directors or executive officers of our company. There are no arrangements or understandings between any of our directors and/or executive officers and any other person pursuant to which that director and/or executive officer was selected.
 
B. 
Compensation

The following table sets forth all compensation paid for the fiscal year ended April 30, 2011 with respect to each of our executive officers and directors during the fiscal year ending April 30, 2011.
 
Name and Principal Position
Annual Compensation
Long Term Compensation
All Other
Compen-
sation
($)
Salary
($)
Bonus
($)
Other Annual
Compen-
sation
($)
Awards
Payouts
 
Securities Under
Options (1)/ SARs (2)
Granted
(#)
Shares or
Units Subject to
Resale
Restrictions
(#)
LTIP (3)
Payouts
(#)
 
Tim Morrison
Chief Executive Officer, Secretary and Director
$61,359
-
 -
600,000 (4)
-
-
-
George Orr, former CFO and a Director(12)
-
-
-
230,000 (5)
-
-
-
Pat McCarron
Vice President, Operations
$185,040
-
-
112,500 (6)
-
-
-
E. Wayne Sampson
Vice President, Land
$176,500
-
-
90,000 (7)
-
 
-
 
-
 
George T. Stapleton, II
Former CEO and Director (8)
-
-
-
230,000 (9)
-
-
-
Kelly D. Kerr
Former Vice President Finance and CFO (10)
$108,281
-
-
-
-
-
-
R. William Thornton
Former President, CEO and Director (11)
$49,359
-
-
-
-
-
-
 
 

 
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(1)
"Options" include all options, share purchase warrants and rights granted by our company as compensation for employment or director services.
(2)
"SAR" or "stock appreciation right" means a right granted by our company as compensation for employment or director services, to receive cash or an issuance or transfer of securities based wholly or in part on changes in the trading price of our publicly traded securities.
(3)
"LTIP" or "long term incentive plan" means a plan that provides compensation intended to motivate performance over a period greater than one fiscal year, but does not include option or SAR plans or plans for compensation through shares or units that are subject to restrictions on resale.
(4)
Represents stock options exercisable at US$0.50 per share, with 100,000 options expiring on April 5, 2014 and 500,000 options expiring on January 1, 2015.
(5)
Represents stock options exercisable at US$0.50 per share until April 5, 2014. In conjunction with the issuance of these options, Mr. Orr forfeited 30,000 previously issued options exercisable at US$1.50 per share.
(6)
Represents stock options exercisable at US$0.50 per share until April 5, 2014. In conjunction with the issuance of these options, Mr. McCarron forfeited 90,000 previously issued options exercisable at US$1.50 per share.
(7)
Represents stock options exercisable at US$0.50 per share until April 5, 2014. In conjunction with the issuance of these options, Mr. Sampson forfeited 90,000 previously issued options exercisable at US$1.50 per share.
(8)
Mr. Stapleton resigned as CEO on January 4, 2011 and as a director on April 29, 2011.
(9)
Represents stock options exercisable at US$0.50 per share until April 5, 2014. In conjunction with the issuance of these options, Mr. Stapleton forfeited 30,000 previously issued options exercisable at US$1.50 per share.
(10)
Mr. Kerr resigned on November 30, 2010.
(11)
Mr. Thornton resigned on June 30, 2010.
(12)
Mr. Orr was our Chief Financial Officer from December 21, 2006 to October 27, 2008, and from February 14, 2011 to June 30, 2011. Mr. Orr’s personal company was paid CND $22,400 for his services during the year ended April 30, 2011.
 
Retirement Benefits
 
We do not have in place any pension or actuarial plan to provide pension, retirement or similar benefits and no funds were set aside or accrued by our company or our subsidiaries during the fiscal year ended April 30, 2011 to provide pension, retirement or similar benefits.
 
Employment Agreements
 
We entered into an executive employment agreement with Pat McCarron, under which we agreed to employ Mr. McCarron as Vice President Operations as of July 16, 2008. Pursuant to the agreement, Mr. McCarron receives an annual salary of $185,040 and bonuses as may be determined by the board. Upon execution of the agreement, we paid Mr. McCarron a $100,000 signing bonus. Mr. McCarron is entitled to coverage under our Directors and Officers Liability Insurance and Errors and Omission Insurance (with a minimum cover of at least $2,000,000 per occurrence). If Mr. McCarron's employment is terminated for just cause or by Mr. McCarron without constructive dismissal, we will pay Mr. McCarron the amount of his unpaid annual salary to and including the date of termination, any declared but unpaid bonus and all outstanding vacation pay and expense reimbursements. If Mr. McCarron's employment is terminated by us without just cause or by Mr. McCarron for constructive dismissal, then in addition to the foregoing amounts, Mr. McCarron will receive a severance payment in the amount of one year's annual salary plus $10,000 in respect of lost benefits less applicable withholdings and deductions and all stock options held by Mr. McCarron will automatically vest. Additionally, in the event of a change of control, we and/or Mr. McCarron may terminate Mr. McCarron's employment, in which event we will pay Mr. McCarron the termination payments set out above.

A change of control is defined in the agreement as the occurrence of any of: (a) the purchase or acquisition of shares of our common stock (or securities convertible thereto or carrying the right to acquire our common stock) as a result of which a person or group of persons, acting jointly or in concert, beneficially owns or exercises control or direction over shares of our common stock that would have the right to cast more than 50% of the votes attached to all our common stock; or (b) approval by our shareholders of: (i) an amalgamation, arrangement or combination of our company with another entity pursuant to which our shareholders immediately before such combination do not own securities of the successor or continuing entity which would entitle them to cast more than 50% of the votes attaching to all of our common stock immediately thereafter; (ii) a liquidation, dissolution or winding-up of our company; (iii) the sale, lease or other disposition of all or substantially all of the assets of our company; (iv) the election at a meeting of our shareholders of a number of directors, who were not included in the slate for election as directors approved by our prior board of directors, and who would represent a majority of our board of directors, or (v) the appointment of a number of directors which would represent a majority of our board of directors and which were nominated by any holder of our voting shares or by any group of holders of our voting shares acting jointly or in concert and not approved by our prior board of directors.

 
31

 



The Company does not have any formal employment agreement with Messrs. Morrison or Freedman.

Director Compensation
 
No cash compensation was paid to any of our directors for services as a director during the fiscal year ended April 30, 2011. Our company has no formal arrangement pursuant to which directors are compensated by us for their services in their capacity as directors, except for the granting from time to time of incentive stock options. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board. Our board of directors may award special remuneration to any director undertaking any special services on our behalf, other than services ordinarily required of a director. No director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments for the fiscal year ended April 30, 2011.

C. 
Board Practices
 
Board of Directors
 
Pursuant to the provisions of the Business Corporations Act (Alberta), at each annual general meeting of our shareholders all of our directors retire and the shareholders appoint a new board of directors. Each director holds office until our next annual general meeting unless: (i) he dies or resigns; (ii) he is removed by ordinary resolution of our shareholders (or class or series of shareholders if such class or series has the exclusive right to elect one or more directors); or (iii) the director becomes disqualified to hold officer, as provided under the Business Corporations Act (Alberta). A director appointed or elected to fill a vacancy on our board holds office for the unexpired term of his predecessor (generally, until our next annual general meeting).
 
We are required to ensure that our articles and by-laws authorize a board of directors consisting of seven directors. Furthermore, in the event that any Series B preferred shares are issued, then the holders of such shares will have the right to nominate a director to our board as long as Series B preferred shares remain issued and outstanding.
 
Committees of the Board of Directors
 
Our board of directors has established the committees described below.
 
Audit Committee
 
The terms under which the audit committee operates are set out in the Audit Committee Charter, which provides that the audit committee will, among other things: (i) review and report to our board of directors our financial statements and MD&A and the auditor's report, if any, prepared in relation to those financial statements, before they are published; (ii) review our annual and interim earnings press releases we publicly disclose this information; satisfy itself that adequate procedures are in place for the review of our public disclosure of financial information extracted or derived from our financial statements and periodically assess the adequacy of those procedures; (iii) recommend to our board of directors the external auditor to be nominated for the purpose of preparing or issuing an auditor's report or performing other audit, review or attest services to our company, and the compensation of the external auditor; (iv) oversee the work of the external auditor engaged for the purpose of preparing or issuing an auditor's report or performing other audit, review or attest services for our company, including the resolution of disagreements between management and the external auditor regarding financial reporting; (v) monitor, evaluate and report to our board of directors on the integrity of the financial reporting process and the system of internal controls that management and the board of directors have established; (vi) monitor the management of the principal risks that could impact the financial reporting of our company; (vii) establish procedures for the receipt, retention and treatment of complaints received by our company regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; (viii) pre-approve all non-audit services to be provided to our company or its subsidiary entities by our company's external auditor; and (ix) review and approve our company's hiring policies regarding partners, employees and former partners and employees of the present and former external auditor of our company.

The members of our company's audit committee are George Orr (Chairman), Fred Zeidman and Elden Schorn. Mr. Zeidman and Mr. Schorn are considered to be independent members. The test we use to determine the independence of our directors is that set out in the Canadian Securities Regulators' Multilateral Instrument 52-110 - Audit Committees. The instrument provides that a member of an audit committee is independent if the member has no direct or indirect material relationship with the issuer (namely, a relationship which could, in the view of the issuer's board of directors, reasonably interfere with the exercise of a member's independent judgement).

 
32

 



Compensation Committee
 
Our compensation committee discharges our board of directors’ responsibilities relating to compensation of our Chief Executive Officer and our company's other executive officers, including the Chairman of the Board, President, Principal Financial Officer, Principal Accounting Officer (or Controller) and Vice President in charge of a principal business unit, division or function such as sales, administration or finance, any other officer who performs a policy-making function, or any other person who performs similar significant policy-making functions for our company (collectively, the Executive Officers). The Committee has overall responsibility for approving and evaluating all compensation plans, policies and programs of our company as they affect the Executive Officers. Prior to October 29, 2007, our corporate governance and human resources committee oversaw our company's compensation matters. Currently, the responsibilities of the compensation committee are performed by the board as a whole.
 
Corporate Governance and Human Resources Committee
 
The function of the corporate governance and human resources committee is to assist our board of directors in fulfilling its oversight responsibilities, primarily through: (i) overseeing the management of programs, including, but not limited to: (A) our company's compensation program, including, but not limited to: benefits program, employee salary and bonus program, stock option program and group savings plan, and (B) corporate policy and procedure process and controls; and (ii) providing an avenue of communication for internal operations. Currently, the responsibilities of the corporate governance and human resources committee are performed by the board as a whole.
 
Nominating Committee
 
Our nominating committee operates and is responsible for: (i) identifying and recommending to our board of directors individuals qualified to be nominated for election to the board; (ii) recommending to our board the members and chairman for each board committee; (iii) overseeing the annual self-evaluation of the performance of the board and the annual evaluation of our company's management; and (iv) establishing a process for nominating and evaluating new members of our board of directors. Our nominating committee operates under a Charter adopted by our board of directors. Currently, the responsibilities of the nominating committee are performed by our board of directors as a whole.
 
Reserves Committee
 
Our reserves committee is responsible for overseeing the engagement of independent reserve engineers and assists our board of directors with its regulatory reporting obligations of reserves. Currently, the responsibilities of the reserves committee are performed by our board of directors as a whole.
 
Director Service Contracts
 
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.

D.
Employees

As of April 30, 2011, 2010 and 2009 we and our subsidiaries employed the following full-time equivalent persons:
 
 
2011
2010
2009
Directors - Canada
2
3
4
Directors - USA
2
2
1
Senior Management - Canada
2
3
4
Senior Management - USA
1
1
0
Managers & Supervisors - Canada
2
2
2
Managers & Supervisors - USA
2
2
2
Office Staff - Canada
0
1
3
Office Staff - USA
0
1
1
Field Staff - USA
13
11
2
Total Employees
24
26
19

E.
Share Ownership
 
Beneficial Ownership of Executive Officers and Directors
 
The following table sets forth certain information as of October 31, 2011 regarding the beneficial ownership of our ordinary shares by each of our directors and executive officers
 

 
33

 



Name
Office Held
Common Shares
Options and Dilutive Securities
Exercisable for Common Shares(1)
Number Beneficially Owned(2)
Percentage of Class(3)
Number Beneficially Owned
(unexercised)
Exercise
Price
Expiration
Date
Tim Morrison
CEO, Secretary and Director
-
-
500,000
100,000
US$0.50
US$0.50
January 1, 2015
April 5, 2015
George Orr
Director
95,000
*
230,000
US$0.50
April 5, 2015
Elden Schorn
Director
-
-
-
-
-
Fred Zeidman
Director
-
-
-
-
-
Jeffrey Freedman
CFO
500,000 (4)
3.6%
-
-
-
Pat McCarron
Vice President, Operations
25,000
*
112,500
US$0.50
April 5, 2015
____________

* Less than 1%.
(1)
Includes vested and unvested stock options granted under our Canadian equity incentive plan and our U.S. equity incentive plan.
(2)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and generally includes voting or investment power with respect to securities. Common shares relating to options currently exercisable or exercisable within 60 days of the date of the above table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
(3)
The percentages shown are based on 14,078,947 common shares issued and outstanding as of October 31, 2011.
(4)
Includes 250,000 common shares issuable upon conversion of 500 shares of Series B Preferred Stock and 250,000 common shares issuable upon exercise of common stock purchase warrants.
 
Stock Options and Equity Incentive Plans
 
On June 5, 2008, our board of directors adopted two new equity incentive plans, the Canadian equity incentive plan and the U.S. equity incentive plan. The Canadian equity incentive plan replaces and supersedes our former Canadian stock option plan, and the U.S. equity incentive plan replaces and supersedes our former U.S. stock option plan. The total number of our common shares that may be awarded under the Canadian equity incentive plan and the U.S. equity incentive plan together cannot exceed 10% of the total number of our common shares issued and outstanding from time to time. Each of our equity and stock option plans are described below.
 
The purpose of our equity and stock option plans are to provide us with a share-related mechanism to attract, retain and motivate qualified directors, officers, consultants and employees, to reward those persons from time to time for their contributions toward our long-term goals, and to enable and encourage such persons to acquire our common shares as long-term investments.
 
Canadian Equity Incentive Plan
 
The Canadian equity incentive plan was adopted by our board of directors and became effective on June 5, 2008. The material terms of the Canadian plan are: (i) the plan administrator is appointed by the board of directors; (ii) the term of the plan is indefinite; (iii) awards eligible to be awarded under the plan include stock options, stock appreciation rights, restricted stock units, performance awards and other stock based awards; (iv) options are subject to adjustment in the event of s subdivision or consolidation of our common shares, an amalgamation, or other corporate event affecting our common shares; and (v) the board of directors determines the date of grant, the number of shares subject to option grants, the exercise price per share, the vesting period and option term. The minimum exercise price of any option granted under the plan is the weighted average price of our common shares on the principal stock exchange on which our common shares trade for the five trading days prior to and including the date of grant.
 
Canadian Stock Option Plan
 
We adopted the Canadian Stock Option Plan for Canadian resident directors, senior officers, employees and consultants on August 24, 2004. The plan provides that stock options granted under the plan vest in the manner determined by the administrator appointed under the plan on the date of the grant. The price at which a stock option may be exercised is determined by our board of directors at the time of the grant. The plan also provides that we may not grant stock options to any person or that person's associates that will in aggregate, when exercised, exceed in any 12 month period 5% of our issued and outstanding common shares.
 

 
34

 



As of February 19, 2007 and August 9, 2007, our Canadian stock option plan was amended and restated as follows: (i) to provide that the total number of common shares that may be issued upon the exercise of stock options issued under the plan plus the total number of common shares that may be issued upon the exercise of stock options issued under a stock option plan, dated January 5, 2007, for United States based employees cannot exceed 20% of the total number of common shares issued and outstanding from time to time; (ii) to set out the circumstances under which the number and class of shares issuable upon the exercise of a stock option will be adjusted; (iii) to allow for the immediate vesting of all unexpired and unvested stock options in the event of a change of control of our company and for the acceleration of the vesting of stock options at the discretion of the administrator appointed under the plan; (iv) to set out how the exercise price of a stock option may be paid and specifically to provide for a (cashless) net exercise option; (v) to provide that our obligation to issue shares upon the exercise of a stock option is dependant upon certain factors, including the compliance of the shares with any applicable laws; (vi) to provide an option holder is responsible for the payment of any withholding taxes in respect of the exercise of a stock option; (vii) to set out the discretion of our board of directors in respect of various matters concerning the interpretation of the plan and the granting and exercise of stock options and, specifically, the discretion to extend the expiry date of the stock options and to determine the price per share at which a stock option may be exercised; and (viii) to correct minor typographical and grammatical errors and inconsistencies in the text of the plan. The Canadian stock option plan was replaced by the Canadian equity incentive plan on June 5, 2008.
 
U.S. Equity Incentive Plan
 
The U.S. equity incentive plan was adopted by our board of directors and became effective on June 5, 2008. The material terms of the plan are: (i) the plan administrator is appointed by the board of directors except that the board of directors may, in its discretion, establish a committee composed of two or more members of the board or two or more other persons to administer the plan; (ii) the term of the plan is 10 years; (iii) awards eligible to be awarded under the plan include stock options, stock appreciation rights, restricted stock units, performance awards and other stock based awards; (iv) options are subject to adjustment in the event of s subdivision or consolidation of our common shares, an amalgamation, or other corporate event affecting our common shares; and (v) the board determines the date of grant, the number of shares subject to option grants, the exercise price per share, the vesting period and option term. The minimum exercise price of any option granted under the plan is the weighted average price of our common shares on the principal stock exchange on which our common shares trade for the five trading days prior to and including the date of grant.
 
U.S. Stock Option Plan
 
As of January 5, 2007, our board of directors adopted a stock option plan for U.S. resident directors, senior officers, employees and consultants. The material terms of the plan were: (i) the number of common shares reserved for issuance under the plan was 20% of the issued and outstanding common shares from time to time less the number of stock options granted under our Canadian stock option plan; (ii) the plan was administered by our board of directors, except that the board of directors may, in its discretion, establish a committee composed of two or more members of the board or two or more other persons to administer the plan; (iii) incentive stock options (stock options which qualify under Section 422 of the Internal Revenue Code of 1986 (United States) may be granted to any individual who, at the time the option is granted, is resident in the U.S. and who is an employee of our company or any related corporation; (iv) non-qualified stock options (stock options that do not qualify under Section 422 of the Internal Revenue Code of 1986) may be granted to employees and to such other persons who are not employees as the plan administrator shall select, subject to any applicable laws; (v) the plan provides that, generally, the number of shares subject to each stock option, the exercise price, the expiry time, the extent to which such stock option is exercisable and other terms and conditions relating to such stock option