FORM 20-F

 
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

  [  ] 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, 2012

 

OR

 

  [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

  [  ] 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

 

Petro River Oil Corp.
(Exact name of the Registrant as specified in its charter)

 

N/A
(Translation of Registrant’s name into English)
 
Delaware
(Jurisdiction of incorporation or organization)
 
1980 Post Oak Blvd., Suite 2020, Houston, TX 77056
 (Address of principal executive offices)
 
Jeffrey Freedman, CEO
1980 Post Oak Blvd., Suite 2020, Houston, TX 77056
Tel: (832) 538-0625
Email: Jeffrey.freedman@gravisoil.com
(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, par value $0.00001 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. 14,078,947 common shares, par value $0.00001 per share, as of April 30, 2012 and as of October 12, 2012.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [  ] 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 [  ] 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 [  ] 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). [X] Yes [  ] 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):

 

[  ] Large Accelerated filer  [  ] 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 by the International Accounting Standards Board [  ]   Other [  ]

 

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. [  ] Item 17 [  ] 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). [  ] Yes [X] No

 

 

 

 
 

 

Explanatory Note:

 

As disclosed in the Current Report on Form 8-K filed by Petro River Oil Corp. (the “Company”, formerly known as Gravis Oil Corporation) with the Securities and Exchange Commission on September 13, 2012, the Company’s stockholders approved (i) amendment of its articles of incorporation to change the name of the Company from “Gravis Oil Corporation” to “Petro River Oil Corp.”, (ii) a continuance of the Company from Alberta, Canada into the State of Delaware as if it had been incorporated under the laws of the State of Delaware (the “Continuance”), and (iii) amendment of its articles of incorporation to change the authorized shares of the Company as reflected in the Certificate of Incorporation of the Company filed as an exhibit to the referenced Form 8-K. At April 30, 2012, which is prior to the Continuance described in clause (ii) above, the Company was a “foreign issuer” required to file an Annual Report on Form 20-F.

 

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Table of Contents

 

      Page
PART I      
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   6
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE   6
ITEM 3. KEY INFORMATION   6
ITEM 4. INFORMATION ON THE COMPANY   18
ITEM 4A. UNRESOLVED STAFF COMMENTS   33
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS OVERVIEW   33
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   44
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   61
ITEM 8. FINANCIAL INFORMATION   61
ITEM 9. THE OFFER AND LISTING   63
ITEM 10. ADDITIONAL INFORMATION   64
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK   80
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   82
       
PART II      
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   83
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   83
ITEM 15. CONTROLS AND PROCEDURES   83
ITEM 16. [RESERVED]   84
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT   84
ITEM 16B. CODE OF ETHICS   85
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES   85
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   85
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   86
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT   86
ITEM 16G. CORPORATE GOVERNANCE   86
ITEM 16H. MINE SAFETY DISCLOSURE   86
       
PART III      
ITEM 17. FINANCIAL STATEMENTS   86
ITEM 18. FINANCIAL STATEMENTS   87
ITEM 19. EXHIBITS   87

 

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INTRODUCTION

 

We are a corporation organized under the laws of the State of Delaware. Prior to September 11, 2012, and at April 30, 2012, we were organized under the laws 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 have traded in the United States on the Over-the-Counter Bulletin Board exchange (OTC) under the symbol “GRAVF”. We are advised that upon the filing of this Annual Report, FINRA will assign the Company a new trading symbol. As used in this annual report, the terms “issuer” and Petro or Gravis means Petro River Oil Corp or, individually, the terms “we”, “us”, “our”, “Company” and “Corporation” mean Petro River Oil Corp. together with its subsidiaries and “MegaWest USA” means our directly-owned subsidiary MegaWest Energy (USA) Corp.

 

As we reported on our Current Report on Form 6-K, filed with the Securities and Exchange Commission on July 29, 2012, we have entered into a non-binding letter of intent with Petro River Oil, LLC, a privately held Delaware limited liability company (“Petro LLC”) that would result in Petro acquiring Petro LLC for common stock, the name of the Company being changed to Petro River Oil Corp. and the Company domesticated to Delaware (the “Merger Transaction”). The letter of intent also contemplates that our board will consist of 5 members, 4 of which will be nominated by Petro LLC. Currently, it is intended that, post-Merger Transaction, current common shareholders of Petro will own approximately 2% of the issued and outstanding shares of the Company, holders of our preferred shares and notes approximately 18% and holders of shares and notes of Petro LLC approximately 80%. Additionally, in advance of the closing of the Merger Transaction, our stockholders approved, and we completed, the name change to Petro River Oil Corp., our continuation/domestication to Delaware, and the election of the directors nominated by Petro LLC.

 

On September 7, 2012, our stockholders approved a special resolution granting the Board of Directors of the Company the discretionary authority to amend the Company’s organizational documents to effect one or more reverse stock-splits of the issued and outstanding common shares, pursuant to which the common shares would be combined and reclassified into one common share at a ratio within the range from 1-for-2 up to 1-for-250; provided, however, that the Company shall not effect a reverse stock-split that, in the aggregate, exceeds 1-for-250. We do not currently intend to issue fractional shares in connection with the reverse stock-split. Therefore, the Company does not expect to issue certificates representing fractional shares. The Board of Directors will have the discretionary authority to determine whether to arrange for the disposition of fractional interests by stockholders entitled thereto, to pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or to entitle stockholders to receive from the Company’s transfer agent, in lieu of any fractional share, the number of shares rounded up to the next whole number. The ownership of a fractional share interest following the reverse stock-split would not give the holder any voting, dividend or other rights, except to receive the cash payment, or, if the Board of Directors so determines, to receive the number of shares rounded up to the next whole number, as described above.

 

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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.

 

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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, 2012, and 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 for the years ended April 30, 2012, 2011 and 2010 have been derived from our audited financial statements and related notes included elsewhere in this annual report. 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.

 

   Years Ended April 30, 
   2012   2011 
Revenue  436,386   $1,565,963 
Operating Expenses   20,568,540   20,470,643 
Net Loss   (10,103,480)  (29,709,386)
Total Comprehensive Loss   (10,065,974)  (29,993,157)
Net (Loss) per Share   (1.12)  (2.27)
Total Assets   1,596,398   20,818,512 
Total Liabilities   12,544,014   23,650,925 
Accumulated Deficit   (146,388,486)  (135,918,002)
Total Stockholders (Deficiency) Equity  (10,947,616)  $(2,832,413)

 

   Years Ended April 30, 
   2010   2009   2008 
Revenue  $1,575,150   $135,190   $644,731 
Operating Expenses   8,604,191    60,082,461    40,734,966 
Net Loss   (7,950,359)   (59,947,271)   (40,090,235)
Total Comprehensive Loss   (2,966,333)   (73,779,415)   (31,585,085)
Net Loss Per Share   (0.611)   (4.60)   (5.05)
Total Assets   31,596,571    30,502,369    88,185,360 
Total Liabilities   2,842,857    952,720    49,807,354 
Accumulated Deficit   (105,144,948)   (96,975,794)   (37,472,384)
Total Stockholders (Deficiency) Equity  $28,753,714   $29,549,649   $38,378,006 

 

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B. Capitalization and Indebtedness

 

Not required.

 

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 and, again, in August 2012, 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 made the required filings with regard to the 2011 cease trade orders and the Alberta and British Columbia cease trade orders were rescinded. The Company intends to make the required filings with regard to the 2012 cease trade orders and believes that the Alberta and British Columbia cease trade orders will be rescinded. However, as of the date of the filing of this report the cease trade orders have not been rescinded and no assurances can be given as to when or if they will be rescinded. Until these cease trade orders are rescinded the Company’s ability to raise capital is significantly restricted.

 

Our current capital and our other existing resources will not be sufficient to provide working capital for the balance of 2012, and the revenues generated will not be sufficient to fund our operations or planned growth. 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.

 

7
 

 

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. The Company plans to consider a full range of strategic alternatives for addressing its financial condition. 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. This may adversely affect our consolidated financial results, financial condition and ability to continue as a going concern.

 

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 and continue as a going concern.

 

We incurred net losses of $10,103,480, $29,709,386 and $7,950,359 for the years ended April 30, 2012, 2011 and 2010 respectively. To date, we have acquired interests in oil and gas properties, but have not established a project on any of our properties that generates commercial revenues. 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.

 

As a result of our inability to raise sufficient capital to sustain our operations, we have discontinued substantially all of our operations with regard to our properties, which has had a material adverse effect on our ability to continue as a going concern.

 

As our Missouri, Kentucky and Montana properties are in early stages of development, we may not be able to establish commercial reserves on these projects. Exploration for commercial reserves of oil is subject to a number of risk factors. Few of the prospects that are explored are ultimately developed into producing oil and/or gas fields. To April 30, 2012, only a portion of the reserves associated with the Missouri Marmaton River and Grassy Creek projects are classified as developed and production activities have been suspended since September 2011. We may not be able to establish commercial reserves in Missouri and it is therefore considered to be an exploration stage company.

 

8
 

 

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. To date, we have acquired interests in oil and gas properties, but have not established a project on any of our properties that generates commercial revenues 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.

 

Our cash and cash equivalents have declined dramatically since April 30, 2011, this decline and out working capital deficiency may materially and adversely affect our ability to obtain additional capital and continue as a going concern.

 

Cash and cash equivalents at April 30, 2012 were $300,274 as compared to $1,179,838 at April 30, 2011. At April 30, 2012, we had a working capital deficiency of approximately $4.5 million. These results may materially and adversely affect our ability to obtain additional capital and, accordingly, our ability to continue as a going concern.

 

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.

 

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Operating Costs have exceeded Gravis' expectations and production has been low when operations were underway.

 

Operating costs on the Missouri properties have been excessively high and have prevented us from attaining expected results. Additionally, production has been below expectations and may never be sufficient to reach full commercial development. We have determined that we will require significant additional financing to take advantage of what has been learned thus far and to follow through to economically viable production of our steam flood projects.

 

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.

 

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.

 

We are currently in default under various secured convertible notes. The inability to repay the outstanding borrowings could cause the investors to foreclose upon the Company’s assets.

 

On July 30, 2010, we issued to various investors senior secured promissory notes and subordinated secured debentures.  Between December 28, 2010 and March 7, 2011, we issued to various investors secured promissory notes.  In connection with the issuance of these securities, we granted a security interest to the investors substantially all of our assets. Interest on these securities is payable quarterly in arrears.  We have not made the required quarterly interest payments and the secured promissory notes issued between December 28, 2010 and March 7, 2011 had a maturity date of June 28, 2012, which have not been repaid, therefore, we are currently in default under the terms of the securities.

 

Although the investors have not demanded current payment on the amounts outstanding (to the extent the principal is not currently due), the obligations of the Company under the various secured notes may be accelerated upon the occurrence of an event of default.  Pursuant to the security interests granted, in the event of a default, the investors have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements. As of the date of this filing, the investors have not declared a default by the Company, although there can be no assurance that they will not declare a default in the future.

 

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.

 

10
 

 

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:

 

  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;

 

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  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.

 

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Any change in government regulation and/or administrative practices may have a negative impact on our ability to operate and on our profitability.

 

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 workers’ compensation, employer’s and general liability, general liability, and 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.

 

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RISKS RELATING TO OUR COMMON SHARES

 

If we fail to return to eligibility for our shares to be quoted on the OTC Bulletin Board, this could 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, resulted in our being removed from quotation on the OTC Bulletin Board. As a result, the market liquidity for our securities may 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.

 

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 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 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.

 

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Stockholders 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.

 

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 and higher insurance costs 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.

 

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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 stockholder’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, Junior Notes and other equity-linked securities exercise or convert all of those derivative instruments held by them, including warrants and accrued interest, they would receive a total of approximately 117,759,023 common shares or approximately 89.3% (as of April 30, 2012) of our fully diluted common shares. Future exercises or conversions of such instruments may result in substantial dilution and new concentrations in ownership. Such stockholders could have the ability to control all matters submitted to our stockholders 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.

 

Stockholders' 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 stockholders in our may be diluted and existing stockholders 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.

 

The Company’s Continuance to Delaware, and continuation as a Delaware corporation may have a material and adverse effect on trusts governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans, and tax-free savings plans.

 

Following the Continuance, the common shares will cease to be qualified investments under the Tax Act and the regulations thereunder for trusts governed by registered retirement savings plans (“RRSPs”), registered retirement income funds (“RRIFs”), deferred profit sharing plans, registered education savings plans, registered disability savings plans, and tax-free savings plans (“TFSA”) (collectively “Deferred Plans”).

 

Serious penalties, including significant penalty taxes for RRSPs, RRIFs and TFSAs, will result from Deferred Plans holding non-qualified investments. In addition, annuitants or holders of RRSPs, RRIFs or TFSAs, as the case may be, may also be subject to penalty taxes in respect of certain transactions undertaken as between their Deferred Plan and themselves or persons with whom they do not deal at arm's length with. Stockholders who hold their shares through Deferred Plans are encouraged to consult their own tax advisors as to appropriate course of action to affect the disposition of their common shares prior to the Continuance given their particular circumstances.

 

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Upon completion of our merger transaction with Petrol River Oil, LLC, the percentage equity ownership of our current shareholders will be reduced to approximately 2% and upon completion of one or more of the reverse stock splits approved by our stockholders certain stockholders may have less than one common share, which would not entitle them to continue to be a stockholder.

 

As we reported on our Current Report on Form 6-K, filed with the Securities and Exchange Commission on July 29, 2012, we have entered into a non-binding letter of intent with Petro River Oil, LLC, a privately held Delaware limited liability company (“Petro LLC”) that would result in Petro acquiring Petro LLC for common stock, the name of the Company being changed to Petro River Oil Corp. and the Company domesticated to Delaware (the “Merger Transaction”). The letter of intent also contemplates that our board will consist of 5 members, 4 of which will be nominated by Petro LLC. Currently, it is intended that, post-Merger Transaction, current common shareholders of Petro will own approximately 2% of the issued and outstanding shares of the Company, holders of our preferred shares and notes approximately 18% and holders of shares and notes of Petro LLC approximately 80%. Additionally, in advance of the closing of the Merger Transaction, our stockholders approved, and we completed, the name change to Petro River Oil Corp., our continuation/domestication to Delaware, and the election of the directors nominated by Petro LLC.

 

On September 7, 2012, our stockholders approved a special resolution granting the Board of Directors of the Company the discretionary authority to amend the Company’s organizational documents to effect one or more reverse stock splits of the issued and outstanding common shares, pursuant to which the common shares would be combined and reclassified into one common share at a ratio within the range from 1-for-2 up to 1-for-250; provided, however, that the Company shall not effect a reverse stock-split that, in the aggregate, exceeds 1-for-250. We do not currently intend to issue fractional shares in connection with the reverse stock-split. Therefore, the Company does not expect to issue certificates representing fractional shares. The Board of Directors will have the discretionary authority to determine whether to arrange for the disposition of fractional interests by stockholders entitled thereto, to pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or to entitle stockholders to receive from the Company’s transfer agent, in lieu of any fractional share, the number of shares rounded up to the next whole number. The ownership of a fractional share interest following the reverse stock-split would not give the holder any voting, dividend or other rights, except to receive the cash payment, or, if the Board of Directors so determines, to receive the number of shares rounded up to the next whole number, as described above.

 

Item 4. Information on the Company

 

A.History and Development of the Company

 

Petro 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 and then Petro on September 11, 2012.

 

At a meeting of the stockholders on October 29, 2007, the stockholders approved the continuance of Petro (then Gravis) from the Province of British Columbia into the Province of Alberta under the Business Corporations Act (Alberta). Effective February 12, 2008, Petro (then 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).

 

At a meeting of the stockholders on September 7, 2012, the stockholders approved the name change and the continuance of the Company from the Province of Alberta Canada to the State of Delaware. Effective September 11, 2012, Petro was continued into the State of Delaware as a corporation organized under the Delaware General Corporations Law (the “Continuance”).

 

We continue to be a reporting issuer under the Securities Act in Alberta and British Columbia and a reporting issuer as that term is defined for United State purposes, as a US 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.

 

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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.

 

As part of the project, we are 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 We recover 100 percent of our capital and operating costs, and will be paid quarterly from 25 percent of the project's net revenues. On April 2, 2012, the project was sold. However we retained the net revenue interest obligation which we determined at the time to be nominal.

 

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 September 21, 2010, we and our 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 (the “Farmee”). On December 4, 2010, this farm-out agreement was expanded to cover the full 29,147 unproved gross acres. All acreage leased in Kentucky by the Farmor and the Farmee in Butler, Warren, Edmonson and Muhlenberg counties was pooled and subject to the new agreement. During September 2011, we reviewed our arrangements with the Farmee with our working interest partner. As a result of this review, we and our working interest partner agreed that there was a lack of development activity by the Farmee and that we should seek a release from the farmout agreement.

 

During the year ended April 30, 2011, we recorded an impairment charge of $3,179,174 (2010 – $nil) on the Kentucky project as a result of the lack of development activity by the Farmee and the curtailment of our 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 we have been exploring the disposition of our interest in this property. To date no offers have been received on the property and the amount that may be ultimately realized is unknown.

 

At April 30, 2012 our Kentucky lease holdings included a 37.5% working interest in 29,147 unproved gross acres (10,930 net acres). The Kentucky property mainly is undeveloped land and, therefore, was not assigned any reserve value under either of our independent reserve reports. A full impairment charge of $100,000 was recorded at April 30, 2012 due to the Company’s financial inability to explore, develop and exploit this property.

 

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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. At April 30, 2012, our leaseholds in Missouri are 34,045 gross acres with 95.8% working interest.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. At April 30, 2012, all of our leaseholds in Texas have expired.

 

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 April 2, 2012, we sold the Chetopa project including certain oil and gas equipment and a 100% interest in one oil and gas lease covering 320 net acres for cash consideration of $7,100 and for a royalty of $5.00 US per bbl. on future production with a royalty cap of $1,000,000.00.

 

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, we and the vendors established a regional area of mutual interest (AMI) covering approximately 1,000,000 acres that would remain active for two years. At April 30, 2012, all of these interests and arrangements were expired.

 

At April 30, 2012, our remaining Montana leasehold is in the Devils Basin prospect and totals 1,175 gross acres (881 net). We currently own a 75% working interest in this prospect but have no immediate plans to develop this property. On April 17, 2012 the Teton Prospect leases totalling 2,807 gross acres (1137 net) expired.

 

In November 2007, we commenced construction of our first commercial project in Missouri called Marmaton River. Commissioning and startup 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).

 

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.

 

20
 

 

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 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, we re-started our 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, we 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, we have a 100% working interest in both projects. A receivable owed to us 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.

 

21
 

 

On July 30, 2010, the Company closed a $2.5 million financing with a group of its existing stockholders. 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 us 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.

 

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, The Company has a 100% working interest in both projects.

 

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. During September 2011, we reviewed our arrangements with the Farmee with our working interest partner. As a result of this review, we and our working interest partner agreed that there was a lack of development activity by the Farmee and that we should seek a release from the farmout agreement.

 

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.

 

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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 $0.20 per share.

 

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.

 

As disclosed in our Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 13, 2012, the Company domesticated into the State of Delaware from Canada by filing of a Certificate of Corporate Domestication and Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Continuance”). The Continuance took effect on September 11, 2012. A copy of the Certificate of Domestication and Certificate of Incorporation were filed as exhibits to the Current Report.

 

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, we re-started our 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 stockholders. 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 us 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.

 

23
 

 

As at April 30, 2011, the Company had a working capital deficiency of $1.8 million, recurring losses and net cash outflows from operating activities and an accumulated deficit of $135.9 million.

 

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.

 

As at April 30, 2012, the Company had a working capital deficiency of approximately $4.5 million, recurring losses and net cash outflows from operating activities and an accumulated deficit of $146.4 million.

 

During September 2011 and, again, in August 2012, 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 made the required filings with regard to the 2011 cease trade orders and the Alberta and British Columbia cease trade orders were rescinded. The Company intends to make the required filings with regard to the 2012 cease trade orders and believes that the Alberta and British Columbia cease trade orders will be rescinded. However, as of the date of the filing of this report the cease trade orders have not been rescinded and no assurances can be given as to when or if they will be rescinded. Until these cease trade orders are rescinded the Company’s ability to raise capital is significantly restricted.

 

Our current capital and our other existing resources will not be sufficient to provide working capital for the balance of 2012, and the revenues generated will not be sufficient to fund our operations or planned growth. 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 the Company for the years ended April 30, 2012, 2011 and 2010:

 

Cost   Missouri     Kentucky     Montana     Kansas     Texas     Other     Total  
Balance, April 30, 2011   $ 16,364,000     $ 100,000     $ 75,000     $ 98,214     $ -     $ 1,338,616     $ 17,975,830  
Additions     243,409       -       -       -       -       -       243,409  
Disposals     (178,339 )     -       -       (7,100 )     -       (246,550 )     (431,989 )
Depletion     (261,061 )     -       -           -       -       (261,061 )
Impairment     (15,218,009 )     (100,000 )     -       (91,114 )     -       (971,043 )     (16,380,166 )
Foreign currency translation                                             (21,023 )     (21,023 )
Balance, April 30, 2012   $ 950,000       -     75,000       -       -       100,000       1,125,000  

 

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 

 

During the year ended April 30, 2012, the Company capitalized $121,000 (2011 - $180,537; 2010 - $161,459) of administrative costs and $nil (2011 - $9,945; 2010 - $50,846) of stock based compensation cost, which have been included as part of the Missouri project additions.

 

Missouri

 

At April 30, 2012, the Company's Missouri lease holdings totaled 34,045 gross acres with 95.8% working interest. During the year ended April 30, 2012, certain leases totaling 3,957 gross acres were sold for cash consideration of $177,200, and three Gross Overriding Royalty agreements ranging from 1% to 5% of future production.

 

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On separate pilot projects at Deerfield (being Marmaton River and Grassy Creek), we built two 500 barrel of oil per day steam drive production facilities (Marmaton River and Grassy Creek) comprised of 116 production wells, 39 steam injection wells and 14 service and observation wells. Throughout the Deerfield area, we have drilled 73 exploration/delineation wells with a 67% success rate. 

 

Effective July 1, 2010, Petro reacquired the 10% working interest in the Company’s Marmaton River and Grassy Creek projects it had sold during fiscal 2010 to MP1, in exchange for a 2.75% gross overriding royalty interest on the projects. Following this acquisition, Petro has a 100% working interest in both projects. 

 

MP1 retains the option to acquire up to a 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.

 

As of April 30, 2012, the Company determined it necessary to impair the oil and gas properties in Missouri by $15,218,009 (2011 -$9,066,590: 2010 -$nil) Management concluded that an impairment was necessary after analyzing the current capitalization of the Company and analyzing the capital needs of each of the oil and gas projects. Management’s assessment was based on its lack of success in raising funds necessary to commercialize its assets. The Company impaired these assets to salvage values.

 

During 2012, the Company earned an average price of $76.75 per barrel of oil equivalent (boe) (2011 -$59; 2010 - $52.90) and incurred operating expenses of $351.71 per boe (2011 -$130.70; 2010 - $132.80). The Company’s 2012 depletion rate was $46.75 per boe (2011 -$27.15; 2010 - $6.02).

 

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While we believe that future uninterrupted commercial operations, taking advantage of what has been learned in the pilot operations, could result in economically viable production rates, we are uncertain of our ability to achieve these results.

 

At April 30, 2012, the Company held a long-term receivable for capital and operating costs owing from MP1, in the amount of $302,536 (April 30, 2011 - $294,862; April 30, 2010 - $307,620) related to the Marmaton River and Grassy Creek projects in Missouri. In July 2010, the Company and MP1 entered into an arrangement whereby the Company reacquired the remaining 10% working interest in the projects in exchange for a 2.75% gross overriding royalty. Under this arrangement, the Company will recover the balance owing from 50% of the GOR payments to the partner. During the time the receivable is outstanding, the Company earns interest on the outstanding balance at the U.S bank prime rate plus 3%. Included in the reported amount receivable is $32,514 of interest earned on the outstanding balance (2011- $15,050; 2010 - $nil). As of April 30, 2012, Management reported an allowance of $302,536, because while operations at Marnaton River and Grass Creek have been suspended currently, at some point in the future, they may resume.

 

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Kentucky

 

The Kentucky lease holdings include a 37.5 % working interest in 29,147 unproved gross acres (10,930 net acres). The Kentucky property is mainly undeveloped land and therefore was not assigned any reserve value under our independent reserve reports.

 

On September 21, 2010, we and our 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 gross acres. All acreage leased in Kentucky by the Farmor and the Farmee in Butler, Warren, Edmonson and Muhlenberg counties was pooled and subject to the new agreement. During September 2011, we reviewed these arrangements with the Farmee with our working interest partner. As a result of this review we and our working interest partner agreed that there was a lack of development activity by the Farmee and that we should seek a release from the agreement.

 

During the year ended April 30, 2012, the Company recorded an impairment charge of $100,000 (2011 -$3,179,174, 2010 - $nil) 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 uncertain.

 

Montana

 

The Montana leasehold is in the Devils Basin prospect and totals 1,175 gross acres (881 net). We currently own a 75% working interest in this prospect, but have no immediate plans to develop this property. On April 17, 2012 the Teton Prospect leases totalling 2,807 gross acres (1137 net) expired.

 

During the year ended April 30, 2012 the Company recorded an impairment charge of $nil (2011 -$602,913; 2010 - $816,690) on the Montana project. The 2011 impairment was recorded due to the expiry of leases and 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

 

On April 2, 2012, we sold our suspended Chetopa pre-commercial heavy oil demonstration project including certain oil and gas equipment and a 100% interest in one oil and gas lease covering 320 net acres for cash consideration of $7,100 and for a royalty of $5.00 US per bbl. on future production with a royalty cap of $1,000,000. One lease of 65 acres expired during the year ended April 30, 2012. The project was suspended in fiscal 2009. During the year ended April 30, 2012 the Company recorded an impairment charge of $91,114 (2011 -$nil; 2010 - $nil).

 

Texas

 

At April 30, 2012 all Petro River’s Texas leases are expired. The Company has recorded an abandonment liability of $260,482 with respect to five remaining wells and leases.

 

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Other

 

Other property consists primarily of four used steam generators and related equipment that will be assigned to future projects. In March of 2012, the Company sold one of its five steam generators, located in Lloydminster, Alberta for cash consideration of $219,154. During the year ended April 30, 2012, the Company recorded an impairment charge of $971,043 (2011 -$nil; 2010 - $55,612).

 

Principal Markets

 

The principal market that we compete in is the North American energy market, specifically the North American oil market.

 

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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

 

As we reported on our Current Report on Form 6-K, filed with the Securities and Exchange Commission on July 29, 2012, we have entered into a non-binding letter of intent with Petro River Oil, LLC, a privately held Delaware limited liability company (“Petro LLC”) that would result in Petro acquiring Petro LLC for common stock, the name of the Company being changed to Petro River Oil Corp. and the Company domesticated to Delaware (the "Merger Transaction"). The letter of intent also contemplates that our board will consist of 5 members, 4 of which will be nominated by Petro LLC. Currently, it is intended that, post-Merger Transaction, current common shareholders of Petro will own approximately 2% of the issued and outstanding shares of the Company, holders of our preferred shares and notes approximately 18% and holders of shares and notes of Petro LLC approximately 80%. Additionally, in advance of the closing of the Merger Transaction, our stockholders approved, and we completed, the name change to Petro River Oil Corp., our continuation/domestication to Delaware, and the election of the directors nominated by Petro LLC.

 

On September 7, 2012, our stockholders approved a special resolution granting the Board of Directors of the Company the discretionary authority to amend the Company’s organizational documents to effect one or more reverse stock splits of the issued and outstanding common shares, pursuant to which the common shares would be combined and reclassified into one common share at a ratio within the range from 1-for-2 up to 1-for-250; provided, however, that the Company shall not effect a reverse stock-split that, in the aggregate, exceeds 1-for-250. We do not currently intend to issue fractional shares in connection with the reverse stock-split. Therefore, the Company does not expect to issue certificates representing fractional shares. The Board of Directors will have the discretionary authority to determine whether to arrange for the disposition of fractional interests by stockholders entitled thereto, to pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or to entitle stockholders to receive from the Company’s transfer agent, in lieu of any fractional share, the number of shares rounded up to the next whole number. The ownership of a fractional share interest following the reverse stock-split would not give the holder any voting, dividend or other rights, except to receive the cash payment, or, if the Board of Directors so determines, to receive the number of shares rounded up to the next whole number, as described above.

 

29
 

 

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, 2012 and 2011.

 

   Producing   Non-Producing 
   April 30, 2012   April 30, 2011   April 30, 2010   April 30, 2012   April 30, 2011   April 30, 2010 
   Gross   Net   Gross   Net   Gross   Net   Gross   Net   Gross   Net   Gross   Net 
Kansas   -    -    -     -     -    -     -    -    33    33.0    33    33.0 
Missouri (1)   -    -    116    116    111    99.9    117    117    1    1    -    - 
Kentucky   -    -    -    -     -    -     5    1.9    5    1.9    5    1.9 
Montana   -    -     -    -      -    -     -    -    -    -    -    - 
Texas   -    -     -    -      -    -     5    3.75    5    3.75    5    1.75 
Total   -    -    116    116    111    99.9    127    122.65    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 ended April 30, 2011. No wells were drilled in the year ended April 30, 2012. 

Project Areas

 

The following table sets forth the lease areas we have an interest in, by area, as of April 30, 2012 and 2011:

 

Project Areas  April 30, 2012   April 30, 2011   April 30, 2010 
   Gross   Net   Gross   Net   Gross   Net 
Kansas   -    -    385    385    385    385 
Missouri (1)   34,045    32,615    38,119    37,470    38,119    36,598 
Kentucky (1)   29,147    10,930    29,147    10,930    29,147    10,930 
Texas (1)   -    -    19,938    9,969    29,516    11,751 
Montana (1)   1,175    881    3,982    2,019    15,688    8,673 
Total   64,367    44,426    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, 2012, 2011 and 2010 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.

 

30
 

 

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, 2012, 2011 and 2010: 

 

Oil (MBbls)  2012   2011   2010 
             
Proved reserves as at May 1   463    445    79 
Extensions and discoveries   -    46    - 
Dispositions   (45)   -    (3)
Production   (6)   (28)   (32)
Revisions of prior estimates   1    -    401 
Total Proved reserves as at April 30   413    463    445 

 

Oil (MBbls)  2012   2011   2010 
             
Proved developed producing   -    191    191 
Non-producing   203    -    - 
Proved undeveloped   210    272    254 
Total Proved reserves as at April 30   413    463    445 

 

Capitalized Costs Related to Oil and Gas Assets  2012   2011   2010 
             
Proved properties  $10,532,021   $10,474,051   $9,630,780 
Unproved properties   105,123,129    105,123,129    104,692,582 
    115,655,150    115,597,180    114,323,362 
Less: amount impaired   (113,552,534)   (98,143,411)   (85,294,734)
Capitalized cost, net of impairment   2,102,616    17,453,769    29,028,628 
Less: accumulated depletion   (1,077,616)   (816,555)   (95,815)
   $1,025,000   $16,637,214   $28,932,813 

 

Costs incurred in Oil and Gas Activities:  2012   2011   2010 
             
Development  $243,409   $1,361,890   $941,332 
Exploration   -    -    - 
   $243,409   $1,623,574   $779,457 

 

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:

 

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  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.

 

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:  2012   2011   2010 
             
Future cash inflows  $27,858,000   $26,338,000   $26,291,000 
Future operating costs   (12,203,000)   (9,686,000)   (10,672,000)
Future development costs   (1,994,000)   (3,345,000)   (3,488,000)
Future asset retirement costs   (146,000)   (141,000)   (139,000)
Future income taxes   -    -    - 
Future net cash flows   13,515,000    13,166,000    11,992,000 
10% discount factor   (4,168,000)   (3,225,000)   (3,286,000)
Standardized measure  $9,347,000   $9,941,000   $8,706,000 

 

Reconciliation of future cash flows relating to proved reserves:  2012   2011   2010 
             
Undiscounted value as at May 1  $13,166,000   $11,992,000   $472,000 
Extensions and discoveries   -    1,308,100    - 
Dispositions   (815,000)   -    (17,900)
Production   (166,068)   (1,904,800)   (481,100)
Revisions of prior volume estimates   28,436    -    10,806,300 
Revisions of pricing   1,301,632    1,770,700    1,212,700 
Undiscounted value as at April 30  $13,515,000    13,166,000    11,992,000 
10% discount factor   (4,168,000)   (3,225,000)   (3,286,000)
Standardized measure  $9,347,000   $9,941,000   $8,706,000 

 

As we reported on our Current Report on Form 6-K, filed with the Securities and Exchange Commission on July 29, 2012, we have entered into a non-binding letter of intent with Petro River Oil, LLC, a privately held Delaware limited liability company (“Petro LLC”) that would result in Petro acquiring Petro LLC for common stock, the name of the Company being changed to Petro River Oil Corp. and the Company domesticated to Delaware (the "Merger Transaction"). The letter of intent also contemplates that our board will consist of 5 members, 4 of which will be nominated by Petro LLC. Currently, it is intended that, post-Merger Transaction, current common stockholders of Petro will own approximately 2% of the issued and outstanding shares of the Company, holders of our Preferred shares and notes approximately 18% and holders of shares and notes of Petro LLC approximately 80%. Additionally, in advance of the closing of the Merger Transaction, our stockholders approved, and we completed, the name change to Petro River Oil Corp., our continuation/domestication to Delaware, and the election of the directors nominated by Petro LLC.

 

32
 

 

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, 2012, 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.

 

Effective June 20, 2011, the Company’s share capital was reverse split on a one-for-ten basis. All common share, preferred share, warrant and stock option figures disclosed herein are reported on a post reverse split basis.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The Company’s significant accounting policies are described in Note 4 to the annual consolidated financial statements for the years ended April 30, 2012, April 30, 2011 and April 30, 2010 respectively. The consolidated financial statements are prepared in conformity with U.S. GAAP.

 

Effective May 1, 2010, the Company started using generally accepted accounting principles in the United States (“US GAAP”) retrospectively to prepare its consolidated financial statements. The decision to change to US GAAP was made to enhance communication with shareholders and other investors and improve the comparability of financial information reported with competitors and peer group companies.

 

The accounting policies set out in note 4 have been applied consistently to all periods presented in these audited consolidated financial statements.

 

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 estimates for Preferred B shares, derivative fair values, stock-based compensation fair values and estimated cost and timing related to asset retirement obligations.

 

Certain fair value estimates are based on expected volatility of the Company’s share price. In years 2012 and 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.

 

33
 

 

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

 

Oil and Gas Operations

 

The Company follows the full cost method of accounting for oil and gas operations whereby all costs related to exploration and development of oil and gas reserves are capitalized. Under this method, the Company capitalizes all acquisition, exploration and development costs incurred for the purpose of finding oil and natural gas reserves, including salaries, benefits and other internal costs directly attributable to these activities. Costs associated with production and general corporate activities, however, are expensed in the period incurred. Costs are capitalized on a country-by-country basis. To date, there has only been one cost center, the United States.

 

Capitalized costs of oil and natural gas properties may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved reserves plus the cost of unproven properties. Should capitalized costs exceed this ceiling, impairment is recognized.

 

The present value of estimated future net cash flows is computed by applying the average first-day-of-the-month prices during the previous twelve-month period of oil and natural gas to estimated future production of proved oil and natural gas reserves as of year-end less estimated future expenditures to be incurred in developing and producing the proved reserves and assuming continuation of existing economic conditions. Prior to December 31, 2009, prices and costs used to calculate future net cash flows were those as of the end of the appropriate quarterly period.

 

Following the discovery of reserves and the commencement of production, the Company computes depletion of oil and natural gas properties using the unit-of-production method based upon production and estimates of proved reserve quantities. Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. Unproved properties are assessed for impairment quarterly. Significant properties are assessed individually.

 

The Company assesses all items classified as unproved property on a quarterly basis for possible impairment. The Company assesses properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: land relinquishment; intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate impairment, the related exploration costs incurred are transferred to the full cost pool and are then subject to depletion and the ceiling limitations on development oil and natural gas expenditures.

 

Proceeds from the sale of oil and gas assets are applied against capitalized costs, with no gain or loss recognized, unless a sale would alter the rate of depletion and depreciation by 25 percent or more.

 

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.

 

Management concluded that for the year ended April 30, 2012, an impairment was necessary after analyzing the current capitalization of the Company and its capital needs, and its lack of success in raising funds necessary to commercialize its assets.

 

As a result of these considerations, the Company’s current and foreseeable inability to develop these properties due to capital constraints, the Company recorded a $16,380,166 impairment charge on its properties during the year ended April 30, 2012, $12,848,677 for the year ended April 30, 2011, and $1,162,545 for the year ended April 30, 2010.

 

34
 

 

Canadian Disclosure Requirements

 

National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities (“NI 51- 101”) imposes oil and gas disclosure standards for Canadian public companies engaged in oil and gas activities. We have provided and continue to provide disclosure which complies with the annual disclosure requirements of NI 51-101, however as an SEC Issuer (as such term is defined under National Instrument 51-102 - Continuous Disclosure Obligations ("NI 51-102")) we are entitled to file our U.S. filings, under some circumstances, in place of continuous disclosure materials set forth in NI 51-102 for Canadian reporting issuers. However, our U.S. filings also contain reserves disclosure prepared in accordance with U.S. disclosure requirements. We have obtained an exemption order from the Alberta Securities Commission dated April 5, 2012, exempting us from certain requirements of NI 51-101 to permit us to provide disclosure prepared in accordance with U.S. disclosure requirements, in addition to the Canadian protocol disclosures.

 

The practice of preparing production and reserve quantities data under Canadian disclosure requirements differs from the U.S. reporting requirements. The primary differences between the two reporting requirements include:

 

the Canadian standards require disclosure of proved and probable reserves, while the U.S. standards require disclosure of only proved reserves;
the Canadian standards require the use of forecast prices in the estimation of reserves, while the U.S. standards require the use of 12-month average prices which are held constant;
the Canadian standards require disclosure of reserves on a gross (before royalties) and net (after royalties) basis, while the U.S standards require disclosure on a net (after royalties) basis;
the Canadian standards require disclosure of production on a gross (before royalties) basis, while the U.S. standards require disclosure on a net (after royalties) basis; and
the Canadian standards require that reserves and other data be reported on a more granular product type basis than required by the U.S. standards.
This supplementary 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”.

 

We retain qualified independent reserves evaluators to evaluate our proved oil reserves. We do not have any natural gas reserves. For the years ended April 30, 2012, 2011 and 2010 the reports by GLJ Petroleum Consultants (“GLJ”) covered 100% of our oil reserves.

 

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

 

We 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 Company evaluates all financial instruments for freestanding and embedded derivatives. Warrants and conversion features related to convertible notes and preferred shares do not have readily determinable fair values and therefore require significant management judgment and estimation. Changes in the fair value of these derivatives during each reporting period are included in the statement of operations. Inputs into the Binomial pricing model require estimates, including such items as estimated volatility of the Company’s stock and the estimated life of the financial instruments being fair valued.

 

While on the date of issuance, the Company used a Black Scholes pricing model, the fair value of options and warrants granted and the conversion feature of convertible notes were as valued subsequent to issuance based on binomial pricing models, which use the common share fair value on the grant date as an input.

 

RECENT ACCOUNTING PRONOUNCEMENTS  

 

In July 2012, the FASB issued the Accounting Standards Update or ASU, 2012-02, Intangibles-Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment, that allows entities to have the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with ASC 350-30. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company does not expect the adoption of these provisions to have a significant effect on its financial statements.

 

In December 2011, the FASB issued the ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, that deferred the effective date for amendments to the presentation of reclassifications of items out of other comprehensive income. ASU 2011-12 was issued to allow the FASB time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. During the redeliberation period, entities will continue to report reclassifications out of accumulated other comprehensive income using guidance in effect before ASU 2011-05 was issued. ASU 2011-05 is to be applied retrospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company does not expect the adoption of these provisions to have a material effect on its financial statements.

 

35
 

 

Results of Operations

 

Effective June 20, 2011, the Company completed a reverse split on a one-for-ten basis. All common share, preferred share, warrant and stock option figures disclosed herein are reported on a post reverse stock split basis.

 

Fiscal Year Ended April 30, 2012 Compared to Fiscal Year Ended April 30, 2011

 

   Years ended April 30 
   2012   2011 
Revenue and other income          
Oil and natural gas sales  $436,386   $1,565,963 
Total Income   436,386    1,565,963 
           
Operating Expenses          
Operating   1,963,969    3,470,746 
Impairment of oil and gas assets   16,380,166    12,848,677 
General and administrative   1,890,791    3,307,060 
Depreciation, depletion and accretion   333,614    844,160 
Total Expenses   20,568,540    20,470,643 
           
Operating loss   (20,132,154)   (18,904,680)
           
Other (income) expenses          
Interest and Other Income   (18,580)   (16,213)
Interest and accretion   3,856,833    1,512,443
Foreign exchange (gain) loss   6,849    (86,959)
Extinguishment of debt   (250,000)   - 
Rent Settlement   (50,000)   - 
Change in fair value of derivatives   (13,573,776)   9,395,435 
Total other (income) expenses   (10,028,674)   10,804,706 
           
Net Loss  $(10,103,480)  $(29,709,386)
           
Net loss attributable to common stockholders  $(15,810,184)  $(30,329,193)
           
Total Comprehensive Loss  $(10,065,974)  $(29,993,157)
           
Net Loss attributable to common stockholders per Common Share – Basic and Diluted  $(1.12)  $(2.27)
           
Weighted Average Number of Common Shares Outstanding   14,078,947    13,387,166 

 

36
 

 

Oil Sales

 

During the year ended April 30, 2012, the Company’s Missouri properties produced 5,584 barrels of oil and sold 5,789 barrels of oil at an average price (net of royalties) of $76.75 per barrel as compared to 2011 production of 26,549 barrels of oil at an average price (net of royalties) of $59 per barrel. Production decreased due to insufficient capital to sustain operations, which resulted in a suspension of production in September 2011.

 

Interest and Other Income

 

During the year ended April 30, 2012 interest on other income of $18,580 consisted mainly of interest on a long-term receivable, as compared interest and other income for the year ended April 30, 2011 of $16,213 which consisted mainly of interest earned from July 2010 to April 2011 on the long-term receivable at U.S bank prime rate plus 3%.

 

Operating Expenses

 

During the year ended April 30, 2012, operating expenses were $1,963,969 ($351.71 per barrel), as compared to operating expenses for the year ended April 30, 2011, of $3,470,746 ($131 per barrel). The decrease in operating expenses primarily is the result of reduced production as a result of a suspension of production due to insufficient capital to sustain operations.

 

General and administrative expenses

 

General and administrative expenses for the year ended April 30, 2012 were $1,890,791, as compared to $3,307,060 for the comparable prior year period. The reduction in these expenses is attributable primarily to a decrease in stock based compensation in the amount of $862,789, a decrease in professional fees of $869,345 which was offset by an increase in office and administrative expenses of $243,994.

 

   Year ended April 30 
   2012   2011 
Stock-based compensation:          
Stock options  $22,371   $575,835 
Compensation warrants   -    152,010 
Consulting warrants   -    166,810 
Shares issued for services   -    - 
Less: capitalized portion   -    (9,495)
   $22,371    885,160 
Salaries and benefits   1,007,929    1,063,706 
Professional fees   234,925    1,104,290 
Investor relations   100,928    64,818 
Office and administrative   569,253    325,259 
Information technology   49,973    44,364 
Less: capitalized portion   (94,588)   (180,537)
    1,868,420    2,421,900 
   $1,890,791   $3,307,060 

 

Interest and accretion expense

 

Interest and accretion expense is related to the interest and accretion on the Junior and Senior notes and for the year ended April 30, 2012 was $3,684,545, as compared to $1,412,086 for the comparable prior year period. The increase in interest and accretion expense for the current fiscal year primarily is attributable to the Company having recorded default interest at a rate of 15% as compared to rates ranging from 7.5% to 12% during fiscal year ending April 30, 2011.

 

37
 

 

Foreign exchange gain/loss

 

Foreign exchange (gain) loss for the year ended April 30, 2012 was $6,849, as compared to ($86,959) for the prior year period, and 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.

 

Change in fair value of derivatives

 

The fair value of our derivative liabilities decreased for the year ended April 30, 2012 by $13,573,776, as compared to an increase in the fair value of $9,395,435 for the year ended April 30, 2011.

 

The decrease 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
Shares
  Preferred B
Option/Warrants
   Note
conversion
features
   Warrants   Consulting
warrants
   Total 
Balance, April 30, 2011   3,219,700     -    5,122,294    2,869,630    2,796,890    491,380    14,499,894 
Exercise of Preferred B Options (b)   -      -    (4,846,941)   -    -    -    (4,846,941)
Expiry of Preferred B Options (b)   -     -    (661,259)   -    -    -    (661,259)
Preferred B Shares and Warrants (b)   -     1,662,100    3,677,600    -    -    -    5,339,700 
Change in fair value   (3,038,040)    (1,635,701 )  (3,014,510)   (2,697,876)   (2,697,876)   (480,591)   (13,573,776)
Balance, April 30, 2012  $181,660    $26,399 $277,184   $171,754   $89,832   $10,789   $757,618 

 

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 and natural gas sales  $1,565,963   $1,575,150 
Total Income   1,565,963    1,575,150 
           
Operating 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 
Total Expenses   20,470,643    8,604,191 
           
Operating loss   (18,904,680)   (7,029,041)
           
Other (income) expenses          
Interest and Other Income   (16,213)   (6,073)
Interest and accretion   1,512,443    - 
Foreign exchange (gain) loss   (86,959)   98,225 
Extinguishment of debt        - 
Rent Settlement        - 
Change in fair value of derivatives   9,395,435    829,166 
Total other (income) expenses   10,804,706    921,318 
           
Net Loss  $(29,709,386)  $(7,950,359)
           
Net Loss attributable to common stockholders  $(30,329,193)  $(8,169,154)
           
Total Comprehensive Loss  $(29,993,157)  $(2,966,333)
           
Net Loss attributable to common stockholders per Common Share – Basic and Diluted  $(2.27)  $(0.61)
           
Weighted Average Number of Common Shares Outstanding   13,387,166    13,325,545 

   

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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 and Other 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.

 

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.

 

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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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B. Liquidity and Capital Resources

 

As at April 30, 2012, the Company had a working capital deficiency of approximately $4.5 million.

 

During September 2011 and, again, in August 2012, 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 made the required filings with regard to the 2011 cease trade orders and the Alberta and British Columbia cease trade orders were rescinded. The Company intends to make the required filings with regard to the 2012 cease trade orders and believes that the Alberta and British Columbia cease trade orders will be rescinded. However, as of the date of the filing of this report the cease trade orders have not been rescinded and no assurances can be given as to when or if they will be rescinded. Until these cease trade orders are rescinded the Company’s ability to raise capital is significantly restricted.

 

Our current capital and our other existing resources will not be sufficient to provide working capital for the balance of 2012, and the revenues generated will not be sufficient to fund our operations or planned growth. 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.

 

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As we reported on our Current Report on Form 6-K, filed with the Securities and Exchange Commission on July 29, 2012, we have entered into a non-binding letter of intent with Petro River Oil, LLC, a privately held Delaware limited liability company (“Petro LLC”) that would result in Petro acquiring Petro LLC for common stock, the name of the Company being changed to Petro River Oil Corp. and the Company domesticated to Delaware (the "Merger Transaction"). It is intended that, post-Merger Transaction, on a consolidated basis, Petro will have cash and cash equivalents of approximately $7 million, which we believe will be sufficient to fund our general administrative and operating expenses for the next three fiscal years.

 

Investing Activities

 

During the year ended April 30, 2012, the Company incurred $243,409 of expenditures on oil and gas assets compared to $1,361,890 in 2011 and $941,332 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, 2012, management reported an allowance of $302,536.

 

During the years ended April 30, 2012, 2011 and 2010 the Company received proceeds of $431,989, $Nil and $2,391,077 from the disposition of oil and gas assets and equipment. The company had net cash provided by (used in) investing activities of $953,243, ($1,367,825) and $1,475,848 for the years ended April 30, 2012, 2011 and 2010 respectively.

 

Financing Activities

 

During the year ended April 30, 2012, the Company received proceeds from the sale of preferred shares of $1,759,900 as compared to $6,114,248 provided by all financing activities in year ended April 30,2011 and $2,136,950 in year ended April 30, 2010.

 

Capitalization

 

Effective June 20, 2011, the Company’s common shares were reverse split on a one-for-ten basis. All common share, preferred share, warrant and stock option figures disclosed herein are reported on a post reverse stock split basis.

 

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

 

As at  April 30 2012   April 30 2011   April 30 2010 
Common shares   14,078,947    14,078,947    13,328,947 
Preferred A Shares   -    -    34,592,950 
Preferred A Warrants   19,250,000    19,250,000    15,400,000 
Preferred B Shares   8,799,995    10,000,000    20,000,000 
Preferred B Warrants   15,399,125    17,500,000    10,000,000 
Senior I Notes   12,646,000    11,750,000     
Senior I Warrants   12,500,000    12,500,000     
Senior II Notes   23,000,000    23,000,000     
Senior II Warrants   9,200,000    9,200,000     
Junior Notes   12,988,903    12,505,340     
Consulting Warrants   2,720,000    2,720,000     
Stock Options   775,000    1,404,300    1,069,800 
Compensation Warrants   480,000    480,000      
    131,837,970    134,388,587    94,391,697 

  

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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

 

In January 2010, the Company experienced a flood in its office premises as a result of a broken water pipe. There was significant damage to the premises rendering them unusable until remediation had been completed by the landlord. Pursuant to the lease contract, the Company has asserted that rent should be abated during the remediation process and accordingly, the Company has not paid rent since December 2009. During the remediation process, the Company engaged an independent environmental testing company to test for air quality and for the existence of other potentially hazardous conditions. The testing revealed the existence of potentially hazardous mold and the consultant provided specific written instructions for the effective remediation of the premises. During the remediation process, the landlord did not follow the consultant’s instructions and correct the potentially hazardous mold situation and subsequently in June 2010 gave notice and declared the premises to be ready for occupancy. The Company re-engaged the consultant to re-test the premises and the testing results again revealed the presence of potentially hazardous mould. The Company has determined that the premises are not fit for re-occupancy and considers the landlord to be in default of the lease and the lease terminated.

 

The landlord disputes the Company’s position and has given notice that it considers the Company to be in default of the lease for failure to re-occupy the premises.

 

In addition, the landlord has claimed that the Company owes monthly rent for the premises from January 2010 to June 30, 2010 in the amount of $247,348 and has claimed that, as a result of the alleged default, pursuant to the terms of the lease, the Company owes three months accelerated rent in the amount of $114,837. The landlord has also asserted that the Company would be liable for an amount up to the full lease obligation of $1,596,329 which otherwise would have been due as follows:

 

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Year Ended April 30    
2012  $473,055 
2013   473,055 
2014   473,055 
2015   177,164 
Thereafter   - 
Total  $1,596,329 

 

To date, no legal action has been commenced by the landlord and the cost, if any, to the Company is not determinable. Accordingly, no amounts related to rent or the disputed lease obligation have been recorded in these financial statements.

 

At April 30, 2012 pursuant to employment agreements with a senior officer, the Company is obligated to pay approximately $200,000 under certain events around employment termination.

 

Item 6. Directors, Senior Management and Employees

 

  A.    Directors, Senior Management

 

Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:

 

Name and Age   Position
Tim L. Morrison (39)  

Chief Executive Officer, Secretary and

Chairman of the Board of Directors, resigned effective January 23, 2012

George Orr (51)   Director, resigned effective June 27, 2012
M. Elden Schorn (73)   Director, resigned effective June 27, 2012
Fred S. Zeidman (66)   Director since November 2009
Jeffrey Freedman (65)   Chief Financial Officer, Chief Executive Officer effective January 23, 2012
Pat McCarron (63)   Vice President, Operations since June 2008
Scot Cohen (43)   Director, elected September 7, 2012
Ruben Alba (39)   Director, elected September 7, 2012
Daniel Smith (40)   Director, elected September 7, 2012
Glenn C. Pollack (54)   Director, elected September 7, 2012

 

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. He resigned from the Company effective January 23, 2012. Prior to joining the Company, he served as Chief Operating Officer of Cox Operating LLC and Cox Oil LLC, a Dallas-based oil and gas production company. 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 holds a B.S. degree in Chemical Engineering from Texas Tech University.

 

44
 

 

George Orr

 

Mr. Orr served as a director since December 2006 and resigned effective June 27, 2012. 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.

 

Elden Schorn

 

Mr. Schorn served as a director since April 2011 and resigned effective June 27, 2012. Mr. Schorn served as Vice President of the British Columbia Region for the Canadian Manufacturers and Exporters Association. 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.

 

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.

 

Scot Cohen

 

Mr. Cohen was elected to serve as a director on September 7, 2012. Mr. Cohen is the Co-founder of Iroquois Capital, a New York based hedge fund. He is also the Co-founder and Managing Director of Iroquois Capital Opportunity (ICO), a private equity fund focused on investments in U.S. onshore oil and gas. Mr. Cohen remains actively involved in a wide variety of charitable organizations. Most notably, Mr.Cohen serves as the Founder and Chairman of the National Foundation for Veteran Redeployment, a non-profit providing scholarships, job placement assistance and mentoring to veterans interested in careers in the oil and gas industry. Mr.Cohen holds a Bachelors of Science degree from Ohio University.

 

Ruben Alba

 

Mr. Alba was elected to serve as a director on September 7, 2012. Mr. Alba spent the majority of his career with both Halliburton Energy Services and Superior Well Services, overseeing regional technical staff and operations. In this capacity, Mr.Alba introduced a number of new and novel technologies involving new fluid chemistry to the industry, as well as completion processes to reservoirs requiring cutting edge technology, where he holds three US Patents. Mr. Alba received his B.S in Chemical Engineering from New Mexico State University and has been active in the oil and gas industry since 1997.

 

Daniel Smith

 

Mr. Smith was elected to serve as a director on September 7, 2012. Mr.Smith is a registered Professional Engineer in Petroleum Engineering and has over 15 years of experience in the oil and gas industry. Mr. Smith spent his career at XTO Energy where he served as an Operations Engineer specializing in hydraulic fracturing and artificial lift. Mr. Smith was directly responsible for managing fields producing in excess of 100 million cubic feet of natural gas per day and worked on numerous drilling projects ranging from the Marcellus Shale to the Permian Basin.

 

Glen C. Pollack

 

Since 2001, Mr. Pollack has been a Managing Director of Candlewood Partners, LLC, a merchant bank focused on middle market capital formation, mergers and restructurings. He was the CEO of $1 billion container terminal project in Damietta, Egypt from February 2009 to March 2012. Mr. Pollack graduated in 1980, from Boston University with a BSBA degree in Accounting.

 

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Jeffrey Freedman

 

Mr. Freedman has been our Chief Financial Officer since July 2011 and effective January 23, 2012 became Interim Chief Executive Officer until being appointed Chief Executive Officer effective September 7, 2012. 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 stockholder, executive and director 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.

 

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.

 

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.

 

Corporate Cease Trade Orders

 

Except as disclosed below, no current director, or current officer has, within the past ten years, been a director, chief executive officer or chief financial officer of any other issuer that, while that person was acting in that capacity:

 

a)was subject to a cease trade order that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or
   
b)was subject to a cease trade order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer,

 

Mr. Zeidman was a director MegaWest Energy Corp. (now Petro), an OTC reporting issuer when on September 7, 2010, and September 8, 2010, the Alberta Securities Commission and BC Securities Commission each issued a Cease Trade Order in the trading of the company. The Cease Trade Orders were issued as a result of the company’s failure to file an annual information form, audited annual financial statements, annual management discussion and analysis and certificates in respect of the annual filings for the year ended April 30, 2010. The Cease Trade Orders were revoked by both the Alberta and BC Securities Commission on October 22, 2010. Mr. McCarron was the Vice President, Operations at the time of the cease trade orders.

 

Mr.Zeidman was a director of the Company when it was cease traded on September 7, 2011 by the Alberta Securities Commission and on September 8,2011 by the BC Securities Commission as a result of the company’s failure to timely file an annual information form, audited annual financial statements, annual management discussion and analysis and accompanying certificates for the year ended April 30,2011. The Cease Trade Orders were rescinded on June 5, 2012 pursuant to the Company having filed the required documents. At the time of the issuance of the Cease Trade Orders, Mr. Freedman was the Chief Financial Officer and Mr. McCarron was the Vice President , Operations.

 

Mr. Zeidman was a director of the Company when it was placed on the List of Defaulting Issuers by the British Columbia Securities Commission on August 29, 2012, and when it subsequently became subject to cease trade orders issued by the Alberta Securities Commission and the British Columbia Securities Commission on August 31, 2012 and September 10, 2012, respectively. The cease trade orders were issued as a result of the Company failing to file certain required disclosure under applicable Canadian securities laws including the Company’s annual information form, annual audited financial statements, annual management’s discussion and analysis, and certification of annual filings for the year ended April 30, 2012. The Company remains on the List of Defaulting Issuers, and the cease trade orders remain in effect as at the date of this form. At the time that the Company was placed on the List of Defaulting issuers and of the issuance of both cease trade orders, Mr. Freedman was the Chief Financial Officer and Mr. McCarron was the Vice President, Operations. At the time of the cease trade order issued by the British Columbia Securities Commission, Messrs. Cohen, Alba, Smith and Pollack were directors of the Company, having been elected on September 7, 2012.

 

Corporate and Personal Bankruptcies

 

Except as disclosed below, no current director, current officer, or promoter of the Company, or a current shareholder of the Company holding a sufficient number of securities of the Issuer to affect materially the control of the Company or a personal holding company of any such persons,

 

46
 

 

a)is, as at the date of this Annual Report, or has been within the 10 years before the date of this Annual Report, a director or executive officer of any company (including Petro) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or
   
b)has, within the 10 years before the date of this Annual Report become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or has been subject to or has instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder.

 

Mr. Zeidman was a director of a small, development stage technology company that became insolvent and declared bankruptcy prior to the technology becoming viable.

 

Penalties or Sanctions

 

No current director or executive officer of the Company, or a shareholder of the Company holding a sufficient number of securities of ours to affect materially the control of the company, has been subject to:

 

a)any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or
   
b)any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

 

  B.    Compensation

 

Introduction

 

The purpose of this Compensation Discussion and Analysis is to provide information about the Company's philosophy, objectives and processes regarding compensation for the Named Executive Officers of the Company (NEOs or Named Executive Officers). It explains how decisions regarding executive compensation are made by the Board of Directors and the reasoning behind these decisions. All members of the Board of Directors are required to have expertise and experience in compensation, and other human resource areas.

 

As at the date hereof, the Company has the following two NEOs:

 

Jeffrey Freedman Interim Chief Executive Officer and Interim Chief Financial Officer ("CEO")
   
Pat McCarron Vice President, Operations

 

Compensation Philosophy and Objectives of Compensation Programs

 

The Board of Directors determines the compensation to be paid or awarded to the NEOs of the Company. The Board has sought to encourage advancement of exploration projects and growth in reserves, in order to enhance stockholder value. To achieve these objectives, the Company believes it is critical to create and maintain compensation programs that attract and retain committed, highly qualified personnel by providing appropriate rewards and incentives and that align the interest of the officers of the Company with those of the Stockholders to provide incentive to the officers to enhance shareholder value. However, as a junior exploration company the Company has been constrained by the amount of capital it has available to it. Additionally, the Company was subject to cease trade orders until June 6, 2012 issued by the Alberta Securities Commission and the British Columbia Securities Commission which significantly reduced its ability to fund operations.

 

47
 

 

The Company has sought new business opportunities, including a proposed restructuring transaction announced June 27, 2012. As a result of the Company ceasing operations during the last fiscal year, compensation for the CEO was based on time spent pursuing and negotiating potential new business transactions, maintaining the Company’s regulatory filings and managing the Company's strategic direction. Similarly, compensation for the Vice President, Operations was based on time spent dealing with ongoing operational issues and assisting with the preparation of requisite regulatory filings. If and when the Company resumes full operations, compensation for the NEOs is expected to be re-evaluated in the specific circumstances. During the last fiscal year, compensation for the NEOs consisted of three elements: contract rate or base salary, long-term equity incentives and benefits (however compensation may include a bonus under some circumstances). The following provides an overview of the three elements of compensation excluding benefits.

 

Compensation Element   Type of Compensation   Name of Plan   Performance Period   Form of Payment
Contract Rate/Base Salary(1)   Hourly rate/Annual - Fixed Pay   Salary Program   1 year   Cash
Bonus   Annual - Variable Pay   N/A   1 year   Cash or shares

Long-Term Equity Incentives

 

  Long Term - Variable Pay   Option Plans   up to 5 years   Options for Common Shares

 

Note:

 

(1)As a result of a significant operational and financial difficulties, compensation of the CEO for the year ended April 30, 2012 was determined on an ad hoc basis by the Board to ensure management continued with the Company.

 

How the Company Determines the Amount for Each Element

 

As indicated above, executive compensation is the responsibility of the Board.

 

During the fiscal year ended April 30, 2012, the Board had no formal meetings dedicated to compensation because of the other significant issues facing the Company.

 

Under ideal circumstances, the Board uses data which, at its reasonable discretion, it believes to be relevant, to ensure that the Company is maintaining a level of compensation that is both commensurate with the size of the Company and sufficient to retain personnel it considers essential to the success of the Company. In reviewing comparative data, the Board does not engage in benchmarking for the purpose of establishing compensation levels relative to any predetermined point. In the Board's view, external and third-party survey data provides an insight into external competitiveness, but it is not an appropriate basis for establishing compensation levels for us. This is primarily due to the differences in the size of comparable companies and the lack of sufficient appropriate matches to provide statistical relevance. Additionally, compensation payable to the NEOs for similarly placed junior exploration entities is frequently nil or nominal, thus such comparatives are typically of little value.

 

In the process used by the Board to establish and adjust executive compensation levels, the Board may consider third-party survey data (although no such data was considered in the year ended April 30, 2012), along with an assessment of individual performance, experience and potential to contribute to operations and growth of the Company. The Board can exercise both positive and negative discretion in relation to the compensation awards and its allocation between cash and non-cash awards.

 

The CEO of the Company may make recommendation to the Board regarding total compensation to the officers of the Company (excluding the CEO), including contract rate or base salaries and long-term equity incentive grants. These recommendations are considered by the Board against information derived from publicly available information and adjusted, as applicable, for inflation and anticipated increases in the current year.

 

Contract Rate/Salary. The contract rate or base salary represents the fixed element of the NEOs cash compensation. The contract rate or base salary reflects economic considerations for each individual's level of responsibility, expertise, skills, knowledge and performance, as well as the overall success of the Company's operations during the fiscal year (with due consideration to financial and operational challenges during the past fiscal year). The contract rate or base salary for the NEOs of the Company are typically reviewed annually by the Board.

 

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Annual Cash Bonus Awards. The Board has the authority, based upon management recommendations, to award discretionary annual bonuses to the executive officers. The annual discretionary bonuses are intended to compensate officers for achieving superior financial and operational goals of the Company. The discretionary annual bonus may be paid in cash or shares in an amount reviewed with management and recommended by the Board and approved by the Board. The actual amount of bonus is determined following a review of each executive's individual performance.

 

Bonuses awarded by the Board are intended to be competitive with the market while rewarding senior executives for meeting qualitative goals, including delivering near-term financial and operating results, developing long-term growth prospects, improving the efficiency and effectiveness of business operations and building a culture of teamwork focused on creating long-term stockholder value. Consistent with a flexible nature of the annual bonus program, the Board does not assign any specific weight to any particular performance goal nor is any specific weight assigned to the performance goals in the aggregate. The Board considers not only the Company's performance during the year with respect to the qualitative goals, but also with respect to market and economic trends and forces, extraordinary internal and market-driven events, unanticipated developments and other extenuating circumstances. In sum, the Board analyzes the total mix of available information on a qualitative, rather than quantitative, basis in making bonus determinations. No cash bonuses were awarded to the NEOs during the 2010, 2011 or 2012 reporting periods as a result of the financial and regulatory challenges faced by the Company in those fiscal years.

 

Long-Term Incentive Programs. The allocation of Options and the terms assigned to those Options are an additional component of the compensation package of the senior officers of the Company. The Company's Option Plans are in place for the purpose of providing Options to the officers. The Board believes that the grant of Options to the executive officers and share ownership by such officers serves to motivate achievement of the Company's long-term strategic objectives and the result will benefit all Stockholders. Options may be awarded to employees of the Company by the Board based upon the recommendation of the CEO, who bases his decision upon the level of responsibility and contribution of the individuals toward the Company's goals and objectives. Also, the Board considers the overall number of Options that are outstanding relative to the number of outstanding Common Shares in determining whether to make any new grants of Options and the size of such grants. The granting of these specific Options is reviewed by the Board for final recommendation to the Board for approval.

 

Risk Assessment and Oversight. The Board is keenly aware of the fact that compensation practices can have unintended risk consequences. The Board will continually review the Company’s compensation policies to identify any practice that might encourage an employee to expose the Company to unacceptable risks. At the present time, the Company does not believe that its compensation programs encourage excessive or inappropriate risk taking as: (i) the Company’s employees can receive both fixed and variable compensation, and the fixed (salary) portion provides a steady income regardless of the stock value which allows employees to focus on the Company’s business; (ii) the employee Option Plans encourage a long-term perspective due to the vesting provisions of the Options; and (iii) the significant challenges faced by the Company in the last fiscal year were indicative of the a low risk profile for such activities as the continuing involvement of the NEOs is predicated by a long-term view to success and value for the Company.

 

Although the Company does not have a policy which prohibits any NEO or director from purchasing financial instruments designed to hedge or offset a decrease in market value of equity securities granted as compensation or held by the NEO or director, to the knowledge of the Company, no NEO or director has entered into any such agreement.

 

During the year ended April 30, 2012, the Company's operational focus was on surviving significant liquidity challenges that were the result of having limited access to capital. There was no increase in base salaries or other benefits compared to the prior year.

 

Summary Executive Compensation Table

 

The following table sets forth a summary of all compensation paid during the period ended April 30, 2012 to the Named Executive Officers and other individuals who served as Named Executive Officers for some period during the year:

 

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                  Non-Equity Incentive Plan         
                  Compensation         
   Fiscal             Long-       
   Year      Share-  Option- AnnualTerm     
   Year      Based  Based IncentiveIncentivePensionAll other   
Name and  Ended  Salary  Awards  Awards PlansPlansValueComp.Total Comp.
Principal Position  April 30  ($)  ($)  ($)(1)(6) ($)($)($)($)($)
Jeffrey Freedman(2)
Interim Chief Interim Executive Officer and Interim Chief Financial Officer
   2012
2011
2010
   120,000

   

   23,300

  

 

 

 

  143,300

                                 
Pat McCarron(5)
Vice President, Operations
   2012
2011
2010
   185,040
185,040
185,040
   

   
35,618
  

 

 
 –
 –
 

  185,040
220,658
185,040
                                 
Tim Morrison(3)
former Chief Executive Officer, President and Secretary
   2012
2011
2010
   130,769
61,359
   

   
128,560
  

 

 

 

  130,769
189,919
                               
George Orr(4)(5)
former Chief Financial Officer
   2012
2011
2010
   83,872
22,496
   

   
72,818
  

 

 

 

  83,872
106,368

  

Notes:

 

(1)"Options" includes all options granted by us as compensation for employment services or office.
(2)Mr. Freedman has been the interim Chief Financial Officer since July 1, 2011 and has acted as Interim Chief Executive Officer since Mr. Morrison's resignation on January 23, 2012.
(3)Mr. Morrison was the Chief Executive Officer, President and Secretary of the Company from January 1, 2011 until his resignation on January 23, 2012.
(4)Mr. Orr was the Chief Financial Officer from February 14, 2011 to June 30, 2011. Mr. Orr resigned from the Company as a director on June 27, 2012. Mr. Orr’s personal holding company was paid $22,496 for consulting services during the year ended April 30, 2011, and $83,872 for the year ended April 30, 2012.
(5)The options granted in 2011 were issued on April 5, 2011 at $0.50 and expire April 5, 2014. In conjunction with the issuance of these Options, Mr. Orr forfeited 30,000 previously issued Options at $1.50, and Mr. McCarron forfeited 90,000 previously issued Options at $1.50.
(6)The fair value of the options granted is obtained by multiplying the number of options granted by their value established according to the Black - Scholes pricing model. This value is the same as the fair value established in accordance with generally accepted accounting principles. The following assumptions were used for options granted in 2012: expected volatility – 100%. The following assumptions were used for options granted in 2011: expected volatility – 130%; risk-free rate – 1.41%; forfeiture rate – 15%; expected life – 3.4 years; dividend yield – 0%. The following assumptions were used for options granted in 2010: expected volatility – 214%; risk-free rate – 2.57%; forfeiture rate – 10%; expected life – 3 years; dividend yield – 0%.

 

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, 2012 to provide pension, retirement or similar benefits.

 

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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 entit