Attached files

file filename
EX-23 - EX-23 - MAINLAND RESOURCES INC.ex23.txt
EX-99.1 - REPORT FROM RYDER SCOTT COMPANY, L.P. - MAINLAND RESOURCES INC.ex99-1.txt
EX-31 - EX-31.1 - MAINLAND RESOURCES INC.ex31-1.txt
EX-10.6 - PETROHAWK AGREEMENT - MAINLAND RESOURCES INC.ex10-6.txt
EX-31 - EX-31.2 - MAINLAND RESOURCES INC.ex31-2.txt
EX-10.7 - WESTROCK AGREEMENT - MAINLAND RESOURCES INC.ex10-7.txt
EX-10.8 - VCS AGREEMENT - MAINLAND RESOURCES INC.ex10-8.txt
EX-32 - EX-32.1 - MAINLAND RESOURCES INC.ex32-1.txt
EX-3.1.2 - AMENDMENT OF ARTICLES - MAINLAND RESOURCES INC.ex3-1number2.txt




                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-K/A
                                AMENDMENT NO. 1


MARK ONE

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934

                   For the fiscal year ended February 28, 2009

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


                For the transition period from ______ to _______


                          COMMISSION FILE NO. 000-52782


                            MAINLAND RESOURCES, INC.
                 ______________________________________________
                 (Name of small business issuer in its charter)


                    NEVADA                              90-0335743
_____________________________________________       ___________________
(State or other jurisdiction of incorporation        (I.R.S. Employer
               or organization)                     Identification No.)


                       20333 STATE HIGHWAY 249, SUITE 200
                              HOUSTON, TEXAS 77070
                    ________________________________________
                    (Address of principal executive offices)


                                 (281) 469-5990
                           ___________________________
                           (Issuer's telephone number)


Securities registered pursuant to Section    Name of each exchange on which
            12(b) of the Act:                         registered:
                   NONE
                   ____


           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                              COMMON STOCK, $0.001
                                (Title of Class)



Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Indicate by check mark if the registration is a well-known seasoned issuer as defined in Rule 403 of the Securities Act. [ ] Yes [ X ] No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ X ] Yes [ ] No Indicate by check mark whether the registrant has (i) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [ X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filed [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [X] Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business of the registrant's most recently completed second fiscal quarter: August 31, 2009 $118,845,000 2
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS N/A Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes[ ] No[ ] APPLICABLE ONLY TO CORPORATE REGISTRANTS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding as of May 17, 2009 Common Stock, $0.001 39,805,001* *Increased from 1,120,500 shares of common stock to 22,410,000 shares of common stock based upon the February 2008 Forward Stock Split and further increased to 26,410,000 based upon the May 2008 Forward Stock Split. DOCUMENTS INCORPORATED BY REFERENCE If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (i) any annual report to security holders; (ii) any proxy or information statement; and (iii) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (the "Securities Act"). The listed documents should be clearly described for identification purposes (e.g. annual reports to security holders for fiscal year ended December 24, 1990). N/A Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] 3
MAINLAND RESOUCES, INC. FORM 10-K/A INDEX Item 1. Business 5 Item 1A. Risk Factors 19 Item 1B. Unresolved Staff Comments 32 Item 2. Properties 32 Item 3. Legal Proceedings 32 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 33 Item 6. Selected Financial Data 38 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 39 Item 7A. Quantity and Qualitative Disclosure About Market Risks Item 8. Financial Statements and Supplemental Data 45 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 65 Item 9A. Controls and Procedures 65 Item 9B. Other Information 67 Item 10. Directors, Executive Officers and Corporate Governance 67 Item 11. Executive Compensation 75 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 78 Item 13. Certain Relationships and Related Transactions and Director Independence 80 Item 14. Principal Accountant Fees and Services 80 Item 15. Exhibits and Financial Statement Schedules 81 4
Statements made in this Form 10-K that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the Securities Exchange Act of 1934. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate" or "continue," or the negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. AVAILABLE INFORMATION Mainland Resources, Inc. files annual, quarterly, current reports, proxy statements, and other information with the Securities and Exchange Commission (the "Commission"). You may read and copy documents referred to in this Annual Report on Form 10-K that have been filed with the Commission at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission filings by going to the Commission's website at http://www.sec.gov PART I This Annual Report is being amended pursuant to that certain comment letter dated January 29, 2010 from the Securities and Exchange Commission primarily pertaining to reserve report disclosure and management's disclosure and analysis disclosure. ITEM 1. BUSINESS BUSINESS DEVELOPMENT Mainland Resources, Inc. was incorporated under the laws of the State of Nevada on May 12, 2006 and had been engaged in the business of acquisition, exploration and development of mineral properties in the United States since its inception. We are a natural resource exploration and production company currently engaged in the exploration, acquisition and development of oil and gas properties in the United States and within North America. Our primary activity and focus is our lease in East Holly Field, De Soto Parish in northwest Louisiana (the "De Soto Parish") as more fully described below. To date, we have acquired approximately 2,551 net acres within the De Soto Parish. We have also leased various other properties totaling approximately 144 net acres within the Cotton Valley/Haynesville trend in the State of Louisiana as more fully described below. 5
After the effective date of our registration statement filed with the Securities and Exchange Commission (August 24, 2007), we commenced trading on the Over-the-Counter Bulletin Board under the symbol "MNLU:OB". Please note that throughout this Annual Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "Mainland Resources," refers to Mainland Resources, Inc. RECENT DEVELOPMENTS FEBRUARY 2008 FORWARD STOCK SPLIT On February 25, 2008, our Board of Directors, pursuant to minutes of written consent in lieu of a special meeting, authorized and approved a forward stock split of twenty for one (20:1) of our total issued and outstanding shares of common stock (the "February 2008 Forward Stock Split"). Each of our shareholders holding one share of common stock was entitled to receive an additional twenty shares of our restricted common stock. The additional shares of our common stock to be issued to the shareholders in accordance with the February 2008 Forward Stock Split were mailed on approximately March 15, 2008 without any action on the part of the shareholders. The February 2008 Forward Stock Split was effectuated based on market conditions and upon a determination by our Board of Directors that the February 2008 Forward Stock Split was in our best interests and of the shareholders. In our judgment, the February 2008 Forward Stock Split resulted in an increase in our trading float of shares of common stock available for sale resulting in facilitation of investor liquidity and trading volume potential. The intent of the February 2008 Forward Stock Split was to increase the marketability of our common stock. The February 2008 Forward Stock Split was effectuated with a record date of March 11, 2008 upon filing the appropriate documentation with NASDAQ. The February 2008 Forward Stock Split increased issued and outstanding shares of common stock from 1,120,500 to approximately 22,410,000 shares of common stock. The current authorized share capital continued to be 200,000,000 shares of common stock with a par value of $0.0001 per share. MAY 2008 FORWARD STOCK SPLIT On May 12, 2008, our Board of Directors, pursuant to minutes of written consent in lieu of a special meeting, authorized and approved a forward stock split of 1.5 for one (1.5:1) of our total issued and outstanding shares of common stock (the "May 2008 Forward Stock Split"). The May 2008 Forward Stock Split was effectuated based on market conditions and upon a determination by our Board of Directors that the May 2008 Forward Stock Split was in our best interests and of the shareholders. In our judgment, the May 2008 Forward Stock Split will further result in an increase in our trading float of shares of common stock available for sale resulting in facilitation of investor liquidity and trading volume potential. The intent of the May 2008 Forward Stock Split is to further increase the marketability of our common stock. 6
The May 2008 Forward Stock Split was effectuated with a record date of May 29, 2008 upon filing the appropriate documentation with NASDAQ. The May 2008 Forward Stock Split increased our issued and outstanding shares of common stock from 26,410,000 to approximately 39,615,000 shares of common stock. The total number of shares of common stock issued and outstanding had previously been 22,410,000 since March 11, 2008 pursuant to a forward stock split effectuated pursuant to the February 2008 Forward Stock Split. We subsequently issued 4,000,000 shares in accordance with the terms and provisions of a private placement offering thus bringing the total number of issued and outstanding shares of common stock to 26,410,000 as of May 29, 2008. The current authorized share capital continued to be 200,000,000 shares of common stock with a par value of $0.0001 per share. See "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities." TRANSFER AGENT Our transfer agent is Empire Stock Transfer, Inc., 2470 Saint Rose Parkway, Suite 304, Henderson, Nevada 89074. CURRENT BUSINESS OPERATIONS We are a natural resource exploration and production company currently engaged in the exploration, acquisition and development of oil and gas properties in the United States and within North America. Our primary activity and focus is our lease in the De Soto Parish. To date, we have acquired approximately 2,551 net acres within the De Soto Parish. We have also leased various other properties totaling approximately 144 net acres within the Cotton Valley/Haynesville trend in the State of Louisiana as more fully described below. OIL AND GAS PROPERTIES EAST HOLLY FIELD, DE SOTO PARISH, LOUISIANA On February 27, 2008, we entered into an option agreement (the "Option Agreement") with Kingsley Resources, Inc., Nevada corporation ("Kingsley"), pursuant to which we acquired all the right, title and interest Kingsley has in and to certain leasehold estates (the "Leases") located in East Holly Field of the De Soto Parish. The Leases create a contiguous block of acreage on the southeast flank of the East Holly Field. The Leases were the subject of a certain purchase agreement dated December 11, 2007 and modified February 1, 2008 (collectively, the "Leasehold Purchase Agreement") between Kingsley and Permian Basin Acquisition Fund ("Permian"), pursuant to which Kingsley acquired the sub-surface rights provided for in the Leases. In accordance with the terms and provisions of the Option Agreement: (i) Kingsley granted to us all of its right, title and interest in and to the Leases and we assumed all rights, duties and obligations of Kingsley under the Leasehold Purchase Agreement; (ii) we agreed to pay to Kingsley $100,000, which is payable as a reimbursement of a deposit paid by Kingsley to Permian under the Leasehold Purchase Agreement; and (iii) on or about March 15, 2008 or at the time we pay the $100,000 to Kingsley under the Option Agreement and such other amounts to Permian as required of Kingsley under the Leasehold Purchase Agreement, the right, title and interest of Permian and Kingsley in the Leases will be transferred and delivered to us, subject to residual royalty payment and other rights reserved under the Leasehold Purchase Agreement and the Option Agreement by Permian and Kingsley. 7
On March 14, 2008, we paid to Permian the aggregate amount of $587,596, which amount did not include the $100,000 required to be paid by us to Kingsley under the terms of the Option Agreement, the $100,000 was paid to Kingsley on April 2, 2008. In accordance thereof, the right, title and interest of Permian and Kingsley in the Leases were transferred to us effective March 14, 2008 by way of assignment. As of the date of this Annual Report, we have completed the Option Agreement and the Leasehold Purchase Agreement at a total cost of $687,596 (which included the $100,000 previously paid to Kingsley) for approximately 2,551 net acres. COTTON VALLEY/HAYNESVILLE As of the date of this Annual Report, we have leased various other properties totaling approximately 144 net acres consisting of approximately 84 net acres leased as of February 29, 2008 and an additional 60 net acres leased during the nine month period ended November 30, 2008 for payment of additional consideration of $22,753. These additional property leases within the Cotton Valley/Haynesville trend in the State of Louisiana are for a three-year term period. We have a 100% working interest and a 75% net revenue interest in the leases. DRILLING INITIATIVES. As of the date of this Annual Report, in conjunction with our joint venture partner, Petrohawk Energy Corporation ("Petrohawk"), our technical team (guided by management), will determine our drilling initiatives. These initiatives are based on project priority, leasehold requirements and availability of resources, access, costs and a number of factors that go into strategic planning. With regards to the East Holly Field, management intends to drill its initial well to a depth similar to that of other area participants in the Cotton Valley and Hosston formations and the Haynesville Shale. The technical team in conjunction with our joint venture partner expects that other wells drilled in this region will be based on the detailed data gained through the initial well drilling process. PETROHAWK AGREEMENT. Effective on July 14, 2008, our Board of Directors entered into a binding venture agreement (the "Letter Agreement") with Petrohawk relating to the joint development of acreage of the Company's leases in DeSoto Parish, Louisiana. In accordance with the terms and provisions of the Letter Agreement: (i) Petrohawk agreed to pay 100% of the costs of development associated with the first well drilled below the Cotton Valley Formation, including drilling, completing and fracture stimulating, as well as costs up to and including pipeline connection; (ii) Petrohawk agreed to pay 80% and we agreed to pay 20% of all costs of the second well drilled below the base of the Cotton Valley Formation; and (iii) Petrohawk agreed to pay 60% and we agreed to pay 40% of all costs of the third well drilled below the base of the Cotton Valley Formation. In accordance with the further terms and provisions of the Letter Agreement, we agreed to transfer 60% of our leases in the DeSoto Parish to Petrohawk at closing, but only as such leases related to all depths below the base of the Cotton Valley Formation and specifically the Haynesville Shale. Petrohawk further agreed to gather and market our production from above the base of the Cotton Valley Formation pursuant to a mutually acceptable agreement. The Letter Agreement was subject to due diligence. 8
Effective August 4, 2008, we entered into a definitive binding agreement with Petrohawk consummating the transaction described above (the "Peotrhawk Agreement"), together with associated assignment, conveyance and bill of sale (the "Assignment"). In accordance with the terms and provisions of the Assignment, we have effectively transferred and conveyed to Petrohawk sixty percent (60%) of our 100% right, title and interest in and to the leases in the DeSoto Parish. Petrohawk has been designated as the operator on all development relating to the leases. GRIFFITHS 11-#1 WELL. On October 20, 2008, the Griffith Well No. 10H was spudded. The Griffiths 11-#1 well commenced production at the end of January 2009. The approximate reading for total gas produced from the Griffiths 11-#1 well and shipped to market through March 10, 2009 was reported at 568,856 MCF or .568 BCF. We believe that the recoverable reserves for the Griffith 11-#1 well may ultimately be from 7.5 BCF to 15.81 BCF. The 15.81 BCF rate was determined by a reserve report prepared by T.W. McQuire & Associates, Inc. The ultimate recovery was determined by suing a type curve that uses 80% decline for the first year followed by a 30% decline for the second year, 15% decline for the third year, and a 10% decline over the remaining expected life of the well. STEPHENSON DOUGLAS LLC 16-#1. The second well under the Petrohawk Agreement, the Stevenson Douglas LLC 16-#1 well, began drilling in April 2009. As of the date of this Annual Report, the Stephenson Douglas LLC 16-#1 well has spud and we cemented surface casing at about 1800 feet. As of the date of this Annual Report, the Stephenson Douglas LLC 16-#1 has been successfully drilled to a depth of 10,700 feet and 7 5/8 inch intermediate casing has been run on the well to this depth. The rig has now been released. Management believes that the Stephenson Douglas LLC 16-#1 well shows similar potentially productive sands in the Hosston and Cotton Valley formations to those discovered in the our Griffiths 11-#1Well. We are awaiting the scheduled arrival of a larger rig capable of whip stocking the well and drilling the lateral portion of the wellbore. MISSISSIPPI PROSPECT/WESTROCK LAND CORP. Effective on September 4, 2008, our Board of Directors authorized the execution of an option agreement (the "Option Agreement") with Westrock Land Corp. ("Westrock") to acquire 5,000 net acres in mineral oil and gas leases located in the State of Mississippi (the "Leases"). In accordance with the terms and provisions of the Option Agreement: (i) we will acquire a 100% working interest and a 75% net revenue interest in the Leases; (ii) we have agreed to pay certain acquisition costs per net mineral acre and also paid a $500,000 deposit to secure the Option Agreement; (iii) the balance of the acquisition costs will be due and payable upon completion of the due diligence, which Option Agreement is subject to the completion of standard due diligence review by us to be completed no later than October 15, 2008; and (iv) upon closing scheduled no later than October 15, 2008, Westrock shall assign to us all of its right, title and interest in and to the Leases free and clear of all liens and encumbrances. On October 15, 2008, November 30, 2008 and subsequently on April 16, 2009, the Option Agreement was extended pursuant to which the option period is currently extended until June 1, 2009. Additional deposits of $250,000, $100,000, $250,000 and $100,000 were paid on October 17, 2008, December 1, 2008, December 29, 2008 and April 27, 2009, respectively, in connection with these extensions for a total deposit of $1,200,000. 9
DRILLING ACTIVITY As of the date of this Annual Report, the following table sets forth the results of our gas drilling activity: GROSS WELLS NET WELLS Total Producing Dry Total Producing Dry 2 1 - .80 .40 - PRODUCTION INFORMATION During fiscal year ended February 29, 2008 and previous, we had no oil and gas production. NET PRODUCTION, AVERAGE SALES PRICE AND AVERAGE PRODUCTION COSTS The table below sets forth the net quantities of gas production (net of all royalties, overriding royalties and production due to others) attributable to us for fiscal year ended February 28, 2009, and the average sales prices, average production costs and direct lifting costs per unit of production. FOR FISCAL YEAR ENDED FEBRUARY 28, 2009 Net production (Mcf) 131,442 Average Sales price (per Mcf)* $ 3.93 Average Production Cost (per Mcf)** $ 1.14 * If applicable, would include deductions for transportation, marketing costs, compressor surcharge and BTU factor. **If applicable, would includes direct lifting costs, which are comprised of labor, repairs and maintenance, materials and supplies, workover costs, insurance and property, gathering, compression, marketing and severance taxes GROSS AND NET PRODUCTIVE GAS WELLS, DEVELOPED ACREAGE PRODUCTIVE WELLS AND DEVELOPED ACRES As of the date of this Annual Report, the tables below set forth our leasehold interest in productive and shut-in gas wells, and in developed acres: PROSPECT GROSS (1) NET (2) East Holly - Haynesville 1 .40 Total 1 .40 10
(1) A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (2) A net well is deemed to exist when the sum of fractional ownership working interest in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof. DEVELOPED ACREAGE TABLE(1) PROSPECT GROSS (2) NET (3) East Holly -Haynesville 640 256 Total 640 256 (1) Consists of acres spaced or assignable to productive wells. (2) A gross acre is an acre in which a working interest is owned. The number of gross acres is the total number of acres in which a working interest is owned. (3) A net acre is deemed to exist when the sum of fractional ownership working interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof. RESERVES We completed our initial reservoir engineering calculations during fiscal year ended February 28, 2010. The value of our reserves is calculated by determining the present value of estimated future revenues to be generated from the production of our proved reserves, net of estimated lease operating expenses, production taxes and future development costs. The tables below summarize our estimated proved reserves as of February 28, 2009 based upon reports prepared by Ryder Scott Company, LP ("Ryder Scott"), an independent reservoir engineering firm. Ryder Scott is one of the largest reservoir-evaluation consulting firms and evaluates oil and gas properties and independently certifies petroleum reserves quantities for various clients throughout the United States and internationally. Ryder Scott prepared its reserve report valuing our proved reserves at February 28, 2009. The report values only our proved reserves and does not value our probable reserves or our possible reserves. The table accounts for straight-line pricing of natural gas at constant prices over the expected life of our wells. Our "SEC Pricing Proved Reserves" were calculated using gas price parameters established by current SEC guidelines and Financial Accounting Standard Board guidance. 11
SEC PRICING PROVED RESERVES(1) NATURAL GAS TOTAL PRE-TAX (MILLIONS (THOUSAND BARRELS PV10% CRUDE OIL OF CUBIC OF OIL Value(3) (BARRELS) FEET) EQUIVALENT)(2) $ thousands _______________________________________________________ PDP Properties(4) -0- 1,256 209 $ 2,168 TOTAL PROVED PROPERTIES: -0- 1,256 209 $ 2,168 ======================================================= (1) The SEC Pricing Proved Reserves table above values oil and gas reserve quantities and related discounted future net cash flows as of February 28, 2009 assuming a constant realized price of $3.55 per 1,000 cubic feet (Mcf) of natural gas. (2) Barrels of oil equivalent ("BOE") are computed based on a conversion ratio of one BOE for each barrel of crude oil and one BOE for every 6,000 cubic feet (i.e., 6 Mcf) of natural gas. (3) Pre-tax PV10% may be considered a non-GAAP financial measure as defined by the SEC and is derived from the standardized measure of discounted future net cash flows, which is the most directly comparable standardized financial measure. Pre-tax PV10% is computed on the same basis as the standardized measure of discounted future net cash flows but without deducting future income taxes. We believe Pre-tax PV10% is a useful measure for investors for evaluating the relative monetary significance of our oil and natural gas properties. We further believe investors may utilize our Pre-tax PV10% as a basis for comparison of the relative size and value of our reserves to other companies because many factors that are unique to each individual company impact the amount of future income taxes to be paid. Our management uses this measure when assessing the potential return on investment related to our oil and gas properties and acquisitions. However, Pre-tax PV10% is not a substitute for the standardized measure of discounted future net cash flows. Our Pre-tax PV10% and the standardized measure of discounted future net cash flows do not purport to present the fair value of our oil and natural gas reserves. (4) "PDP" consists of our proved developed producing reserves. The table above assumes prices and costs discounted using an annual discount rate of 10% without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service and depreciation, depletion and amortization, or federal income taxes. The "Pre-tax PV10%" values of our proved reserves presented in the foregoing tables may be considered a non-GAAP financial measure as defined by the SEC. The following table reconciles the Pre-tax PV10% value of our SEC Pricing Proved Reserves to the standardized measure of discounted future net cash flows. 12
SEC PRICING PROVED RESERVES STANDARDIZED MEASURE RECONCILIATION ($ THOUSANDS) ________________________________________________________________________________ Pre-tax Present Value of estimated future net revenues (Pre-tax PV10%) $ 2,168 Future income taxes, discounted at 10% (713) _______ Standardized measure of discounted future net cash flows $ 1,455 ======= UNDEVELOPED ACREAGE As of the date of this Annual Report, the table below sets forth our leasehold interest in undeveloped acreage, the chart below reflects the Gross and Net undeveloped acreage for the zones the Company may develop in the future : PROSPECT GROSS NET* East Holly -Haynesville 2,055 822 East Holly- Cotton Valley 2,695 2,021 GAS DELIVERY COMMITMENTS We have no gas delivery commitments. HAYNESVILLE SHALE AREA Our oil and gas properties are located in the Gulf Coast Salt Basin trend, outside of the core area initially exploited for the Haynesville Shale. Management believes that over-thickened Haynesville Shale deposits can be isolated which are rich in organic carbon, possess superior rock properties and are gas-charged. A deep well drilled on the leases in 1981 confirmed the presence of highly pressured natural gas within an over-thickened Haynesville shale section. The well was drilled to a depth of 22,000 feet, reaching total depth while still within the Haynesville shale. A poor understanding of shale gas 28 years ago combined with a casing problem in the wellbore, encouraged the operator to plug and abandon the well. We have been able to secure a full suite of data from that well/project area which included: all geophysical log data, drill cuttings, seismic data, drilling reports, and related technical information. This information was critical in determining the quality of the gas within the reservoir, the propensity of the Haynesville Shale to produce gas on the leases, as well as the gas in place per section. A geophysical assessment of the property was commissioned. Seismic lines crossing the property were reprocessed and a detailed interpretation was made by a geophysicist with strong knowledge of the play. A well-defined dome-shaped structure was mapped and the leased acreage of which sits squarely on the crest is ideally positioned for gas accumulation. A series of maps were produced which image the reservoir surface as well as other potentially prospective horizons on the property. These maps also assist in better evaluating surrounding acreage. Rock data (cuttings samples) were viewed and sampled and sent to a rock evaluation lab for testing. Parameters such as mineralogy and geochemistry were measured using x-ray diffraction and rock evaluation pyrolysis. Thin section (microscope slide) work was also conducted to better evaluate rock type, mineral characteristics and porosity styles. This data was then provided to a leading petrophysical group who has experience with the Haynesville Shale to complete a petrophysical analysis (log analysis) of the entire prospective section, which included all of the penetrated Haynesville Formation. 13
The results of these extensive studies suggested that the leases of interest contain significant hydrocarbons. In that the Haynesville is so thick in this locale, vertical wells can be used to develop the property, reducing costs and many of the drilling challenges associated with horizontal wellbores. Drilling costs were estimated by an engineering company experienced in the project area, of 22,000 ft. Based on observed production rates within the Haynesville Formation of NW Louisiana and other Bossier Formation wells in East Texas, the highly over-pressured Haynesville observed within the lease of interest may produce at very high rates. Economic analyses conducted suggest that rates in excess of 5mmcf/day will generally be economic, if gas prices are stable in excess of $4mcf. As of May 13, 2009, contract natural gas prices were $4.33/mcf. PROPOSED FUTURE BUSINESS OPERATIONS Our current strategy is to complete further acquisition of additional oil and gas opportunities which fall within the criteria of providing a geological basis for development of drilling initiatives that can provide near term revenue potential and fast drilling capital repatriation from production cash flows to create expanding and proven reserves. We anticipate that our ongoing efforts, subject to adequate funding being available, will continue to be focused on successfully concluding negotiations for additional tracts of prime acreage in the oil and gas producing domains, and to implement the drilling of new wells to develop reserves and to provide revenues. We plan to build a strategic base of proven reserves and production. Our ability to continue to complete planned exploration activities and expand land acquisitions and explore drilling opportunities is dependent on adequate capital resources being available and further sources of debt and equity being obtained. The two following alternatives provide the basis for business development options: DEVELOPMENT OF LEASE The requirement to raise further funding for oil and gas exploration beyond that obtained for the next six month period continues to depend on the outcome of geological and engineering testing occurring over this interval. Based upon the completion of current property evaluations, we will attempt to raise capital to further our drilling program, build production infrastructure and pipeline, and raise additional capital for further land acquisitions. This includes the following activity: o Site preparation for entry into current wellbores including roadway upgrade and operations site, design, review, and finalize testing procedures, book zone fracture and testing consultants, and arrange equipment required. o If gas content conducive to production, complete well by inserting downhole pump and rods, set pumping unit, wellhead, and gas line. o Complete pipeline. 14
o Create well development model and investment documents to develop wells on subject leases including funding plan. o Create investor communications materials, corporate identity. o Raise funding for well development. o Drill, complete, and produce from well drilling program and selective re-entry programs. o Target further leases for exploration potential and obtain further funding to acquire new development targets. NEW LEASE ACQUISITION AND DEVELOPMENT Additional land acquisitions may be assessed and obtained subject to adequate capital resources being available and further sources of debt and equity being obtained. The following outlines anticipated activities pursuant to this business option. o Site preparation for entry into current wellbores including roadway upgrade and operations site, design, review, and finalize testing procedures, book zone fracture and testing consultants, arrange equipment required. o If gas content not deemed conducive to production, target further leases for exploration potential and obtain further funding to acquire new development targets. We will require additional funding to implement our proposed future business activities. We do not expect to purchase any significant equipment or increase significantly the number of our employees during the next twelve months. Our current business strategy is to obtain resources under contract where possible because management believes that this strategy, at its current level of development, provides the best services available in the circumstances, leads to lower overall costs, and provides the best flexibility for our business operations. MATERIAL AGREEMENTS VIARD CONSULTING SERVICES Effective October 2, 2008, our Board of Directors authorized the engagement of Viard Consulting Services, now known as VCS Group Inc. ("VCS Group") in accordance with the terms and provisions set forth in that certain letter agreement dated February 11, 2009 (the "Agreement"). We engaged VCS Group to render services and related reports to use in order to ensure compliance with Section 404 of the Sarbanes-Oxley Act of 2002. In accordance with the terms and provisions of the Agreement, VCS Group shall perform certain services including, but not limited to, the following: (i) re-assess our existing controls and business cycles and conduct a risk assessment on each cycle for fiscal year 2009 for audit attestation; (ii) conduct a full review of the management governance process; (iii) assemble a project team to conduct evaluations; (iv) define significant processes, materiality and fraud; (v) document and evaluate internal controls at the entity-wide level; (vi) assist management in development of 15
policies and procedures; (vii) identify deficiencies; (viii) develop and execute independent testing procedures and (ix) summarize findings and report to Board of Directors and management. In furtherance of the terms and provisions of the Agreement, we agreed to pay VCS Group an hourly rate of $155. As of the date of this Annual Report, we have paid VCS Group an aggregate $56,724 for fees and associated expenses. One of our directors, Angelo Viard, is the sole officer, director and shareholder of VCS Group and receives compensation indirectly through VCS Group. See "Item 13. Certain Relationships and Related Transactions and Director Independence." COMPETITION We operate in a highly competitive industry, competing with major oil and gas companies, independent producers and institutional and individual investors, which are actively seeking oil and gas properties throughout the world together with the equipment, labor and materials required to operate properties. Most of our competitors have financial resources, staff and facilities substantially greater than ours. The principal area of competition is encountered in the financial ability to acquire good acreage positions and drill wells to explore for oil and gas, then, if warranted, drill production wells and install production equipment. Competition for the acquisition of oil and gas wells is intense with many oil and gas properties and/or leases or concessions available in a competitive bidding process in which we may lack technological information or expertise available to other bidders. Therefore, we may not be successful in acquiring and developing profitable properties in the face of this competition. No assurance can be given that a sufficient number of suitable oil and gas wells will be available for acquisition and development. GOVERNMENT REGULATION The production and sale of oil and gas are subject to various federal, state and local governmental regulations, which may be changed from time to time in response to economic or political conditions and can have a significant impact upon overall operations. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties, taxation, abandonment and restoration and environmental protection. These laws and regulations are under constant review for amendment or expansion. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. Changes in these regulations could require us to expend significant resources to comply with new laws or regulations or changes to current requirements and could have a material adverse effect on our business operations. REGULATION OF OIL AND NATURAL GAS PRODUCTION Our oil and natural gas exploration, production and related operations are subject to extensive rules and regulations promulgated by federal, state and local authorities and agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases our cost of doing business and affects our profitability. Although we believe we are in substantial compliance with all applicable laws and regulations, because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws. 16
Many states require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration and production of oil and natural gas. Such states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from wells, and the regulation of spacing, plugging and abandonment of such wells. FEDERAL REGULATION OF NATURAL GAS The Federal Energy Regulatory Commission ("FERC") regulates interstate natural gas transportation rates and service conditions, which affect the marketing of natural gas produced by us, as well as the revenues received by us for sales of such production. Since the mid-1980's, FERC has issued a series of orders that have significantly altered the marketing and transportation of natural gas. These orders mandate a fundamental restructuring of interstate pipeline sales and transportation service, including the unbundling by interstate pipelines of the sale, transportation, storage and other components of the city-gate sales services such pipelines previously performed. One of FERC's purposes in issuing the orders was to increase competition within all phases of the natural gas industry. Certain aspects of these orders may be modified as a result of various appeals and related proceedings and it is difficult to predict the ultimate impact of the orders on us and others. Generally, the orders eliminate or substantially reduce the interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only storage and transportation service, and have substantially increased competition and volatility in natural gas markets. The price, which we may receive for the sale of oil and natural gas liquids, would be affected by the cost of transporting products to markets. FERC has implemented regulations establishing an indexing system for transportation rates for oil pipelines, which, generally, would index such rates to inflation, subject to certain conditions and limitations. We are not able to predict with certainty the effect, if any, of these regulations on any future operations. However, the regulations may increase transportation costs or reduce wellhead prices for oil and natural gas liquids. ENVIRONMENTAL MATTERS Our operations and properties will be subject to extensive and changing federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation and discharge of materials into the environment, and relating to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may (i) require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities; (ii) limit or prohibit construction, drilling and other activities on certain lands lying within wilderness and other protected areas; and (iii) impose substantial liabilities for pollution resulting from our operations. The permits required for several of our operations are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce their regulations, and violations are subject to fines or injunctions, or both. In the 17
opinion of management, we are in substantial compliance with current applicable environmental laws and regulations, and we have no material commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing environmental laws and regulations or in interpretations thereof could have a significant impact on our business operations, as well as the oil and natural gas industry in general. The Comprehensive Environmental, Response, Compensation, and Liability Act ("CERCL ") and comparable state statutes impose strict, joint and several liabilities on owners and operators of sites and on persons who disposed of or arranged for the disposal of "hazardous substances" found at such sites. It is not uncommon for the neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes govern the disposal of "solid waste" and "hazardous waste" and authorize the imposition of substantial fines and penalties for noncompliance. Although CERCLA currently excludes petroleum from its definition of "hazardous substance," state laws affecting our operations impose clean-up liability relating to petroleum and petroleum related products. In addition, although RCRA classifies certain oil field wastes as "non-hazardous," such exploration and production wastes could be reclassified as a hazardous wastes, thereby making such wastes subject to more stringent handling and disposal requirements. We intend to acquire leasehold interests in properties that for many years have produced oil and natural gas. Although the previous owners of these interests may have used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties. In addition, some of our properties may be operated in the future by third parties over which we have no control. Notwithstanding our lack of control over properties operated by others, the failure of the operator to comply with applicable environmental regulations may, in certain circumstances, adversely impact our business operations. The National Environmental Policy Act ("NEPA") is applicable to many of our planned activities and operations. NEPA is a broad procedural statute intended to ensure that federal agencies consider the environmental impact of their actions by requiring such agencies to prepare environmental impact statements ("EIS") in connection with all federal activities that significantly affect the environment. Although NEPA is a procedural statute only applicable to the federal government, a portion of our properties may be acreage located on federal land. The Bureau of Land Management's issuance of drilling permits and the Secretary of the Interior's approval of plans of operation and lease agreements all constitute federal action within the scope of NEPA. Consequently, unless the responsible agency determines that our drilling activities will not materially impact the environment, the responsible agency will be required to prepare an EIS in conjunction with the issuance of any permit or approval. The Endangered Species Act ("ESA") seeks to ensure that activities do not jeopardize endangered or threatened animals, fish and plant species, nor destroy or modify the critical habitat of such species. Under ESA, exploration and production operation, as well as actions by federal agencies, may not significantly impair or jeopardize the species or their habitat. ESA provides for criminal penalties for willful violations of the Act. Other statutes that provide protection to animal and plant species and that may apply to our operations include, but are not necessarily limited to, the Fish and Wildlife 18
Coordination Act, the Fishery Conservation and Management Act, the Migratory Bird Treaty Act and the National Historic Preservation Act. Although we believe that our operations are in substantial compliance with such statutes, any change in these statutes or any reclassification of a species as endangered could subject us to significant expense to modify our operations or could force to discontinue certain operations altogether. Management believes that we are in substantial compliance with current applicable environmental laws and regulations. RESEARCH AND DEVELOPMENT ACTIVITIES No research and development expenditures have been incurred, either on our account or sponsored by customers, to the date of our inception. EMPLOYEES We do not employ any persons on a full-time or on a part-time basis. Michael J. Newport is our President and Chief Executive Officer and William D. Thomas is our Chief Financial Officer and Treasurer. These individuals are primarily responsible for all of our day-to-day operations. Our executive officers are retained and compensated in accordance with the terms and provisions of certain verbal consultant agreements. Other services are provided by outsourcing and consultant and special purpose contracts. ITEM 1A. RISK FACTORS An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that are facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks. RISKS RELATED TO OUR BUSINESS WE WILL NEED TO RAISE ADDITIONAL FINANCING TO COMPLETE FURTHER EXPLORATION AND PRODUCTION ACTIVITIES. We will require significant additional financing in order to continue our exploration and development activities and our production activities and our assessment of the commercial viability of certain of our oil and gas properties. Furthermore, if the cost of our planned exploration, development and production programs are greater than anticipated, we may have to seek additional funds through public or private share offerings or arrangements with corporate partners. There can be no assurance that we will be successful in our efforts to raise these required funds, or on terms satisfactory to us. The continued exploration and development and production of our oil and gas properties and the development of our business will depend upon our ability to establish the commercial viability of our oil and gas properties and to ultimately develop 19
cash flow from operations and reach profitable operations. We currently are in the exploration and production stage. Although we have revenues from operations, we are experiencing significant negative cash flow. Accordingly, the only other sources of funds presently available to us are through the sale of equity. We presently believe that debt financing will not be an alternative to us as certain of our properties are in the exploration stage. Alternatively, we may finance our business by offering an interest in our oil and gas properties to be earned by another party or parties carrying out further exploration and development thereof or to obtain project or operating financing from financial institutions, neither of which is presently intended. If we are unable to obtain this additional financing, we will not be able to continue our exploration activities and our assessment of the commercial viability of our oil and gas properties. Further, if we are able to establish that development of our oil and gas properties is commercially viable, our inability to raise additional financing at this stage would result in our inability to place our oil and gas properties into production and recover our investment. Certain of our properties contain proven reserves in accordance with the definitions adopted by the SEC. However, there is no assurance that any exploration and development program that we carry out will establish further proven reserves. Certain of our other oil and gas properties are in the exploration stage as opposed to the development stage and have no known body of reserves. The known reserves at these projects have not yet been determined to be economic, and may never be determined to be economic. We plan to conduct further exploration activities on our oil and gas property, which future exploration may include the completion of feasibility studies necessary to evaluate whether additional commercial proven reserves exist on our mineral property. There is a substantial risk that these exploration activities will not result in discoveries of commercially recoverable reserves of oil or gas. Any determination that our property contains further commercially recoverable quantities of oil or gas may not be reached until such time that final comprehensive feasibility studies have been concluded establishing that a potential reserve is likely to be economic. There is a substantial risk that any preliminary or final feasibility studies carried out by us will not result in a positive determination that our oil and gas property can be commercially developed. RESERVE ESTIMATES DEPEND ON MANY ASSUMPTIONS THAT MAY TURN OUT TO BE INACCURATE. ANY MATERIAL INACCURACIES IN THESE RESERVE ESTIMATES OR UNDERLYING ASSUMPTIONS WILL MATERIALLY AFFECT THE QUANTITIES AND PRESENT VALUE OF OUR RESERVES. We have received an "Estimated Future Reserves and Income Attributable to Certain Leasehold Interests" report from Ryder Scott Company, L.P. The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of our reported reserves. In order to prepare our estimates, we must project production rates and the timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires that economic assumptions be made about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of oil and natural gas reserves are inherently imprecise 20
Actual future production, oil and natural gas prices received, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of our reported reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control. OUR EXPLORATION AND DEVELOPMENT ACTIVITIES ON OUR OIL AND GAS PROPERTIES MAY NOT BE COMMERCIALLY SUCCESSFUL, WHICH COULD LEAD US TO ABANDON OUR PLANS TO DEVELOP THE PROPERTY AND OUR INVESTMENTS IN EXPLORATION. Our long-term success depends on our ability to establish commercially recoverable quantities of oil and natural gas on our properties that can then be developed into commercially viable operations. Oil and gas exploration is highly speculative in nature, involves many risks and is frequently non-productive. These risks include unusual or unexpected geologic formations, and the inability to obtain suitable or adequate machinery, equipment or labor. The success of oil and gas exploration is determined in part by the following factors: o identification of potential oil and natural gas reserves based on superficial analysis; o availability of government-granted exploration permits; o the quality of management and geological and technical expertise; and o the capital available for exploration. Substantial expenditures are required to establish proven and probable reserves through drilling and analysis, to develop processes to extract oil and gas, and to develop the drilling and processing facilities and infrastructure at any chosen site. Whether an oil and gas reserve will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the reserve; oil and natural gas prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of oil and gas and environmental protection. We may invest significant capital and resources in exploration activities and abandon such investments if we are unable to identify commercially exploitable reserves. The decision to abandon a project may reduce the trading price of our common stock and impair our ability to raise future financing. We cannot provide any assurance to investors that we will discover or acquire any oil or gas reserves in sufficient quantities on any of our properties to justify commercial operations. Further, we will not be able to recover the funds that we spend on exploration if we are not able to establish commercially recoverable reserves of oil or natural gas on our property. 21
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING HISTORY. In considering whether to invest in our common stock, you should consider that there is only limited historical financial and operating information available on which to base your evaluation of our performance. Our inception was May 12, 2006 and, as a result, we have a limited operating history. WE HAVE A HISTORY OF OPERATING LOSSES AND THERE CAN BE NO ASSURANCE WE WILL BE PROFITABLE IN THE FUTURE. We have a history of operating losses, expect to continue to incur losses, and may never be profitable, and we must be considered to be in the exploration stage. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred losses totaling ($13,731,959) from May 12, 2006 (inception) to February 28, 2009. Further, we do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that: (i) the costs to acquire additional leases are more than we currently anticipate; (ii) drilling and completion costs for additional wells increase beyond our expectations; or (iii) we encounter greater costs associated with general and administrative expenses or offering costs. Our development of and participation in what could evolve into an increasing number of oil and gas prospects may require substantial capital expenditures. The uncertainty and factors described throughout this section may impede our ability to economically find, develop, produce, and acquire natural gas and oil reserves. As a result, we may not be able to achieve or sustain profitability or positive cash flows from operating activities in the future. WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS' REPORT ACCOMPANYING OUR FEBRUARY 28, 2009 AND FEBRUARY 29, 2008 FINANCIAL STATEMENTS. The independent auditor's report accompanying our February 28, 2009 and February 29, 2008 audited financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The consolidated financial statements have been prepared "assuming that the Company will continue as a going concern." Our ability to continue as a going concern is dependent on raising additional capital to fund our operations and ultimately on generating future profitable operations. There can be no assurance that we will be able to raise sufficient additional capital or eventually have positive cash flow from operations to address all of our cash flow needs. If we are not able to find alternative sources of cash or generate positive cash flow from operations, our business and shareholders will be materially and adversely affected. 22
WE WILL REQUIRE ADDITIONAL FUNDING IN THE FUTURE. Based upon our historical losses from operations, we will require additional funding in the future. If we cannot obtain capital through financings or otherwise, our ability to execute our development plans and achieve production levels will be greatly limited. Our current development plans require us to make capital expenditures for the exploration and development of our oil and natural gas properties. Historically, we have funded our operations through the issuance of equity. We may not be able to obtain additional financing on favorable terms, if at all. Our future cash flows and the availability of financing will be subject to a number of variables, including potential production and the market prices of oil and natural gas. Further, debt financing, if utilized, could lead to a diversion of cash flow to satisfy debt-servicing obligations and create restrictions on business operations. If we are unable to raise additional funds, it would have a material adverse effect upon our operations. AS PART OF OUR GROWTH STRATEGY, WE INTEND TO ACQUIRE ADDITIONAL OIL AND GAS PROPERTIES. As part of our growth strategy, we intend to acquire additional oil and gas production properties. Current and subsequent acquisitions may pose substantial risks to our business, financial condition, and results of operations. In pursuing acquisitions, we will compete with other companies, many of which have greater financial and other resources to acquire attractive properties. Even if we are successful in acquiring additional properties, some of the properties may not produce revenues at anticipated levels or failure to conduct drilling on prospects within specified time periods may cause the forfeiture of the lease in that prospect. There can be no assurance that we will be able to successfully integrate acquired properties, which could result in substantial costs and delays or other operational, technical, or financial problems. Further, acquisitions could disrupt ongoing business operations. If any of these events occur, it would have a material adverse effect upon our operations and results from operations. WE ARE A NEW ENTRANT INTO THE OIL AND GAS EXPLORATION AND DEVELOPMENT INDUSTRY WITHOUT PROFITABLE OPERATING HISTORY. Since inception, our activities have been limited to organizational efforts, obtaining working capital and acquiring and developing a very limited number of mineral properties. Subsequently, we changed our business strategy from mineral exploration to oil and gas exploration. As a result, there is limited information regarding oil and gas property related production potential or revenue generation potential. Certain of our oil and gas properties have proven reserves. Other properties have no probable or proved reserves. As a result, our future revenues may be limited or non-existent. The business of oil and gas exploration and development is subject to many risks and if oil and natural gas is found in economic production quantities, the potential profitability of future possible oil and gas ventures depends upon factors beyond our control. The potential profitability of oil and natural gas properties if economic quantities are found is dependent upon many factors and risks beyond our control, including, but not limited to: (i) unanticipated ground conditions; (ii) geological problems; (iii) drilling and other processing problems; (iv) the occurrence of unusual weather or operating conditions and other force majeure events; (v) lower than expected reserve quantities; (vi) accidents; (vii) delays in the receipt of or failure to receive necessary government permits; (viii) delays in transportation; (ix) labor disputes; (x) government permit restrictions and regulation restrictions; (xi) unavailability of materials and equipment; and (xii) the failure of equipment or drilling to operate in accordance with specifications or expectations. 23
OUR DRILLING OPERATIONS MAY NOT BE SUCCESSFUL. There can be no assurance that our current well re-completion activities or drilling activities will be successful, and we cannot be sure that our overall drilling success rate or our production operations within a particular area will ever come to a successful fruition and, if it does, will not decline over time. We may not recover all or any portion of our capital investment in the wells or the underlying leaseholds. Unsuccessful drilling activities would have a material adverse effect upon our results of operations and financial condition. The cost of drilling, completing, and operating wells is often uncertain, and a number of factors can delay or prevent drilling operations including: (i) unexpected drilling conditions; (ii) pressure or irregularities in geological formations; (iii) equipment failures or accidents; (iv) adverse weather conditions; and (iv) shortages or delays in availability of drilling rigs and delivery of equipment. OUR PRODUCTION INITIATIVES MAY NOT PROVE SUCCESSFUL. The properties from which we intend to produce natural gas frequently contain water, which may hamper our ability to produce gas in commercial quantities. The amount of natural gas that can be commercially produced depends upon the coal quality, the original gas content of the coal seam, the thickness of the seam, the reservoir pressure, the rate at which gas is released from the coal, and the existence of any natural fractures through which the gas can flow to the well bore. However, coal beds frequently contain water that must be removed in order for the gas to detach from the coal and flow to the well bore. The average life of a coal bed well is only five to six years. Our ability to remove and dispose of sufficient quantities of water from the coal seam will determine whether or not we can produce coal bed methane in commercial quantities. There is no guarantee that the potential drilling locations we have or acquire in the future will ever produce natural gas or oil, which could have a material adverse effect upon our results of operations. PROSPECTS THAT WE DECIDE TO DRILL MAY NOT YIELD NATURAL GAS OR OIL IN COMMERCIALLY VIABLE QUANTITIES. We describe our East Holly Field and our Cotton Valley prospects in this Annual Report. Our prospects were in the stage of preliminary evaluation and assessment and development and we have decided to drill on the property. However, the use of seismic data, historical drilling logs, offsetting well information, and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling and testing whether natural gas or oil will be present or, if present, whether natural gas or oil will be present in sufficient quantities or quality to recover drilling or completion costs or to be economically viable. In sum, the cost of drilling, completing and operating any wells is often uncertain and new wells may not be productive. 24
WE MAY BE UNABLE TO IDENTIFY LIABILITIES ASSOCIATED WITH THE PROPERTY OR OBTAIN PROTECTION FROM SELLERS AGAINST THEM. One of our growth strategies is to capitalize on opportunistic acquisitions of oil and natural gas reserves. However, our review of our current acquired property is inherently incomplete because it generally is not feasible to review in depth every individual property involved in each acquisition. A detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Further, environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken. We may not be able to obtain indemnification or other protections from the sellers against such potential liabilities, which would have a material adverse effect upon our results of operations. THE POTENTIAL PROFITABILITY OF OIL AND GAS VENTURES DEPENDS UPON GLOBAL POLITICAL AND MARKET RELATED FACTORS BEYOND OUR CONTROL. 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 and other changes and events may materially affect our financial performance. The potential profitability of oil and gas properties is dependent on these and other factors beyond our control. PRODUCTION OR OIL AND GAS RESOURCES IF FOUND ARE DEPENDENT ON NUMEROUS OPERATIONAL UNCERTAINTIES SPECIFIC TO THE AREA OF THE RESOURCE THAT AFFECTS ITS PROFITABILITY. Production area specifics affect profitability. Adverse weather conditions can hinder drilling operations and ongoing production work. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. Production and treatments on other wells in the area can have either a positive or negative effect on our production and wells. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The content of hydrocarbons is subject to change over the life of producing wells. The marketability of oil and gas from any specific reserve which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include, but are not limited to, the proximity and capacity of oil and gas pipelines, availability of room in the pipelines to accommodate additional production, processing and production equipment operating costs and equipment efficiency, market fluctuations of prices and oil and gas marketing relationships, local and state taxes, mineral owner and other royalties, land tenure, lease bonus costs and lease damage costs, allowable production, and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in us not receiving an adequate return on our invested capital. IF PRODUCTION RESULTS FROM OPERATIONS, WE ARE DEPENDENT UPON TRANSPORTATION AND STORAGE SERVICES PROVIDED BY THIRD PARTIES. We will be dependent on the transportation and storage services offered by various interstate and intrastate pipeline companies for the delivery and sale of our gas supplies. Both the performance of transportation and storage services by interstate pipelines and the rates charged for such services are subject to the jurisdiction of the Federal Energy Regulatory Commission or state regulatory agencies. An inability to obtain transportation and/or storage services at competitive rates could hinder our processing and marketing operations and/or affect our sales margins. 25
OUR RESULTS OF OPERATIONS ARE DEPENDENT UPON MARKET PRICES FOR OIL AND GAS, WHICH FLUCTUATE WIDELY AND ARE BEYOND OUR CONTROL. Our revenue, profitability, and cash flow depend upon the prices and demand for oil and natural gas. The markets for these commodities are very volatile and even relatively modest drops in prices can significantly affect our financial results and impede our growth. Prices received also will affect the amount of future cash flow available for capital expenditures and may affect our ability to raise additional capital. Lower prices may also affect the amount of natural gas and oil that can be economically produced from reserves either discovered or acquired. Factors that can cause price fluctuations include: (i) the level of consumer product demand; (ii) domestic and foreign governmental regulations; (iii) the price and availability of alternative fuels; (iv) technical advances affecting energy consumption; (v) proximity and capacity of oil and gas pipelines and other transportation facilities; (vi) political conditions in natural gas and oil producing regions; (vii) the domestic and foreign supply of natural gas and oil; (viii) the ability of members of Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; (ix) the price of foreign imports; and (x) overall domestic and global economic conditions. The availability of a ready market for our oil and gas depends upon numerous factors beyond our control, including the extent of domestic production and importation of oil and gas, the relative status of the domestic and international economies, the proximity of our properties to gas gathering systems, the capacity of those systems, the marketing of other competitive fuels, fluctuations in seasonal demand and governmental regulation of production, refining, transportation and pricing of oil, natural gas and other fuels. THE OIL AND GAS INDUSTRY IN WHICH WE OPERATE INVOLVED MANY INDUSTRY RELATED OPERATING AND IMPLEMENTATION RISKS THAT CAN CAUSE SUBSTANTIAL LOSSES, INCLUDING, BUT NOT LIMITED TO, UNPRODUCTIVE WELLS, NATURAL DISASTERS, FACILITY AND EQUIPMENT PROBLEMS AND ENVIRONMENTAL HAZARDS. Our drilling activities are subject to many risks, including the risk that we will not discover commercially productive reservoirs. Drilling for oil and natural gas can be unprofitable, not only from dry holes, but from productive wells that do not produce sufficient revenues to return a profit. In addition, our drilling and producing operations may be curtailed, delayed or canceled as a result of other drilling and production, weather and natural disaster, equipment and service failure, environmental and regulatory, and site specific related factors, including but not limited to: (i) fires; (ii) explosions; (iii) blow-outs and surface cratering; (iv) uncontrollable flows of underground natural gas, oil, or formation water; (v) natural disasters; (vi) facility and equipment failures; (vii) title problems; (viii) shortages or delivery delays of equipment and services; (ix) abnormal pressure formations; and (x) environmental hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases. 26
If any of these events occur, we could incur substantial losses as a result of: (i) injury or loss of life; (ii) severe damage to and destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of our operations; or (vii) repairs necessary to resume operations. If we were to experience any of these problems, it could affect well bores, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations. We may be affected by any of these events more than larger companies, since we have limited working capital. THE OIL AND GAS INDUSTRY IS HIGHLY COMPETITIVE AND THERE IS NO ASSURANCE THAT WE WILL BE SUCCESSFUL IN ACQUIRING LEASES. The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration activities during periods of low oil and natural gas market prices. Our larger competitors may be able to absorb the burden of present and future federal, state, local and other laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our industry, we may be at a disadvantage in bidding for exploratory prospects and producing oil and natural gas properties. THE MARKETABILITY OF NATURAL RESOURCES WILL BE AFFECTED BY NUMEROUS FACTORS BEYOND OUR CONTROL, WHICH MAY RESULT IN US NOT RECEIVING AN ADEQUATE RETURN ON INVESTED CAPITAL TO BE PROFITABLE OR VIABLE. The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable. 27
OIL AND GAS OPERATIONS ARE SUBJECT TO COMPREHENSIVE REGULATION WHICH MAY CAUSE SUBSTANTIAL DELAYS OR REQUIRE CAPITAL OUTLAYS IN EXCESS OF THOSE ANTICIPATED CAUSING AN ADVERSE EFFECT ON OUR BUSINESS OPERATIONS. Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local 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 operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may 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, thus causing an adverse effect on us. 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. To date we have not been required to spend material amounts on compliance with environmental regulations. However, we may be required to do so in the future and this may affect our ability to expand or maintain our operations. In general, our exploration and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry. We believe that our operations comply, in all material respects, with all applicable environmental regulations. We need insurance to protect our self against risks associated with the leases obtained. The leases allow for entry onto the properties for the purposes of oil and gas exploration. The insurance we require relates solely to developments on the properties for the purposes of oil and gas exploration. When and if we are convinced that our current lease or those subsequently acquired are capable of production and sales, and we plan to drill more than one well, we intend to maintain a $2,000,000 per year limit policy on bodily injury and general liability with regard to risks incurred for the drilling of up to 25 wells. This will allow for our growth to contain non contract labor that would require us to carry such additional insurance for risks pertaining to oil and gas exploration conducted directly by us. Such a policy would include coverage for numerous locations for pollution, environmental damage, chemical spills and commercial general liability, fire, and personal injury. Such a policy will not be required until such time and date as we believe that we will begin a sustained drilling and operating program, and that at least one well has been drilled and is producing to justify and warrant further drilling and a sustained drilling and operating program. 28
ANY CHANGE TO GOVERNMENT REGULATION/ADMINISTRATIVE PRACTICES MAY HAVE A NEGATIVE IMPACT ON OUR ABILITY TO OPERATE AND OUR PROFITABILITY. The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on 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. WE MAY BE UNABLE TO RETAIN KEY EMPLOYEES OR CONSULTANTS OR RECRUIT ADDITIONAL QUALIFIED PERSONNEL. Our extremely limited personnel means that we would be required to spend significant sums of money to locate and train new employees in the event any of our employees resign or terminate their employment with us for any reason. Due to our limited operating history and financial resources, we are entirely dependent on the continued service of Michael J. Newport, our Chief Executive Officer, and William D. Thomas, our Chief Financial Officer. Further, we do not have key man life insurance on either of these individuals. We may not have the financial resources to hire a replacement if one or both of our officers were to die. The loss of service of either of these employees could therefore significantly and adversely affect our operations. OUR OFFICERS AND DIRECTORS MAY BE SUBJECT TO CONFLICTS OF INTEREST. Certain of our executive officers and directors serve only part time and may devote part of his or her working time to other business endeavors, including consulting relationships with other entities and associated duties and responsibilities to these other entities. Specifically, our President/Chief Executive Officer and our Treasurer/Chief Financial Officer incur approximately 90% of their working time to the affairs and business operations of the Company. The members of our Board of Directors incur approximately 40% to 50% of their working time to the affairs and business operations of the Company. Therefore, we have recognized that our executive officers and directors are subject to conflicts of interest.. Such conflicts of interest may include: (i) deciding how much time to devote to our affairs; (ii) potential exploitation of a business opportunity that should be presented to us; and (iii) having a personal financial interest (such as a significant investment or compensatory arrangement), whether direct or indirect, in a business transaction or arrangement we may enter into or in an entity doing business with us. Because of these relationships, our officers and directors will be subject to conflicts of interest. Therefore, we have adopted certain corporate governance policies and documentation, including a conflict of interest policy, to address such conflicts of interest. These corporate governance documents may be viewed in full on our website, WWW.MAINLANDRESOURCES.COM under the "Corporate Governance" tax on the Investor Relations page. See " "Item 10. Directors, Executive Officers and Corporate Governance - Additional Corporate Governance". 29
NEVADA LAW AND OUR ARTICLES OF INCORPORATION MAY PROTECT OUR DIRECTORS FROM CERTAIN TYPES OF LAWSUITS. Nevada law provides that our officers and directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as officers and directors. Our Bylaws permit us broad indemnification powers to all persons against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our officers and directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our officers and directors against claims, including claims arising out of their negligence, poor judgment, or other circumstances. RISKS RELATED TO OUR COMMON STOCK SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK INTO THE PUBLIC MARKET BY CERTAIN STOCKHOLDERS MAY RESULT IN SIGNIFICANT DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK AND COULD AFFECT YOUR ABILITY TO REALIZE THE CURRENT TRADING PRICE OF OUR COMMON STOCK. Sales of a substantial number of shares of our common stock in the public market by certain stockholders could cause a reduction in the market price of our common stock. As of the date of this Annual Report, we have 39,615,000 shares of common stock issued and outstanding. Of the total number of issued and outstanding shares of common stock, certain stockholders are able to resell up to 417,000 Pre-February 2008 Forward Stock Split and May 2008 Forward Stock Split shares of our common stock pursuant to the Registration Statement declared effective on August 24, 2007 (12,510,000 shares post-February 2008 Forward Stock Split and May 2008 Forward Stock Split). As a further result of the Registration Statement, 1,000,000 Pre-February 2008 Forward Stock Split and May 2008 Forward Stock Split shares of our common stock were issued and are available for immediate resale which could have an adverse effect on the price of our common stock (30,000,000 shares Post February 2008 Forward Stock Split and May 2008 Forward Stock Split). As of the date of this Annual Report, there are 15,780,001 outstanding shares of our common stock that are restricted securities as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). Although the Securities Act and Rule 144 place certain prohibitions on the sale of restricted securities, restricted securities may be sold into the public market under certain conditions. See "Item 5. Market for Common Equity and Related Stockholder Matters." Any significant downward pressure on the price of our common stock as the selling stockholders sell their shares of our common stock could encourage short sales by the selling stockholders or others. Any such short sales could place further downward pressure on the price of our common stock. 30
THE TRADING PRICE OF OUR COMMON STOCK ON THE OTC BULLETIN BOARD WILL FLUCTUATE SIGNIFICANTLY AND STOCKHOLDERS MAY HAVE DIFFICULTY RESELLING THEIR SHARES. As of the date of this Annual Report, our common stock trades on the Over-the-Counter Bulletin Board. There is a volatility associated with Bulletin Board securities in general and the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: (i) disappointing results from our discovery or development efforts; (ii) failure to meet our revenue or profit goals or operating budget; (iii) decline in demand for our common stock; (iv) downward revisions in securities analysts' estimates or changes in general market conditions; (v) technological innovations by competitors or in competing technologies; (vi) lack of funding generated for operations; (vii) investor perception of our industry or our prospects; and (viii) general economic trends. In addition, stock markets have experienced price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to sell their shares at a fair price and you may lose all or part of your investment. ADDITIONAL ISSUANCE OF EQUITY SECURITIES MAY RESULT IN DILUTION TO OUR EXISTING STOCKHOLDERS. Our Articles of Incorporation authorize the issuance of 200,000,000 shares of common stock. Common stock is our only authorized class of stock. The board of directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, your proportionate ownership interest and voting power will be decreased accordingly. Further, any such issuance could result in a change of control. OUR COMMON STOCK IS CLASSIFIED AS A "PENNY STOCK" UNDER SEC RULES WHICH LIMITS THE MARKET FOR OUR COMMON STOCK. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer, and sales person in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, 31
the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for stock that becomes subject to those penny stock rules. If a trading market for our common stock develops, our common stock will probably become subject to the penny stock rules, and shareholders may have difficulty in selling their shares. A MAJORITY OF OUR DIRECTORS AND OFFICERS ARE OUTSIDE THE UNITED STATES, WITH THE RESULT THAT IT MAY BE DIFFICULT FOR INVESTORS TO ENFORCE WITHIN THE UNITED STATES ANY JUDGMENTS OBTAINED AGAINST US OR ANY OF OUR DIRECTORS OR OFFICERS. A majority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons' assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States. ITEM 1B. UNRESOLVED STAFF COMMENTS No report is required. ITEM 2. DESCRIPTION OF PROPERTIES We lease our principal office space located at 20333 State Highway 249, Suite 200, Houston, Texas 77070. The office space is for corporate identification, mailing, and courier purposes only and costs us approximately $1,500 monthly. The office and services related thereto may be cancelled at any time with a thirty day notice. ITEM 3. LEGAL PROCEEDINGS Management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Annual Report, no director, officer or affiliate is (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During fiscal year ended February 28, 2009, no matters were submitted to our stockholders for approval. 32
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET FOR COMMON EQUITY Shares of our common stock commenced trading on the OTC Bulletin Board under the symbol "MNLU:OB" on approximately May 24, 2006. The market for our common stock is limited, and can be volatile. The following table sets forth the high and low bid prices relating to our common stock on a quarterly basis for the periods indicated as quoted by the NASDAQ stock market. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions. QUARTER ENDED HIGH BID LOW BID February 28, 2009 $4.10 $4.00 November 30, 2008 $4.76 $4.65 August 31, 2008 $6.30 $6.20 May 31, 2008 $6.00 $4.40 February 29, 2008 $1.75 $1.75 November 30, 2007 $0.009 $0.009 August 31, 2007 $0.009 $0.009 May 31, 2007 $0.009 $0.009 As of May 22, 2009, we had 51 shareholders of record, which does not include shareholders whose shares are held in street or nominee names. DIVIDEND POLICY No dividends have ever been declared by the Board of Directors on our common stock. Our losses do not currently indicate the ability to pay any cash dividends, and we do not indicate the intention of paying cash dividends either on our common stock in the foreseeable future. FORWARD STOCK SPLIT FEBRUARY 2008 FORWARD STOCK SPLIT On February 25, 2008, our Board of Directors, pursuant to minutes of written consent in lieu of a special meeting, authorized and approved the February 2008 Forward Stock Split. Each of our shareholders holding one share of common stock was entitled to receive an additional twenty shares of our restricted common stock. The additional shares of our common stock to be issued to the shareholders in accordance with the February 2008 Forward Stock Split were mailed on approximately March 15, 2008 without any action on the part of the shareholders. The February 2008 Forward Stock Split was effectuated based on market conditions and upon a determination by our Board of Directors that the February 2008 Forward Stock Split was in our best interests and of the shareholders. In our judgment, the February 2008 Forward Stock Split resulted in an increase in our trading float of shares of common stock available for sale resulting in facilitation of investor liquidity and trading volume potential. The intent of the February 2008 Forward Stock Split was to increase the marketability of our common stock. 33
The February 2008 Forward Stock Split was effectuated with a record date of March 11, 2008 upon filing the appropriate documentation with NASDAQ. The February 2008 Forward Stock Split increased issued and outstanding shares of common stock from 1,120,500 to approximately 22,410,000 shares of common stock. The current authorized share capital continued to be 200,000,000 shares of common stock with a par value of $0.0001 per share. MAY 2008 FORWARD STOCK SPLIT On May 12, 2008, our Board of Directors, pursuant to minutes of written consent in lieu of a special meeting, authorized and approved the May 2008 Forward Stock Split. The May 2008 Forward Stock Split was effectuated based on market conditions and upon a determination by our Board of Directors that the May 2008 Forward Stock Split was in our best interests and of the shareholders. In our judgment, the May 2008 Forward Stock Split will further result in an increase in our trading float of shares of common stock available for sale resulting in facilitation of investor liquidity and trading volume potential. The intent of the May 2008 Forward Stock Split is to further increase the marketability of our common stock. The May 2008 Forward Stock Split was effectuated with a record date of May 29, 2008 upon filing the appropriate documentation with NASDAQ. The May 2008 Forward Stock Split increased our issued and outstanding shares of common stock from 26,410,000 to 39,615,000 shares of common stock. The total number of shares of common stock issued and outstanding had previously been 22,410,000 since March 11, 2008 pursuant to a forward stock split effectuated pursuant to the February 2008 Forward Stock Split. We subsequently issued 4,000,000 shares in accordance with the terms and provisions of a private placement offering thus bringing the total number of issued and outstanding shares of common stock to 26,410,000 as of May 29, 2008. The current authorized share capital continued to be 200,000,000 shares of common stock with a par value of $0.0001 per share. SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS We have one equity compensation plan, the Mainland Resources Inc. 2008 Stock Option Plan (the "2008 Plan"). The table set forth below presents information relating to our equity compensation plans as of the date of this Annual Report: 34
NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE REMAINING AVAILABLE FOR OUTSTANDING OPTIONS, PRICE OF OUTSTANDING FUTURE ISSUANCE UNDER WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS PLAN CATEGORY (A) (B) (EXCLUDING COLUMN (A)) _______________________________________________________________________________________________________________________ Equity Compensation Plans Approved by Security Holders -0- -0- -0- Equity Compensation Plans Not Approved by Security Holders Warrants 3,000,000 $1.33 -0- 2008 Stock Option 1,200,000* 1.17 -0- Plan 1,900,000 3.00 200,000 Total 6,100,000 2.82 200,000 *We originally granted an aggregate of 2,100,000 Stock Options to certain of our officers, directors and management at an exercise price of $1.17 per share. Of these Stock Options, an aggregate 900,000 previously granted to one of our directors were cancelled. 2008 STOCK OPTION PLAN On April 7, 2008, our Board of Directors authorized and approved the adoption of the 2008 Plan effective April 7, 2008, under which an aggregate of 3,800,000 (as increased in accordance with the May 2008 Forward Stock Split) of our shares may be issued. The purpose of the 2008 Plan is to enhance our long-term stockholder value by offering opportunities to our directors, officers, employees and eligible consultants to acquire and maintain stock ownership in order to give these persons the opportunity to participate in our growth and success, and to encourage them to remain in our service. The 2008 Plan is to be administered by our Board of Directors or a committee appointed by and consisting of one or more members of the Board of Directors, which shall determine (i) the persons to be granted Stock Options under the 2008 Plan; (ii) the number of shares subject to each option, the exercise price of each Stock Option; and (iii) whether the Stock Option shall be exercisable at any time during the option period up to ten (10) years or whether the Stock Option shall be exercisable in installments or by vesting only. The 2008 Plan provides authorization to the Board of Directors to grant Stock Options to purchase a total number of shares of Common Stock of the Company, not to exceed 3,800,00 shares as at the date of adoption by the Board of Directors of the 2008 Plan (as increased in accordance with the May 2008 Forward Stock Split). At the time a Stock Option is granted under the 2008 Plan, the Board of Directors shall fix and determine the exercise price at which shares of our common stock may be acquired. In the event an optionee ceases to be employed by or to provide services to us for reasons other than cause, retirement, disability or death, any Stock Option that is vested and held by such optionee generally may be exercisable within up to ninety (90) calendar days after the effective date that his position ceases, and after such 90-day period any unexercised Stock Option shall expire. In the event an optionee ceases to be employed by or to provide services to us for reasons of retirement, disability or death, any Stock Option that is vested and held by such optionee generally may be exercisable within up to one-year after the effective date that his position ceases, and after such one-year period any unexercised Stock Option shall expire. 35
No Stock Options granted under the Stock Option Plan will be transferable by the optionee, and each Stock Option will be exercisable during the lifetime of the optionee subject to the option period up to ten (10) years or limitations described above. Any Stock Option held by an optionee at the time of his death may be exercised by his estate within one (1) year of his death or such longer period as the Board of Directors may determine. The exercise price of a Stock Option granted pursuant to the 2008 Plan shall be paid in full to us by delivery of consideration equal to the product of the Stock Option in accordance with the requirements of the Nevada Revised Statutes. Any Stock Option settlement, including payment deferrals or payments deemed made by way of settlement of pre-existing indebtedness may be subject to such conditions, restrictions and contingencies as may be determined. INCENTIVE STOCK OPTIONS The 2008 Plan further provides that, subject to the provisions of the Stock Option Plan and prior shareholder approval, the Board of Directors may grant to any key individuals who are our employees eligible to receive options, one or more incentive stock options to purchase the number of shares of common stock allotted by the Board of Directors (the "Incentive Stock Options"). The option price per share of common stock deliverable upon the exercise of an Incentive Stock Option shall be at least 100% of the fair market value of the common shares of the Company, and in the case of an Incentive Stock Option granted to an optionee who owns more than 10% of the total combined voting power of all classes of our stock, shall not be less than 100% of the fair market value of our common shares. The option term of each Incentive Stock Option shall be determined by the Board of Directors, which shall not commence sooner than from the date of grant and shall terminate no later than ten (10) years from the date of grant of the Incentive Stock Option, subject to possible early termination as described above. As of the date of this Annual Report, no Stock Options have been exercised. RECENT SALES OF UNREGISTERED SECURITIES As of the date of this Annual Report and during fiscal year ended February 28, 2009, to provide capital, we sold stock in private placement offerings, issued stock in exchange for our debts or pursuant to contractual agreements as set forth below. JULY 2008 PRIVATE PLACEMENT OFFERING Effective May 2008, we completed a private placement offering (the "2008 Private Placement") with certain non-United States residents (collectively, the "Investors"). In accordance with the terms and provisions of the 2008 Private Placement, we issued to the Investors an aggregate of 6,000,000 units at a per unit price of $0.67 (the "Unit") in our capital for aggregate proceeds of $4,000,000. Of the amount of $4,000,000 received, $50,000 was as settlement of debt and the remaining $3,950,000 was received in cash. Each Unit was comprised of one share of restricted common stock and one-half non-transferable warrant (the "Warrant"). Each Warrant is exercisable at $1.33 per share for a period of one year from the date of issuance ending on May 1, 2009 (the "Exercise Period"). On April 29, 2009, our Board of Directors pursuant to written consent resolutions approved a thirty-day extension to the Exercise Period to June 1, 2009 based on current market conditions. 36
The Units under the 2008 Private Placement were sold to non-United States Investors in reliance on Regulation S promulgated under the United States Securities Act of 1933, as amended (the "Securities Act"). The 2008 Private Placement has not been registered under the Securities Act or under any state securities laws and may not be offered or sold without registration with the United States Securities and Exchange Commission or an applicable exemption from the registration requirements. The per share price of the Units was arbitrarily determined by our Board of Directors based upon analysis of certain factors including, but not limited to, stage of development and exploration of properties, industry status, investment climate, perceived investment risks, our assets and net estimated worth. The Investors executed subscription agreements and acknowledged that the securities to be issued have not been registered under the Securities Act, that they understood the economic risk of an investment in the securities, and that they had the opportunity to ask questions of and receive answers from our management concerning any and all matters related to acquisition of the securities. CONSULTING AGREEMENT Effective on March 17, 2009, we issued 2,500 shares of our restricted common stock at a per share price of $3.55 in accordance with the terms and provisions of a consulting services agreement. The shares of common stock were issued in reliance on Regulation S promulgated under the Securities Act. The per share price of the Units was arbitrarily determined by our Board of Directors based upon analysis of certain factors including, but not limited to, stage of development and exploration of properties, industry status, investment climate, perceived investment risks, our assets and net estimated worth. 37
ITEM 6. SELECTED FINANCIAL DATA The following selected financial information is qualified by reference to, and should be read in conjunction with our financial statements and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operation" contained elsewhere herein. The selected income statement data for fiscal years ended February 28, 2009 and February 29, 2008 and the selected balance sheet data as of February 28, 2009 and February 29, 2008 are derived from our audited consolidated financial statements which are included elsewhere herein. FISCAL YEARS ENDED FOR THE PERIOD FROM FEBRUARY 28, 2009 MAY 12, 2006 (INCEPTION) AND FEBRUARY 29, 2008 TO FEBRUARY 28, 2009 ____________________________ ________________________ Oil and gas revenue $516,579 -0- $516,579 GENERAL AND ADMINISTRATIVE EXPENSES Operating costs and $149,323 -0- $149,323 taxes Depletion Allowance 12,000 -0- 12,000 Consulting fees 595,374 -0- 595,374 Management and rent 126,400 8,627 140,820 fees - related party Marketing expenses 921,107 -0- 921,107 Mineral property -0- 10,070 14,510 costs Office and general 82,798 58,657 142,047 Professional fees 243,710 67,169 311,310 Salary expense 12,002,685 -0- 12,002,685 NET OPERATING LOSS (13,616,818) (144,523) (13,772,597) OTHER INCOME Gain on settlement 33,239 -0- 33,239 of debt Interest income 7,399 -0- 7,399 NET LOSS ($13,576,180) ($144,523) ($13,731,959) Foreign currency 422 (617) -0- translation adjustment COMPREHENSIVE LOSS ($13,575,758) ($145,140) ($13,731,939) BALANCE SHEET DATA TOTAL ASSETS $2,398,332 $28,671 TOTAL LIABILITIES 70,230 127,496 STOCKHOLDERS EQUITY (DEFICIT) $2,328,102 ($98,825) 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The summarized financial data set forth in the table below is derived from and should be read in conjunction with our audited financial statements for the period from inception (May 12, 2006) to fiscal year ended February 28, 2009, including the notes to those financial statements which are included in this Annual Report. The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this Annual Report, particularly in the section entitled "Risk Factors". Our audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. We are an exploration stage company and have generated limited revenue to date. The above table sets forth selected financial information for the periods indicated. We have incurred recurring losses to date. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities. 39
RESULTS OF OPERATION FISCAL YEAR ENDED FEBRUARY 28, 2009 COMPARED TO FISCAL YEAR ENDED FEBRUARY 29, 2008. Our comprehensive loss for fiscal year ended February 28, 2009 was ($13,575,758) compared to a comprehensive loss of ($145,140) during fiscal year ended February 29, 2008 (an increase of $13,430,618). During fiscal year ended February 28, 2009, we generated $516,579 in oil and gas revenue compared to $-0- generated during fiscal year ended February 29, 2008. During fiscal year ended February 28, 2009, we incurred general and administrative expenses of $14,133,397 compared to $144,523 incurred during fiscal year ended February 29, 2008 (an increase of $13,988,874). These general and administrative expenses incurred during fiscal year ended February 28, 2009 consisted of: (i) operating costs and taxes of $149,323 (2008: $-0-); (ii) depletion allowance of $12,000 (2008: $-0-); (iii) consulting fees of $595,374 (2008: $-0-); (iv) management and rent fees-related party of $126,400 (2008: $8,627); (v) marketing expenses of $921,107 (2008: $-0-); (vi) mineral property costs of $-0- (2008: $10,070); (vii) office and general of $82,798 (2008: $58,657); (viii) professional fees of $243,710 (2008: $67,169); and (ix) salary expense of $12,002,685 (2008: $-0-). Of the $14,133,397 incurred as general and administrative expenses during fiscal year ended February 28, 2009, we incurred management fees of $126,400 payable to our officers and directors. See "Item 11. Executive Compensation". General and administrative expenses incurred during fiscal year ended February 28, 2009 compared to fiscal year ended February 29, 2008 increased primarily due to the increase in salary expense of $12,002,685 relating to the valuation of stock based compensation consisting of the grant of _____ additional stock options during the period, and the increase in consulting fees of $595,374, marketing expenses of $921,107 and professional fees of $243,710 relating to the increased scale and scope of our business operations. The valuation $12,002,685 relating to the stock options was based on an expected volatility of 260%. We arrived at the 260% volatility by a comparison of other small oil and gas reporting companies regarding valuation of stock options since we have a lack of liquidity and trading history for our shares of common stock. We thus determined that the 260% volatility was appropriate for calculation of the employee stock option compensation using the Black-Sholes method. General and administrative expenses also generally include corporate overhead, financial and administrative contracted services, marketing, and consulting costs. Our net operating loss during fiscal year ended February 28, 2009 was ($13,616,818) compared to a net operating loss of ($144,523) during fiscal year ended February 29, 2008 (an increase of $13,472,295). 40
During fiscal year ended February 28, 2009, we recorded other income in the amount of $33,239 (2008: $-0-) in gain on settlement of debt and $7,399 (2008: $-0-) in interest income. This resulted in a net loss of ($13,576,180) for fiscal year ended February 28, 2009 compared to a net loss of ($144,523) for fiscal year ended February 29, 2008. Our net loss of (13,576,180) for fiscal year ended February 28, 2009 was offset for foreign currency translation adjustment of $422 (2008: ($617). This resulted in a comprehensive loss of ($13,575,758) for fiscal year ended February 28, 2009 as compared to a comprehensive loss of ($145,140) for fiscal year ended February 29, 2008. The weighted average number of shares outstanding was 38,527,911 for fiscal year ended February 28, 2009 (as increased in accordance with the February 2008 Forward Stock Split and the May 2008 Forward Stock Split) compared to 26,106,803 for fiscal year ended February 29, 2008. LIQUIDITY AND CAPITAL RESOURCES FISCAL YEAR ENDED FEBRUARY 28, 2009 As at fiscal year ended February 28, 2009, our current assets were $1,623,321 and our current liabilities were $70,230, which resulted in a working capital surplus of $1,553,091. As at fiscal year ended February 28, 2009, current assets were comprised of: (i) $150,276 in cash; (ii) $373,045 in accounts receivable; and (iii) $1,100,000 in deposit on properties. As at fiscal year ended February 28, 2009, current liabilities were comprised of $70,230 in accounts payable and accrued liabilities. As at fiscal year ended February 28, 2009, our total assets were $2,398,332 comprised of current assets in the amount of $1,623,321 and valuation of proved oil and gas properties, net of accumulated depletion of $775,011. The increase in total assets during fiscal year ended February 28, 2009 from fiscal year ended February 29, 2008 was primarily due to the substantial increase in current assets, including the $1,100,000 deposit, and the valuation of the proved oil and gas properties of $775,011. As at fiscal year ended February 28, 2009, our total liabilities were $70,230 comprised entirely of current liabilities. The decrease in liabilities during fiscal year ended February 28, 2008 from fiscal year ended February 29, 2008 was primarily due to the decrease in accounts payable and accrued liabilities and related party advance by way of settlement of debt by issuance of shares of our common stock in the 2008 Private Placement Offering. Stockholders' equity (deficit) increased from ($98,825) for fiscal year ended February 29, 2008 to $2,328,102 for fiscal year ended February 28, 2009. CASH FLOWS FROM OPERATING ACTIVITIES We have not generated positive cash flows from operating activities. For fiscal year ended February 28, 2009, net cash flows used in operating activities was ($1,941,806) consisting primarily of a net loss of ($13,576,180). Net cash flows used in operating activities was adjusted by $12,002,685 in stock based compensation, $12,000 in depletion and ($33,239) in non-cash mineral property expenditures (recoveries). Net cash flows used in operating activities was further changed by $32,111 in accounts payable and accrued liabilities, ($373,045) in accounts receivable, and ($6,138) in accounts payable - related parties. 41
For fiscal year ended February 29, 2008, net cash flows used in operating activities was ($88,639). Net cash flows used in operating activities was adjusted by $8,627 in donated services and expenses. Net cash flows used in operating activities was further changed by $3,000 in prepaid expenses and other, $6,138 in accounts payable - related parties and $38,119 in accounts payable and accrued liabilities. CASH FLOWS FROM INVESTING ACTIVITIES For fiscal year ended February 28, 2009, net cash flows used in investing activities was ($1,877,835) consisting of investment in oil and gas property compared to net cash flows used in investing activities during fiscal year ended February 29, 2008 of ($9,176) consisting of investment in oil and gas property. CASH FLOWS FROM FINANCING ACTIVITIES We have financed our operations primarily from either advancements or the issuance of equity and debt instruments. For fiscal year ended February 28, 2009, net cash flows provided from financing activities was $3,950,000 compared to $103,691 for fiscal year ended February 29, 2008. Cash flows from financing activities for fiscal year ended February 28, 2009 consisted primarily of $3,950,000 in proceeds on sale of common stock. Cash flows from financing activities for fiscal year ended February 29, 2008 consisted of $20,452 in proceeds on sale of common stock and $83,239 in advances from related parties. We expect that working capital requirements will continue to be funded through a combination of our existing funds and further issuances of securities. Our working capital requirements are expected to increase in line with the growth of our business. PLAN OF OPERATION AND FUNDING Our results to date reflect initial production from our first well drilled in our Haynesville shale property in DeSoto Parish, Louisiana. The production from the first well, the Griffith #1, is still being evaluated, but we believe the well will produce sufficient quantities of natural gas to be profitable as planned. We will, however, as discussed below, require significant additional capital from unidentified sources. Equity and credit markets remain depressed since the credit crisis began in September 2008 and there is no guarantee that we will be able to access the markets and raise sufficient capital to participate in future drilling. In case we cannot raise sufficient funds to pay for our share of the planned drilling expenditures, we may choose to sell part or all of the property. Based on recent sales, we believe that we can sell our Haynesville shale acreage for a profit, which would be sufficient to continue to execute our business plan to drill additional wells and acquire additional prospective oil and gas leases for future drilling. 42
Moreover, existing working capital, further advances and debt instruments, and anticipated cash flow are expected to be adequate to fund our operations over the next six months. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt instruments. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) oil and gas operating properties; (ii) possible drilling initiatives on current properties and future properties; and (iii) future property acquisitions. We intend to finance these expenses with further issuances of securities, and debt issuances. Thereafter, we expect we will need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations. During fiscal year ended February 28, 2009, we engaged in the 2008 Private Placement Offering pursuant to which we raised $4,000,000 under Regulation S of the Securities Act. MATERIAL COMMITMENTS As of the date of this Annual Report, and other than our obligations under the Operating Agreement as incurred, we do not have any material commitments. PURCHASE OF SIGNIFICANT EQUIPMENT We do not intend to purchase any significant equipment during the next twelve months. OFF-BALANCE SHEET ARRANGEMENTS As of the date of this Annual Report, 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. GOING CONCERN The independent auditors' report accompanying our February 28, 2009 and February 29, 2008 financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared "assuming that we will continue as a going concern," which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business. 43
RECENT ACCOUNTING PRONOUNCEMENTS In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 163, ACCOUNTING FOR FINANCIAL GUARANTEE INSURANCE CONTRACTS - AN INTERPRETATION OF FASB STATEMENT NO. 60. SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise's risk-management activities. SFAS 163 requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. We do not expect the adoption of this standard to have a significant impact on our financial position, cash flows or results of operations In March 2008, the FASB issued SFAS No. 161, "DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. SFAS 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity's liquidity by requiring disclosure of derivative features that are credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. SFAS 161 will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, will be adopted by us beginning in the first quarter of fiscal 2010. We do not expect there to be any significant impact of adopting SFAS 161 on our financial position, cash flows and results of operations. In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS, AN AMENDMENT OF ARB NO. 51" which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. SFAS No. 160 is effective as of the beginning of an entity's first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. We do not expect there to be any significant impact of adopting SFAS 160 on its financial position, cash flows or results of operations. In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "BUSINESS COMBINATIONS". SFAS No. 141(R) will change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the entity's first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations completed by us prior to June 1, 2009 will be recorded and disclosed following existing GAAP. We do not expect there to be any significant impact of adopting SFAS 141 on our financial position, cash flows or results of operations. 44
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115 ("SFAS No. 159"). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board's long-term measurement objectives for accounting for financial instruments. This statement is effective as of the beginning of our first fiscal year that begins after November 15, 2007, although earlier adoption is permitted. We have determined that the adoption of this standard did not have a significant impact on our financial position, cash flows or results of operations. In September 2006, FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS ("SFAS No. 157"). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), expands disclosures about fair value measurements, and applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the FASB anticipates that for some entities, the application of SFAS No. 157 will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, which for us is the fiscal year beginning March 1, 2008. We have determined that the adoption of this standard did not have a significant impact on our financial position, cash flows or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM DATED MAY 12, 2009. BALANCE SHEETS AS AT FEBRUARY 28, 2009 AND FEBRUARY 29, 2008. STATEMENTS OF OPERATIONS FOR FISCAL YEARS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29, 2008 AND FOR THE PERIOD FROM INCEPTION (MAY 12, 2006) TO FEBRUARY 28, 2009. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM INCEPTION (MAY 12, 2006) TO FEBRUARY 28, 2009. STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29, 2008 AND FOR THE PERIOD FROM INCEPTION (MAY 12, 2006) TO FEBRUARY 28, 2009. 45
NOTES TO FINANCIAL STATEMENTS. MAINLAND RESOURCES INC. (An Exploration Stage Company) FINANCIAL STATEMENTS FEBRUARY 28, 2009 DE JOYA GRIFFITH & COMPANY, LLC CERTIFIED PUBLIC ACCOUNTANTS & CONSTULTANTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders Mainland Resources, Inc. Las Vegas, Nevada We have audited the accompanying balance sheets of Mainland Resources, Inc. (An Exploration Stage Company) as of February 28, 2009 and 2008, and the related statements of operations, stockholders' deficit, and cash flows for the years then ended and from inception (May 12, 2006) to February 28, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mainland Resources, Inc. as of February 28, 2009 and 2008, and the results of its operations and cash flows for the years then ended and from inception (May 12, 2006) to February 28, 2009, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Mainland Resources, Inc.'s internal control over financial reporting as of February 28, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 12, 2009 expressed an unqualified opinion thereon. DE JOYA GRIFFITH & COMPANY, LLC /s/ DE JOYA GRIFFITH & COMPANY, LLC HENDERSON, NV MAY 12, 2009 2580 Anthem Village Drive, Henderson, NV 89052 Telephone (702) 563-1600 ? Facsimile (702) 920-8049 46
DE JOYA GRIFFITH & COMPANY, LLC CERTIFIED PUBLIC ACCOUNTANTS & CONSTULTANTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (ICOFR) To The Board of Directors and Stockholders Mainland Resources, Inc. Las Vegas, Nevada We have audited Mainland Resources, Inc.'s internal control over financial reporting as of February 28, 2009, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Mainland Resources, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting which is contained in Part I, Item 9A of this Annual Report on Form 10-K under the heading "Management's Report on Internal Control Over Financial Reporting". Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Mainland Resources, Inc. maintained, in all material respects, effective internal control over financial reporting as of February 28, 2009, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets as of February 28, 2009 and 2008, and the related statements of operations, stockholders' deficit, and cash flows for the years then ended and from inception (May 12, 2006) to February 28, 2009, of Mainland Resources, Inc. and our report dated May 12, 2009 expressed an unqualified opinion thereon. DE JOYA GRIFFITH & COMPANY, LLC /s/ DE JOYA GRIFFITH & COMPANY, LLC HENDERSON, NV MAY 12, 2009 2580 Anthem Village Drive, Henderson, NV 89052 Telephone (702) 563-1600 ? Facsimile (702) 920-8049 47
MAINLAND RESOURCES INC. (An Exploration Stage Company) BALANCE SHEETS (U.S. Dollars) February 28, February 29, 2009 2008 _________________________________________________________________________________________________________________________________ ASSETS CURRENT ASSETS Cash $ 150,276 $ 19,495 Accounts Receivable 373,045 - Deposit on properties (Note 4) 1,100,000 - _________________________________________________________________________________________________________________________________ Total current assets 1,623,321 19,495 OIL AND GAS PROPERTIES, (Note 4) Proved, net of accumulated depletion $12,000 (2008 - nil) 775,011 9,176 _________________________________________________________________________________________________________________________________ TOTAL ASSETS $ 2,398,332 $ 28,671 ================================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable and accrued liabilities $ 70,230 $ 38,119 Accounts payable - related parties (Note 7) - 6,138 Related party advance (Note 7) - 83,239 _________________________________________________________________________________________________________________________________ TOTAL CURRENT LIABILITIES 70,230 127,496 STOCKHOLDERS' EQUITY (DEFICIT) (Note 5) Common stock, 200,000,000 shares authorized with $0.0001 par value Issued and outstanding - 39,615,000 common shares 3,962 3,362 (February 29, 2008 - 33,615,000) Additional paid-in-capital 16,056,099 54,014 Deficit accumulated during exploration stage (13,731,959) (155,779) _________________________________________________________________________________________________________________________________ 2,328,102 (98,403) Other comprehensive income: Foreign currency loss - (422) _________________________________________________________________________________________________________________________________ TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 2,328,102 (98,825) _________________________________________________________________________________________________________________________________ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) $ 2,398,332 $ 28,671 ================================================================================================================================= The accompanying notes are an integral part of these financial statements. 48
MAINLAND RESOURCES INC. (An Exploration Stage Company) STATEMENTS OF OPERATIONS May 12, 2006 Year Ended Year Ended (inception) to February 28, February 29, February 28, 2009 2008 2009 _________________________________________________________________________________________________________________________________ REVENUES Oil and gas revenue $ 516,579 $ - $ 516,579 _________________________________________________________________________________________________________________________________ GENERAL AND ADMINISTRATIVE EXPENSES Operating costs and taxes 149,323 - 149,323 Depletion Allowance 12,000 - 12,000 Consulting Fees 595,374 - 595,374 Management and rent fees - related party (Note 7) 126,400 8,627 140,820 Marketing expenses 921,107 - 921,107 Mineral property costs - 10,070 14,510 Office and general 82,798 58,657 142,047 Professional fees 243,710 67,169 311,310 Salary expense (Note 6) 12,002,685 - 12,002,685 _________________________________________________________________________________________________________________________________ 14,133,397 144,523 14,289,176 _________________________________________________________________________________________________________________________________ NET OPERATING LOSS (13,616,818) (144,523) (13,772,597) OTHER INCOME Gain on settlement of debt 33,239 - 33,239 Interest income 7,399 - 7,399 _________________________________________________________________________________________________________________________________ NET LOSS (13,576,180) (144,523) (13,731,959) _________________________________________________________________________________________________________________________________ Comprehensive income (loss): Foreign currency translation adjustment 422 (617) - _________________________________________________________________________________________________________________________________ COMPREHENSIVE LOSS $ (13,575,758) $ (145,140) $ (13,731,959) ================================================================================================================================= BASIC LOSS PER COMMON SHARE $ (0.35) $ (0.01) ============================================================================================================= WEIGHTED AVERAGE NUMBER OF 38,527,911 26,106,803 COMMON SHARES OUTSTANDING - BASIC ============================================================================================================= The accompanying notes are an integral part of these financial statements. 49
MAINLAND RESOURCES INC. (An Exploration Stage Company) STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE PERIOD FROM MAY 12, 2006 (INCEPTION) TO FEBRUARY 28, 2009 Deficit accumulated Other Common Stock Additional during Accumulated Number of Amount Paid in exploration Comprehensive Stockholders' Shares Capital stage Income Equity _________________________________________________________________________________________________________________________________ Balance, May 12, 2006 - $ - $ - $ - $ - $ - Common stock issued for cash at $0.00003 per share - June 15, 2006 6,000,000 600 (428) - - 172 Common stock issued for mineral properties at $0.0014 per share - July 15, 2006 3,105,000 311 4,129 - - 4,440 Common stock issued for cash at $0.0014 per sh8are - October 6, 2006 12,510,000 1,251 16,641 - - 17,892 Donated Services and rent - - 5,793 - - 5,793 Foreign currency translation adjustment - - - - 195 195 Net loss for the year - - - (11,256) - (11,256) _________________________________________________________________________________________________________________________________ Balance, February 28, 2007 21,615,000 2,162 26,135 (11,256) 195 17,236 Common stock issued for cash at $0.0017 per share - October 15, 2007 12,000,000 1,200 19,252 - - 20,452 Donated services and rent - - 8,627 - - 8,627 Foreign currency translation adjustment - - - - (617) (617) Net loss for the year - - - (144,523) - (144,523) _________________________________________________________________________________________________________________________________ Balance, February 29, 2008 33,615,000 3,362 54,014 (155,779) (422) (98,825) Common stock issued for cash at $0.67 per share - - May 1, 2008 to July 22, 2008 6,000,000 600 3,999,400 - 4,000,000 Stock based compensation - - 12,002,685 - - 12,002,685 Foreign currency translation adjustment - - - - 422 422 Net loss for the year - - - (13,576,180) - (13,576,180) _________________________________________________________________________________________________________________________________ Balance, February 28, 2009 39,615,000 $ 3,962 $16,056,099 $(13,731,959) $ - $2,328,102 ================================================================================================================================= The accompanying notes are an integral part of these financial statements. 50
MAINLAND RESOURCES INC. (An Exploration Stage Company) STATEMENTS OF CASH FLOWS May 12, 2006 (inception) to Year ended February 28, February 28, 2009 2008 2009 ___________________________________________________________________________________________________________________________________ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (13,576,180) $ (144,523) $ (13,731,959) Adjustments to reconcile net loss to net cash used in operating activities: - Non-cash mineral property expenditures (recoveries) (33,239) - (28,799) - Depletion 12,000 - 12,000 - Stock-based compensation (Note 6) 12,002,685 - 12,002,685 - Donated services and expenses - 8,627 14,420 CHANGES IN OPERATING ASSETS AND LIABILITIES - Accounts receivable (373,045) - (373,045) - Prepaid expenses and other - 3,000 - - Accounts payable - related parties (6,138) 6,138 - - Accounts payable and accrued liabilities 32,111 38,119 70,230 ___________________________________________________________________________________________________________________________________ NET CASH USED IN OPERATING ACTIVITIES (1,941,806) (88,639) (2,034,468) ___________________________________________________________________________________________________________________________________ CASH FLOWS FROM INVESTING ACTIVITIES Investment in oil and gas property (777,835) (9,176) (787,011) Deposit on properties (1,100,000) - (1,100,000) ___________________________________________________________________________________________________________________________________ NET CASH FLOWS USED IN INVESTING ACTIVITIES (1,877,835) (9,176) (1,887,011) ___________________________________________________________________________________________________________________________________ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds on sale of common stock 3,950,000 20,452 3,988,516 Advances from related party - 83,239 83,239 ___________________________________________________________________________________________________________________________________ NET CASH PROVIDED BY FINANCING ACTIVITIES 3,950,000 103,691 4,071,755 ___________________________________________________________________________________________________________________________________ EFFECT OF EXCHANGE RATE CHANGES ON CASH 422 (617) - ___________________________________________________________________________________________________________________________________ INCREASE IN CASH 130,781 5,259 150,276 CASH, BEGINNING OF PERIOD 19,495 14,236 - ___________________________________________________________________________________________________________________________________ CASH, END OF PERIOD $ 150,276 $ 19,495 $ 150,276 =================================================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING ACTIVITIES: Cash paid for interest $ - $ - $ - Cash paid for income taxes $ - $ - $ - Common stock issued for acquisition of mineral property $ - $ - $ 4,440 Common stock issued for satisfaction of liability $ 50,000 $ - $ 50,000 Donated services and rent $ - $ 8,627 $ 14,420 The accompanying notes are an integral part of these financial statements. 51
MAINLAND RESOURCES INC. (An Exploration Stage Company) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2009 NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION Mainland Resources Inc. (the "Company") is an exploration stage company that was incorporated May 12, 2006 in the State of Nevada for the purpose of mineral exploration. During 2008, the Company entered into an option agreement on certain oil and gas leaseholds in the state of Louisiana (refer to Note 4). The Company now intends to locate, explore, acquire and develop oil and gas properties in the United States. The Company began drilling its first well in October 2008. The first well was completed at the end of January 2009 and is in production. The Company began drilling its second well in April 2009. It is expected to be completed by the end of June 2009. GOING CONCERN The Company commenced operations on May 12, 2006 and has not realized any revenues since inception. As of February 28, 2009, the Company has an accumulated deficit of $13,731,959. The ability of the Company to continue as a going concern is dependent on raising capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the Company's ability to continue as a going concern. These financials do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty. To date, the Company has funded its initial operations by way of private placements of common stock and advances from related parties. During 2009, the Company completed a private placement of $4,000,000 at $0.67 per unit with each unit consisting of one common share and one half warrant at $1.33 per share exercisable for a period of one year from issuance (refer to Note 5). NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The Company was incorporated on May 12, 2006 in the State of Nevada. The Company's fiscal year end is February 28. 52
BASIS OF PRESENTATION These financial statements are presented in United States dollars and have been prepared in accordance with United States generally accepted accounting principles. OIL AND GAS PROPERTIES The Company follows the full cost method of accounting for its oil and gas operations whereby all costs related to the acquisition of methane, petroleum, and natural gas interests are capitalized. Under this method, all productive and non-productive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such costs include land and lease acquisition costs, annual carrying charges of non-producing properties, geological and geophysical costs, costs of drilling and equipping productive and non-productive wells, and direct exploration salaries and related benefits. Proceeds from the disposal of oil and gas properties are recorded as a reduction of the related capitalized costs without recognition of a gain or loss unless the disposal would result in a change of 20 percent or more in the depletion rate. The Company currently operates solely in the U.S. Depreciation and depletion of proved oil and gas properties is computed on the units-of-production method based upon estimates of proved reserves, as determined by independent consultants, with oil and gas being converted to a common unit of measure based on their relative energy content. The costs of acquisition and exploration of unproved oil and gas properties, including any related capitalized interest expense, are not subject to depletion, but are assessed for impairment either individually or on an aggregated basis. The costs of certain unevaluated leasehold acreage are also not subject to depletion. Costs not subject to depletion are periodically assessed for possible impairment or reductions in recoverable value. If a reduction in recoverable value has occurred, costs subject to depletion are increased or a charge is made against earnings for those operations where a reserve base is not yet established. Estimated future removal and site restoration costs are provided over the life of proven reserves on a units-of-production basis. Costs, which include production equipment removal and environmental remediation, are estimated each period by management based on current regulations, actual expenses incurred, and technology and industry standards. The charge is included in the provision for depletion and depreciation and the actual restoration expenditures are charged to the accumulated provision amounts as incurred. The Company applies a ceiling test to capitalized costs which limits such costs to the aggregate of the estimated present value, using a ten percent discount rate of the estimated future net revenues from production of proven reserves at year end at market prices less future production, administrative, financing, site restoration, and income tax costs plus the lower of cost or estimated market value of unproved properties. If capitalized costs are determined to exceed estimated future net revenues, a write-down of carrying value is charged to depletion in the period. ASSET RETIREMENT OBLIGATIONS The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the related oil and gas properties. As of February 28, 2009, there has been no asset retirement obligations rendered. 53
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant areas requiring management's estimates and assumptions are the determination of the fair value of transactions involving common stock, stock based compensation, financial instruments as well as deferred tax balances and asset impairment tests. Further, depreciation, depletion and amortization of oil and gas properties and the impairment of oil and gas properties are determined using estimates of oil and gas reserves. There are numerous uncertainties in estimating the quantity of reserves and in projecting the future rates of production and timing of development expenditures, including future costs to dismantle, dispose, plug, and restore the Company's properties. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. Proved reserves of oil and natural gas are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing conditions. FINANCIAL INSTRUMENTS The fair value of the Company's financial assets and financial liabilities approximate their carrying values due to the immediate or short-term maturity of these financial instruments. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalent accounts in financial institutions. As of February 28, 2009, the Company's cash and cash equivalents do not exceed federally insured limits. EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive earnings (loss) per share reflect the potential dilution of securities that could share in the earnings of the Company. Dilutive earnings (loss) per share is equal to that of basic earnings (loss) per share as the effects of stock options and warrants have been excluded as they are anti-dilutive. 54
REVENUE RECOGNITION Oil and natural gas revenues are recorded using the sales method, whereby the Company recognizes oil and natural gas revenue based on the amount of oil and gas sold to purchasers, when title passes, the amount is determinable and collection is reasonably assured. Actual sales of gas are based on sales, net of the associated volume charges for processing fees and for costs associated with delivery, transportation, marketing, and royalties in accordance with industry standards. Operating costs and taxes are recognized in the same period in which revenue is earned. INCOME TAXES The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. As at February 28, 2009, the Company had net operating loss carryforwards, however, due to the uncertainty of realization, the Company has provided a full valuation allowance for the deferred tax assets resulting from these loss carryforwards. STOCK-BASED COMPENSATION The Company has adopted SFAS No. 123(R), "SHARE-BASED PAYMENT," which requires the compensation cost related to share-based payments, such as stock options and employee stock purchase plans, be recognized in the financial statements based on the grant-date fair value of the award. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123(R) and the conclusions reached by the Emerging Issues Task Force ("EITF") in Issue No. 96-18. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18. RECENT ACCOUNTING PRONOUNCEMENTS In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 163, ACCOUNTING FOR FINANCIAL GUARANTEE INSURANCE CONTRACTS - AN INTERPRETATION OF FASB STATEMENT NO. 60. SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for 55
some disclosures about the insurance enterprise's risk-management activities. SFAS 163 requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. The Company does not expect the adoption of this standard to have a significant impact on its financial position, cash flows or results of operations. In March 2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 161"). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. SFAS 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity's liquidity by requiring disclosure of derivative features that are credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. SFAS 161 will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, and will be adopted by the Company beginning in the first quarter of fiscal 2010. The Company does not expect the adoption of this standard to have a significant impact on its financial position, cash flows or results of operations. In December 2007, the FASB issued SFAS No. 160, NONCONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS, AN AMENDMENT OF ARB NO. 51 ("SFAS No. 160"), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. SFAS No. 160 is effective as of the beginning of an entity's first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the adoption of this standard to have a significant impact on its financial position, cash flows or results of operations. In December 2007, the FASB issued SFAS No. 141 (Revised 2007), BUSINESS COMBINATIONS ("SFAS No. 141R"). SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the entity's first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations completed by the Company prior to March 1, 2009 will be recorded and disclosed following existing GAAP. The Company does not expect the adoption of this standard to have a significant impact on its financial position, cash flows or results of operations. In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115 ("SFAS No. 159"). This statement permits entities to choose to measure many 56
financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board's long-term measurement objectives for accounting for financial instruments. This statement is effective as of the beginning of the Company's first fiscal year that begins after November 15, 2007, although earlier adoption is permitted. The Company has determined that the adoption of this standard did not have a significant impact on its financial position, cash flows or results of operations. In September 2006, FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS ("SFAS No. 157"). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), expands disclosures about fair value measurements, and applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the FASB anticipates that for some entities, the application of SFAS No. 157 will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, which for the Company is the fiscal year beginning March 1, 2008. The Company has determined that the adoption of this standard did not have a significant impact on its financial position, cash flows or results of operations. NOTE 3 - MINERAL PROPERTIES SOUTHWEST AND SEDONA MINING CLAIM The Company previously owned two mining claims located in the Similkameen Mining Division of British Columbia, Canada. As described in Notes 1 and 4, the Company has changed its focus to oil and gas exploration and has decided not to proceed with the development of these mineral properties. On April 28, 2008, the Company exchanged its interest in these two mining claims with a former shareholder of the Company in settlement of $33,239 owing by the Company to the former shareholder (refer to Note 7). This amount was recorded as a mineral property recovery during the period and the Company has no ongoing obligations in connection with this property. NOTE 4 - OIL AND GAS PROPERTIES EAST HOLLY PROSPECT On February 27, 2008, the Company entered into an option agreement (the "Option Agreement") with Kingsley Resources, Inc. ("Kingsley"), pursuant to which the Company acquired all the right, title and interest Kingsley has in and to certain leasehold estates in the state of Louisiana ("the Leases") which were the subject of a purchase agreement dated December 11, 2007, and modified February 1, 2008 (collectively, the "Leasehold Purchase Agreement") between Kingsley and Permian Basin Acquisition Fund ("Permian"), pursuant to which Kingsley had the right to acquire the sub-surface rights provided for in the Leases. In order to complete the acquisition of the Leases the Company was 57
required to pay $100,000 on April 2, 2008 to Kingsley and assume all of Kingsley's obligations under the Leasehold Purchase Agreement. On March 14, 2008, the Company completed the Option agreement and the Leasehold Purchase Agreement at a total cost of $687,596, which includes the $100,000 that was paid on April 2, 2008, for approximately 2,551 net acres. COTTON VALLEY/ HAYNESVILLE The Company has leased various other properties totalling approximately 144 net acres, consisting of approximately 84 net acres leased as of February 29, 2008 and added 60 net acres leased during the nine month period ended November 30, 2008 for an additional consideration of $22,753. These additional property leases, within the Cotton Valley/Haynesville trend in the state of Louisiana, are for three year terms. The Company has a 100% Working Interest and a 75% N.R.I. in the leases comprising a total of 2,695 net acres. PETROHAWK VENTURE AGREEMENT On July 14, 2008, The Company entered into a binding venture agreement with Petrohawk Energy Corporation ("Petrohawk") for the joint development of the Haynesville Shale on the Company's properties ("the Leases") in De Soto Parish, Louisiana. Effective August 4, 2008, the Company entered into a definitive binding agreement with Petrohawk consummating the transaction on July 14, 2008. Under the terms of the Agreement, Petrohawk has agreed to pay 100% of the costs of development associated with the first well drilled below the Cotton Valley Formation, including drilling, completing and fracture stimulating, as well as costs up to and including pipeline connection. Petrohawk has also agreed to pay 80% of all costs of the second well drilled on the Leases below the base of the Cotton Valley with the Company paying the remaining 20% of the costs. For the third and all subsequent wells drilled on the Leases below the base of the Cotton Valley Formation, Petrohawk will pay 60% and the Company will pay 40%. The Company will transfer 60% of its De Soto Parish leases to Petrohawk at closing, but only as the Leases relate to all depths below the base of the Cotton Valley Formation, and specifically the Haynesville Shale. Petrohawk agrees to gather and market the Company's production from above the base of the Cotton Valley Formation, pursuant to a mutually acceptable agreement. GRIFFITHS 11- #1 The first well under the Petrohawk Agreement, the Griffiths 11- #1, began drilling in October 2008. The well commenced production at the end of January 2009. STEVENSON DOUGLAS LLC. 16 - #1 The second well under the Petrohawk Agreement, the Steven Douglas LLC 16 - #1, began drilling in April 2009. The Company expects the well to be completed by the end of June 2009. 58
MISSISSIPPI PROSPECT On September 3, 2008, the Company signed an Option Agreement with Westrock Land Corp to acquire 5,000 net acres in mineral oil and gas leases located in the State of Mississippi. In accordance with the terms and provisions of the Option Agreement; (i ) the Company will acquire a 100% working interest and a 75% net revenue interest in the Leases; (ii) the Company has agreed to pay certain acquisitions costs per net mineral acres and also paid a $500,000 deposit on September 3, 2008 to secure the Option Agreement; (iii) the balance of the acquisition costs totaling $2,275,000 will be due and payable upon completion of the due diligence, to be completed by the Company no later than October 15, 2008. The Option Agreement was subsequently extended on each of October 15, 2008, November 30, 2008 and April 16, 2009 whereby the option period has been extended until June 1, 2009. Additional deposits of $250,000, $100,000, $250,000 and $100,000 were paid on October 17, 2008, December 1, 2008, December 29, 2008 and April 27, 2009 for a total deposit to date of $1,200,000 (February 28, 2009 - $1,100,000). Should we determine after completing our due diligence that the Mississippi Project is uneconomic or should we be unable to raise sufficient funds to complete the acquisition, then the deposit will be forfeited and the full amount of the deposits will be written off. The Company's Oil and Gas properties are made up as follows: February 28, February 29, 2008 2009 _______________________________________________________________________________ Oil and Gas Properties: Proved, subject to depletion $ 787,011 $ - Unproved, not subject to depletion - 9,176 _______________________________________________________________________________ 787,011 9,176 Accumulated depletion (12,000) - _______________________________________________________________________________ $ 775,011 $ 9,176 =============================================================================== 59
The following is a summary of the transactions involving the Company's unproven properties not subject to depletion: Acquisition Development Costs Costs Total _____________________________________________________________________________________________ Balance, February 28, 2007 $ - $ - $ - Incurred during the year 9,176 - 9,176 _____________________________________________________________________________________________ Balance, February 29, 2008 9,176 - 9,176 Incurred during the year 702,923 74,912 777,835 Reallocated to proven and subject to depletion (712,099) (74,912) (787,011) _____________________________________________________________________________________________ Balance, February 28, 2009 $ - $ - $ - ============================================================================================= Depletion of proved oil and gas properties during the year was computed on the units-of-production method based upon estimated proved reserves of 8.5 Bcf, reserves produced during the year of 131,442 Mcf and capitalized costs to be amortized totaling $775,011, resulting in a depletion cost of $12,000 for the year end February 28, 2009. NOTE 5 - STOCKHOLDERS' EQUITY (DEFICIT) (A) SHARE CAPITAL The Company's capitalization is 200,000,000 common shares with a par value of $0.0001 per share. On February 25, 2008, the directors of the Company approved a special resolution to undertake a forward split of the common stock of the Company on a basis of 20 new shares for 1 old share and was effective March 11, 2008. On May 12, 2008, the directors of the Company approved a special resolution to undertake a forward split of the common stock of the Company on a basis of 1.5 new shares for 1 old share and was effective March 29, 2008. All references in these financial statements to number of common shares, price per share and weighted average number of common shares outstanding prior to the 20:1 forward stock split on March 11, 2008 and the 1.5:1 forward stock split on May 29, 2008 have been adjusted to reflect these stock splits on a retroactive basis, unless otherwise noted. 60
(B) PRIVATE PLACEMENTS On June 15, 2006, the Company issued 6,000,000 unregistered shares of common stock at $0.00003 per share for proceeds of $172. On October 6, 2006, the Company issued 12,510,000 unregistered shares of common stock at a price of $0.0014 per share for proceeds of $17,892. On October 15, 2007, the Company issued 12,000,000 unregistered shares of common stock at a price of $0.0017 per share for proceeds of $20,452. Between May 1, 2008 and July 22, 2008, the Company completed a private placement of 6,000,000 unregistered units at $0.67 per unit for proceeds of $4,000,000. Of this amount, $50,000 was by way of a settlement of debt and the remaining $3,950,000 was received in cash. Each unit consists of one common share and one-half non-transferable share purchase warrant; one whole non-transferable purchase warrant is exercisable at $1.33 per share for a period of one year from the date of issuance ending on May 1, 2009. (C) OTHER ISSUANCES On July 15, 2006, the Company issued 3,105,000 shares of common stock at a price of $0.0014 per share on settlement of $4,440 for mineral property acquisition. Subsequent to the year end on March 17, 2009, the Company issued 2,500 shares of common stock at an estimated fair value of $3.55 per share as per the terms of a consulting agreement that became effective March 1, 2009. (D) SHARE PURCHASE WARRANTS Subsequent to the year end, on April 29, 2009 the Company extended expiration of the 3,000,000 warrants from May 1, 2009 to June 1, 2009. Details of the Company's share purchase warrants issued and outstanding as of February 28, 2009 are as follows: Weighted Number of warrants Exercise price average price to purchase shares Expiry Date ________________________________________________________________________________ $1.33 $1.33 3,000,000 May 1, 2009 The Company's share purchase warrants activity for the period ended February 28, 2009 is summarized as follows: Weighted average exercise Price Weighted average remaining Number of Warrants per share In contractual life (in years) _________________________________________________________________________________________________________ Balance, February 28, 2007 and February 29, 2008 - $ - - Issued 3,000,000 1.33 - Expired - - - Exercised - - - _________________________________________________________________________________________________________ Balance, February 28, 2009 3,000,000 $ 1.33 0.17 ========================================================================================================= 61
NOTE 6 - STOCK OPTION PLAN On April 7, 2008, the Board of Directors of the Company ratified, approved and adopted a Stock Option Plan for the Company allowing for the grant of up to 2,200,000 options to acquire common shares with terms of up to 10 years. On July 9, 2008, the Board of Directors of the Company ratified, approved and amended the Stock Option Plan for the Company increasing the allowable grant from 2,200,000 options to 3,800,000 options. In the event an optionee ceases to be employed by or to provide services to the Company for reasons other than cause, any Stock Option that is vested and held by such optionee maybe exercisable within up to ninety calendar days after the effective date that his position ceases. No Stock Option granted under the Stock Option Plan is transferable. Any Stock Option held by an optionee at the time of his death may be exercised by his estate within one year of his death or such longer period as the Board of Directors may determine. As approved by the Board of Directors, on April 7, 2008, the Company granted 2,100,000 fully vested stock options to certain officers, directors and management of the Company at $1.17 per share for terms of ten years. The total fair value of these options at the date of grant was estimated to be $2,457,000 and was determined using the Black-Scholes option pricing model with an expected life of 5 years, a risk free interest rate of 2.75%, a dividend yield of 0% and expected volatility of 260% and was recorded as a stock based compensation expense in 2009. As approved by the Board of Directors, between July 9, 2008 and August 19, 2008, the Company granted a total of 1,350,000 fully vested stock options to certain officers and directors of the Company at prices ranging from $4.20 per share to $6.35 per share for terms of ten years. The total fair value of these options at the date of grant was estimated to be $7,157,685 and was determined using the Black-Scholes option pricing model with the following assumptions; expected lives of 5 years, risk free interest rates ranging from 3.07% - 3.12%, dividend yields of 0% and expected volatility of 260%. This amount was recorded as a stock based compensation expense in 2009. As approved by the Board of Directors, on November 18, 2008, the Company granted a total of 250,000 fully vested stock options to a director of the Company at $5.00 per share for terms of ten years. The total fair value of these options at the date of grant was estimated to be $1,182,500 and was determined using the Black-Scholes option pricing model with the following assumptions; an expected life of 5 years, a risk free interest rate of 2.22%, a dividend yield of 0% and expected volatility of 260%. This amount has been recorded as a stock based compensation expense in 2009. As approved by the Board of Directors, on February 4, 2009, the Company granted a total of 300,000 fully vested stock options to two directors of the Company at $3.00 per share for terms of ten years. The total fair value of these options at the date of grant was estimated at $1,197,000 and determined using the Black-Scholes option pricing model with the following assumptions; an expected life of 5 years, a risk free interest rate of 1.91%, a dividend yield of 0% and expected volatility of 260%. This amount has been recorded as a stock based compensation expense in 2009. 62
Also effective February 4, 2009, the Company cancelled 900,000 previously granted and fully vested options to a former director at $1.17 per share and repriced to $3.00 per share, 1,600,000 previously granted and fully vested options with original exercise prices ranging from $4.20 per share to $6.35 per share with all other terms remaining unchanged from the original issuances. The estimated incremental fair value resulting from the modification of these options of $8,500 has been recorded as a stock based compensation expense in 2009. The Company's stock option activity for the period ended February 28, 2009 is summarized as follows: Weighted average exercise Weighted average remaining Number of Options Price per share In contractual life (in years) _________________________________________________________________________________________________________________ Balance, February 28, 2007 and February 29, 2008 - $ - - Granted 4,000,000 2.82 - Exercised - - - Expired / cancelled (900,000) 1.17 _________________________________________________________________________________________________________________ Balance, February 28, 2009 3,100,000 $ 2.29 9.36 ================================================================================================================= During 2008, a shareholder of the Company advanced $50,000 to the Company. On May 1, 2008, the advance was converted into 75,000 private placement units of the Company at a price of $0.67 as described in Note 5 (b). During 2008, the Company arranged a short-term non-interest bearing advance for $33,239 from an existing shareholder. During first quarter of fiscal 2009, the Company exchanged its interest in the Southwest and Sedona mineral claims located in the province of British Columbia for the amount owing on this loan payable (refer Note 3). The Company paid a total of $126,400 in management fees to officers and directors of the Company in 2009 (2008 - $8,627). During 2008, the Company recognized $4,245 for donated services and $2,122 for donated rent for office premises, which was recorded in office and general expenses. NOTE 8 - INCOME TAXES The Company has adopted the FASB No. 109 for reporting purposes. As of February 28, 2009, and February 29, 2008 the Company had net operating loss carry forwards of approximately $1,710,000 and $137,000, respectively that may be available to reduce future years' taxable income through 2029. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carryforwards. 63
The provision for income taxes consisted of the following components for the years ended February 28, 2009 and February 29, 2008: 2009 2008 ___________________ Current: Federal 35.0% 35.0% State 0.0% 0.0% Deferred: - - ___________________ Total income tax provision 35.0% 35.0% =================== Components of net deferred tax assets, including a valuation allowance, are as follows at December 31: 2009 2008 ________________________ Deferred tax assets: Net operating loss carryforward $1,710,414 $136,919 ________________________ Total deferred tax assets 598,645 47,922 Less: Valuation Allowance (598,645) (47,922) ________________________ Net Deferred Tax Assets $ - $ - ======================== The valuation allowance for deferred tax assets as of February 28, 2009 and February 29, 2008 was $598,645 and $47,922, respectively. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred tax assets would be realized as of February 28, 2009 and February 29, 2008. NOTE 9 - SUBSEQUENT EVENTS On March 17, 2009, the Company issued 2,500 shares of common stock at an estimated fair value of $3.55 per share as per the terms of a consulting agreement that became effective March 1, 2009 (refer to Note 5). 64
The Option Agreement with Westrock Land Corp was extended on April 16, 2009 whereby the option period has been extended until June 1, 2009. An additional deposit of $100,000 was paid on April 27, 2009 in connection with this extension (refer to Note 4). On April 29, 2009, the Company extended the expiration period on the 3,000,000 warrants from May 1, 2009 to June 1, 2009 (refer to Note 5). On May 4, 2009, 187,500 warrants were exercised at $1.33333 per share, for total net proceeds to the Company of $250,000. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Our principal independent accountant from February 20, 2008 to current date is De Joya Griffith & Company, LLC ("De Joya"). The report of De Joya on our financial statements for fiscal year ended February 28, 2009 and of Dale Matheson Carr-Hilton LaBonte LLP, Chartered Accountants, for fiscal year ended February 29, 2008 did not contain an adverse opinion or disclaimer of opinion, nor was it modified as to uncertainty, audit scope or accounting principles, other than to state that there is substantial doubt as to our ability to continue as a going concern. During fiscal year ended February 28, 2009, there were no disagreements between us and De Joya, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of De Joya, would have caused De Joya to make reference thereto in its report on our audited financial statements. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the SECURITIES EXCHANGE ACT OF 1934 , as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our president (also our principal executive officer) and our secretary, treasurer and chief financial officer (also our principal financial and accounting officer) to allow for timely decisions regarding required disclosure. As of February 29, 2009, we carried out an evaluation, under the supervision and with the participation of our President/Chief Executive Officer and our Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our President/Chief Executive Offier and our Chief Financial Officer concluded that our disclosure controls and procedures were effective: (i) in providing reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and (ii) in the reliability of our financial reports as of the end of the period covered by this Annual Report. Effectiveness of disclosure controls was primarily a function of our current scale and scope of operations considering the volume of transactions and capital resources. 65
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, we evaluated the effectiveness of our internal control over financial reporting as of February 28, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. This Annual Report does include an attestation report of our registered public accounting firm De Joya Griffith & Company, LLC., Certified Public Accountants regarding internal control over financial reporting. Management's report was subject to attestation by our registered public accounting firm pursuant to the temporary rules of the SEC that permit us to provide only management's report in this Annual Report on Form 10-K. INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our Chief Executive Officer and our Chief Financial Officer have concluded that these controls and procedures are effective at the "reasonable assurance" level. CHANGES IN INTERNAL CONTROLS No significant changes were implemented in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. AUDIT COMMITTEE REPORT The Board of Directors has established an audit committee. The members of the audit committee are Mr. Robert Fedun, Mr. Ernest Sorochan and Mr. Angelo Viard. All of the members of the audit committee are "independent" within the meaning of Rule 10A-3 under the Exchange Act. The current audit committee was organized on February 4, 2009 and operates under a written charter adopted by our Board of Directors. 66
The audit committee has received and reviewed the written disclosures and the letter from De Joya Griffith & Company, LLC., Certified Public Accountants required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, as amended. Based on the reviews and discussions referred to above, the audit committee has recommended to the Board of Directors that the financial statements referred to above be included in our Annual Report on Form 10-K for fiscal year ended February 28, 2009 filed with the Securities and Exchange Commission. ITEM 9B. OTHER INFORMATION Not applicable. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal. Our directors and executive officers, their ages and positions held are as follows: NAME AGE POSITION WITH THE COMPANY Michael J. Newport 55 President/Chief Executive Officer and a Director William D. Thomas 57 Secretary/Treasurer and Chief Financial Officer Robert D. Fedun 65 Director, Compensation Committee member and Audit Committee member Ernest G. Sorochan 64 Director, Audit Committee member Simeon King Horton 57 Director Angelo Viard 36 Director, Compensation Committee member and Audit Committee member BUSINESS EXPERIENCE The following is a brief account of the education and business experience of each director, executive officer and key employee during at least the past five years, indicating each person's principal occupation during the period, and the name and principal business of the organization by which he or she was employed, and including other directorships held in reporting companies. 67
MICHAEL J. NEWPORT. Mr. Newport has been our President/Chief Executive Officer and a director since February 28, 2008. Mr. Newport has been actively involved in land management for nearly thirty years. He started his career with Amoco in their New Orleans office in May 1979 where he spent two years. Mr. Newport was actively involved in supervising brokers and writing all forms of land contracts for North and South Louisiana, Mississippi, Alabama and Florida. He then became a district landman for Harkins & Company in their Jackson, Mississippi office where he spent four years assembling drilling prospects and all land activities associated with operations in Mississippi, Alabama, Florida and Louisiana. The next four years were spent in Harkin's Oklahoma City office where he had the same responsibilities for Oklahoma and Arkansas as well as Mississippi, Alabama, Florida and Louisiana. Mr. Newport then joined Greenhill Petroleum in 1989 in Houston, Texas, where he was the land manager for six years in their Permian Basin Region. In addition to land management activities, Mr. Newport was responsible for acquisitions and divestitures. After leaving Greenhill, Mr. Newport has spent the last thirteen years managing brokers for West Texas, South Texas, East Texas, Oklahoma and North Louisiana as well as performing all landman management activities for various operators actively drilling and completing wells in these areas. Mr. Newport has nearly thirty years of experience in all phases of oil and gas land management with expertise in acquisitions, operations, divestitures, agreement preparation, negotiations, CAD mapping and broker supervision. Mr. Newport received a BBA in Finance in June of 1977, an MBA degree in August of 1978 and also completed hours for a Petroleum Land Management degree in May of 1979, all from the University of Oklahoma. WILLIAM D. THOMAS. Mr. Thomas has been our Chief Financial Officer and Secretary/Treasurer since August 18, 2008. Mr. Thomas has over thirty years of experience in the finance and accounting areas for the natural resource sector. Currently, Mr. Thomas is also the Chief Financial Officer of Mainland Resources, Inc., and Morgan Creek Energy, Nevada corporations that trade on the OTC Bulletin Board as well as Mira Resources, a Canadian public company traded on the TSX Venture Exchange. Mr. Thomas has held various successive management positions with Kerr McGee Corporation's China operations based in Beijing, China, ending in 2004 with his final position as director of business services. For a brief period after leaving Kerr McGee, Mr. Thomas acted as a self-practitioner in the accounting and finance field. In July 2007, he took on the role of chief financial officer for two public resource companies; Hana Mining Inc. and NWT Uranium Corp. Mr. Thomas resigned from NWT Uranium Corp. in July, 2008 but continues to serve as CFO for Hana Mining. Mr. Thomas was previously general manager (1999-2002), and finance and administration manager (1996-1999) of Kerr McGee's China operations. While in China, Mr. Thomas was responsible for finance including Sarbanes Oxley reporting, budgeting, treasury, procurement, taxation, marketing, insurance and business development, including commercial negotiations with the Chinese partner, China National Offshore Oil Co (CNOOC) and other Chinese and joint venture partners. Mr. Thomas focused heavily on supporting exploration and development operations for three operated blocks in Bohai Bay, as well as evaluation and negotiation of new venture blocks in East China Sea and the South China Sea. He was also responsible for the liaison with CNOOC and other Chinese oil companies, Kerr McGee US management and joint venture partners, where his main focus was to ensure cost effective and timely achievement of various approved work programs and budgets. He was also Chief Representative for Kerr McGee on the Joint Management Committee (JMC). Mr. 68
Thomas previously worked as manager of fixed asset accounting for Kerr McGee Corporation's US operations (1996), as finance director of Kerr McGee's UK operations based in London/Aberdeen (1992-1996), and Kerr McGee's Canadian operations in Calgary, Alberta, Canada (1984-1992), including the predecessor company, Maxus Canada Ltd, which was acquired by Kerr McGee Ltd. Over the course of his career, he has been involved in all aspects of managing accounting, budgeting, human resources, administration, insurance, taxation and other business support aspects surrounding gas properties for Kerr McGee. Mr. Thomas was responsible to ensure compliance with COPAS, SEC, FASB and international accounting regulations. He participated on a team that developed the Oracle accounting system application to the Kerr McGee's worldwide operations. He was most notably involved in the company's initial entry into both China and the UK North Sea - start ups of local and expatriate personnel that eventually developed into core areas (over $1 Billion in value) for Kerr McGee, including the company's first operated offshore oil fields in China (CFD 1-1) and the UK (Gryphon). In his early career Mr. Thomas also held senior management positions in the finance divisions of Norcen Energy Ltd of Calgary, Alberta (1981-1984), Denison Mines Ltd of Ontario Canada (1978-1981) and Algoma Steel Corporation of Sault Ste Marie, Ontario, Canada (1977). He was also a Senior Auditor for the accounting firm, Coopers & Lybrand in Toronto, Canada (1975-1977). Mr. Thomas attained his Chartered Accountant (CA) designation from the Canadian Institute of Chartered Accountants in 1977. He holds an Honors Bachelor of Commerce and Finance from the University of Toronto, Ontario, Canada. ROBERT D. FEDUN. Mr. Fedun has been one of our directors since February 28, 2008 and our prior Secretary/Treasurer and Chief Financial Officer until his resignation on August 18, 2008. Mr. Fedun has been actively involved in the oil and gas industry for the past forty years. From 1994 to present, Mr. Fedun is the President, Director and Chief Financial Officer of Dynamic Resources Corp., a corporation organized in 1994 under the laws of the Province of Alberta, Canada, engaged in oil and gas exploration primarily in North Louisiana and Texas. Mr. Fedun is directly responsible for management of the business operations and affairs. From 1985 through 1991, Mr. Fedun was the Vice President of Sales, Engineering and Manufacturing for PAMCO (Power Application and Manufacturing Company). From 1975 to 1985, Mr. Fedun was a sales representative for Gardner Denver Corporation where he was responsible for selling oil field equipment, mainly gas compressors, high pressure plunger pumps and high volume industrial air compressors. From 1965 through 1975, Mr. Fedun worked in the oil field as an engineering technician for Pan American Petroleum (now Amoco Petroleum) and Home Oil Corporation. He was also employed by Shell Canada and Alberta Oil and Gas Conservation Board. Mr. Fedun earned a degree in gas technology from Northern Alberta Institute of Technology in 1965. ERNEST G. SOROCHAN, P. ENG. Mr. Sorochan has been one of our directors since July 15, 2008. Mr. Sorochan has had over forty years of experience in the petroleum industry where he has engaged in International Project Management operations for oil companies in North America, South America, Africa and Australia. He has experience in economic evaluations of oil and gas projects, planning, coordinating and implementing multi-well drilling completion programs, sales and marketing experience with international service companies, hands-on experience in cementing, acidizing, sand control, hydraulic fracturing, drill stem testing and service tools, field experience in drilling, completions and work-overs of oil and gas wells, and operational experience in high pressure sour gas fields and gas plant facilities. 69
From approximately April 2004 to present, Mr. Sorochan has been an area engineer for Compton Petroleum Corporation in Calgary, Alberta. He provides engineering support for the Dalmead, Crossfied, Brant, Centron and Vulcan areas in Southern Alberta. Prior to 2004, he was Vice President of Operations for Redwood Energy Ltd., in Calgary, Alberta, Technical Manager for Pan Ocean Oil Corporation in Nigeria, Business Development for Redwood Energy Ltd. in Canada, Senior Production Engineer for Momentum Enterprises Inc. in the Ukraine, Drilling and Completions Superintendent for Alberta Energy Company International in Argentina, Production Engineering Consultant for E.G. Consulting Ltd., District Manager for Dowell Schlumberger Corporation in Australia, Nigeria and Argentina and Technical Sales Representative for Canadian Fracmaster Ltd. in Red Deer Alberta. Mr. Sorochan earned a B.Sc. Chemical Engineering from the University of Alberta and has a Diploma in Gas Technology from the Northern Alberta Institute of Technology. He is a member of Petroleum Engineers and of the Association of Professional Engineers, Geologists and Geophysicists of Alberta. SIMEON KING HORTON. Ms. Horton has been one of our directors since August 18, 2008. Ms. Horton had previously been a member of the Board of Directors of the Company and the Company's Chief Geologist and provides consulting services to the Company. Ms. Horton has been actively involved as a petroleum geologist for the past thirty years. From 1996 to present, Ms. Horton has been a consulting petroleum geologist. She has been very active in the Hosston/Cotton Valley trends in North Louisiana and East Texas. She has generated drilling prospects in the area and has successfully been responsible for the drilling of the Hosston/Cotton Valley in an area where there are sixteen to twenty wells per section. From 1989 to 1996, Ms. Horton worked with Grigsby Petroleum in Shreveport, Louisiana, which is owned by Mr. Jack Grigsby, an independent geologist. Grigsby Petroleum is very active in North Louisiana and East Texas, with numerous properties. Included in these properties were Hosston and Cotton Valley production. Ms. Horton was responsible for all the producing properties, the development of the properties, and the drilling of new wells. During 1986, Ms. Horton moved to Shreveport, Louisiana. From 1986-1989, she was a consultant for various oil and gas investors. Subsequently, Ms. Horton worked for Mr. Dudley Hughes, an independent geologist, in Jackson, Mississippi, from 1977 to 1986. During that time, her experience was in the Mississippi/Alabama Salt Basin, Black Warrior Basin in North Mississippi and Northwest Alabama, and South Florida. The main targets of exploration were the Smackover/Norphlet Formations (being located in the Salt Basin), the Paleozoics (being located in the Black Warrior Basin), and the Sunniland Lime (being located in South Florida). She was also exposed to the Perth Basin, located in Australia. During her time with Dudley Hughes, she was extensively involved in the exploration and development of a very aggressive drilling program and involved in all facets of the industry where she was the district geologist. Ms. Horton received a Bachelor of Science degree with a major in geology and a minor in mathematics from the University of Southern Mississippi, Hattiesburg, Mississippi in 1977. She graduated with honors and was selected Outstanding Graduating Senior in Geology for the academic year of 1976-1977. Ms. Horton attended geology field camp thru the Rolla School of Mines, University of Missouri, which was conducted in the State of Utah. Ms. Horton is also an active member of the American Association of Petroleum Geologist and the Shreveport Geological Society, Shreveport, Louisiana. 70
ANGELO VIARD. Mr. Viard has been one of our directors since September 29, 2008. During the past ten years, Mr. Viard has been involved in providing companies with advisory services including, but not limited to, managerial, investment strategy, finance, information technology, compliance, accounting, business development, mergers and acquisitions, and capital fund raising. In a wide range of industry sectors across the United States, South America and Europe. Currently, Mr. Viard is the president of VCS Group, Inc., which is currently engaged by us as a consultant. From approximately June 2007 through October 2008, Mr. Viard was the president/chief executive officer of VCS Group, Inc. Mr. Viard's functions include full budgeting responsibilities, management of budgets and planning, creation of policies and administrative procedures to restructure business processes, authoring multi-company employee manuals, design work order tracking and billing interface systems for accounting, and updating business plans, accounting structures and organizational changes to maximize business growth. From approximately August 2006 through June 2007, Mr. Viard was the IT operations manager for Bare Essentuals where he was responsible for developing, coordinating multiple related projects in alignment with strategic and tactical company goals, served as a primary customer advocate, planned and coordinated long term systems strategy, and managed the day to day operations of the IT department, including LAN/WAN architecture, telecommunications and hardware/software support. From approximately August 2005 through August 2006, Mr. Viard was a senior IT audit consultant for PriceWaterhouse Coopers LLP where he was responsible for determining the audit documentation, strategy and plan. From approximately December 2004 through August 2005, Mr. Vaird was the chief executive officer and founder of Technology Mondial Inc., which was a start-up company specializing in broadband wireless technology in Cost Rica and management and development of wireless connection planning for Latin America. Mr. Viard was also previously employed with OpenTV Inc, where he was manager of information system and technology, Thomas Weisel Partners LLC where he was an information technology brokerage services manager, BancBoston Robertson Stephens & Co. where he was a senior system engineer, and Environmental Chemical Corporation where he was a technical analyst. Mr. Viard is also a Director of Morgan Creek Energy, a Nevada corporation that trades on the OTC Bulletin Board. Mr. Viard holds a master in computer science, a BS in business management and administration, and an A/A in computer business administration and network. FAMILY RELATIONSHIPS There are no family relationships among our directors or officers. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS During the past five years, none of our directors, executive officers or persons that may be deemed promoters is or have been involved in any legal proceeding concerning: (i) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time 71
of the bankruptcy or within two years prior to that time; (ii) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction permanently or temporarily enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity; or (iv) being found by a court, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law (and the judgment has not been reversed, suspended or vacated). COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the reports received by us and on the representations of the reporting persons, we believe that these persons have complied with all applicable filing requirements during the fiscal year ended February 28, 2009. COMMITTEES OF THE BOARD OF DIRECTORS AUDIT COMMITTEE As of the date of this Annual Report, Messrs. Fedun, Viard and Sorochan have been appointed as members to our Audit Committee. All of the members are "independent" within the meaning of Rule 10A-3 under the Exchange Act and are in addition financial experts. The Audit Committee operates under a written audit committee charter adopted by the Board of Directors on February 4, 2009. The Audit Committee's primary function is to provide advice with respect to our financial matters and to assist the Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance. The Audit Committee's primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as our compliance with laws and regulations; (iv) oversee management's establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and the Board of Directors. COMPENSATION COMMITTEE As of the date of this Annual Report, Messrs. Fedun and Viard have been appointed as members to our Compensation Committee. The Compensation Committee operates under a written charter adopted by the Board of Directors pursuant to a written consent resolutions signed by all the members of the Board of Directors on February 4, 2009. 72
OVERVIEW OF COMPENSATION PROCESS The Compensation Committee of our Board of Directors is responsible for setting the compensation of our executive officers, overseeing the Board's evaluation of the performance of our executive officers and administering our equity-based incentive plans, 401(k) plan and deferred compensation plan, among other things. The Compensation Committee undertakes these responsibilities pursuant to a written charter adopted by the Compensation Committee and the Board of Directors, which will be reviewed at least annually by the Compensation Committee. The charter may be viewed in full on our website, www.mainlandresources.com under the "Corporate Governance" tab on the Investor Relations page. The Compensation Committee is composed solely of "non-employee directors" as defined in Rule 16b-3 of the rules promulgated under the Exchange Act, "outside directors" for purposes of regulations promulgated pursuant to Section 162(m) of the Internal Revenue Code ("IRC"), and "independent directors" as defined in Section 303A of the New York Stock Exchange ("NYSE") corporate governance listing standards, in each case as determined by the Board of Directors. Our Board of Directors recommends Compensation Committee membership based on such knowledge, experience and skills that it deems appropriate in order to adequately perform the responsibilities of the Compensation Committee. Messrs. Johnson, Horton and Viard serve as members of the Compensation Committee. The Compensation Committee annually reviews executive compensation and our compensation policies to ensure that the Chief Executive Officer and the other executive officers are rewarded appropriately for their contributions to us and that the overall compensation strategy supports the objectives and values of our organization, as well as stockholder interests. The Compensation Committee will conduct this review and compensation determination through a comprehensive process involving a series of meetings typically occurring in the first quarter of each year. COMPENSATION PHILOSOPHY The fundamental objective of our executive compensation policies is to attract, retain and motivate executive leadership for us that will execute our business strategy, uphold our values and deliver results and long-term value to our stockholders. Accordingly, the Compensation Committee seeks to develop compensation strategies and programs that will attract, retain and motivate highly qualified and high-performing executives through compensation that is: (i) PERFORMANCE BASED: a significant component of compensation should be determined based on whether or not we meet certain performance criteria that in the view of our Board of Directors are indicative of our success; (ii) STOCKHOLDER BASED: equity incentives should be used to align the interests of our executive officers with those of our stockholders; (iii) FAIR: compensation should take into account compensation among similarly situated companies, our success relative to peer companies and our overall pay scale. 73
It is the Compensation Committee's goal to have a substantial portion of each executive officer's compensation contingent upon our performance, as well as upon his or her individual performance. The Compensation Committee's compensation philosophy for an executive officer emphasizes an overall analysis of the executive's performance for the year, projected role and responsibilities, required impact on execution of our strategy, external pay practices, total cash and total direct compensation positioning, and other factors the Compensation Committee deems appropriate. The Compensation Committee's philosophy also considers employee retention, vulnerability to recruitment by other companies and the difficulty and costs associated with replacing executive talent. Based on these objectives, compensation programs for similarly situated companies and the philosophies of the Compensation Committee, the Compensation Committee has determined that we should provide our executive officers compensation packages composed of the following elements: (i) base salary, which reflects individual performance and is designed primarily to be competitive with salary levels at comparably sized companies; and (ii) long-term stock-based incentive awards which strengthen the mutuality of interests between executive officers and our stockholders. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the reports received by us and on the representations of the reporting persons, we believe that these persons have complied with all applicable filing requirements during the fiscal year ended February 28, 2009. ADDITIONAL CORPORATE GOVERNANCE POLICIES Our Board of Directors considered additional corporate governance issues, structure, policies and principles. Therefore, pursuant to the written consent resolutions signed by all the members of the Board of Directors on February 4, 2009, our Board of Directors adopted the following documents as additional corporate governance documents (collectively, the Corporate Governance Documents"): (i) Mainland Resources, Inc. Corporate Governance Principles; (ii) Mainland Resources, Inc. Nominating and Governance Committee Charter and Responsibilities; (iii) Mainland Resources, Inc. Board Committees Policy; (iv) Mainland Resources, Inc. Code of Business Conduct and Ethics; (v) Mainland Resources, Inc. Code of Conduct for the Board of Directors; (vi) Mainland Resources, Inc. Corporate Governance Guideline; (vii) Mainland Resources Inc. Corporate Governance Policy; (viii) Mainland Resources, Inc. Conflict of Interest Policy; (ix) Mainland Resources, Inc. Whistleblower Policy and Procedures; and (x) Mainland Resources, Inc. Board Roles and Responsibilities. The Corporate Governance Documents may be viewed in full on our website, WWW.MAINLANDRESOURCES.COM under the "Corporate Governance" tab on the Investor Relations page. 74
ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid to our Chief Executive Officer and those executive officers that earned in excess of $100,000 during fiscal years ended February 28, 2009 and February 29, 2008 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE _______________________________________________________________________________________________________________________________ NON-EQUITY NON-QUALIFIED ALL OTHER INCENTIVE PLAN DEFERRED COMPENSATION NAME AND STOCK COMPENSATION COMPENSATION PRINCIPAL SALARY BONUS AWARDS OPTION AWARDS EARNINGS TOTAL POSITION YEAR ($) (1) ($) ($) ($)(2) ($) ($) ($) ($) _______________________________________________________________________________________________________________________________ (3) Rahim Javraj, prior President, CEO and CEO 2007 $ -0- -0- -0- $ -0- -- -- $ -0- $-0- _______________________________________________________________________________________________________________________________ (4) Michael J. Newport, current President/CEO 2008 $95,000 -0- -0- $1,651,500 -- -- -0- 2,333,000 _______________________________________________________________________________________________________________________________ (1) This amount represents fees paid to the Named Executive Officers during the past year pursuant to consulting services provided in connection with his respective position as Chief Executive Officer. (2) This amount represents the fair value of these Stock Options at the date of grant which was estimated using the Black-Scholes option pricing model. (3) Rahim Javraj tendered his resignation to us as our President/Chief Executive Officer on February 28, 2008. (4) Michael J. Newport was appointed as our President/Chief Executive Officer on February 28, 2008. 75
STOCK OPTIONS/SAW GRANTS IN FISCAL YEAR ENDED FEBRUARY 28, 2009 The following table sets forth information as at February 28, 2009 relating to Stock Options that have been granted to the Named Executive Officers. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END OPTION AWARDS STOCK AWARDS Equity Incentive Equity Plan Incentive Awards: Plan Market or Awards: Payout Equity Market Number of Value of Incentive Plan Value of Unearned Unearned Number of Number of Awards: Number Number of Shares Shares, Shares, Securities Securities of Securities Shares or or Units Units or Units or Underlying Underlying Underlying Units of of Stock Other Other Unexercised Unexercised Unexercised Option Stock That That Rights That Rights That Options Options Unearned Exercise Option Have Not Have Not Have Not Have Not Exercisable Unexercisable Options Price Expiration Vested Vested Vested Vested Name (#) (#) (#) ($) Date (#) ($) (#) (#) ____________________________________________________________________________________________________________________________________ Michael J. Newport 900,000 -0- -0- $ 1.17 04/07/18 -0- -0- -0- -0- President/CEO 150,000 -0- -0- 3.00 02/04/19 -0- -0- -0- -0- William Thomas, 750,000 -0- -0- 3.00 07/09/18 -0- -0- -0- -0- Treasurer/CFO Robert Fedun 300,000 -0- -0- 1.17 04/07/18 -0- -0- -0- -0- Ernest Sorochan 200,000 -0- -0- 3.00 07/15/18 -0- -0- -0- -0- Simeon King Horton 400,000 -0- -0- 3.00 08/18/08 -0- -0- -0- -0- 150,000 -0- -0- 3.00 02/04/19 -0- -0- -0- -0- Angelo Viard 250,000 -0- -0- 3.00 11/18/18 -0- -0- -0- -0- David Urquhart 900,000* -0- -0- 1.17 04/07/18 -0- -0- -0- -0- *As of the date of this Annual Report, the 900,000 Stock Options granted to David Urquhart have been cancelled. 76
The following table sets forth information relating to compensation paid to our directors during fiscal years ended February 28, 2009: DIRECTOR COMPENSATION TABLE Change in Pension Value and Fees Non-Equity Nonqualified Earned or Incentive Deferred All Paid in Stock Option Plan Compensation Other Cash Awards Awards Compensation Earnings Compensation Total Name ($) ($) ($) ($) ($) ($) ($) _______________________________________________________________________________________________________________________ Michael J. Newport(1) -0- -0- -0- -0- -0- -0- -0- Robert Fedun (2) -0- -0- 351,000 -0- -0- -0- 351,000 Ernest Sorochan (3) -0- -0- 1,162,000 -0- -0- -0- 1,162,000 Simeon King Horton(4) -0- -0- 3,194,500 -0- -0- $58,840 3,253,340 Angelo Viard (5) -0- -0- 1,185,000 -0- -0- $56,724 1,241,724 (1) Mr. Newport was granted 900,000 Stock Options on April 7, 2008 exercisable into 900,000 shares of common stock at $1.17 per share with a Black Scholes valuation of $1,053,000 and a further 150,000 Stock Options on February 4, 2009 exercisable into 150,000 shares of our common stock at $3.00 per share with a Black Scholes valuation of $598,500. However, this valuation has not been included in the Director Compensation Table and has been included in the Executive Compensation table above. See "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." (2) Mr. Fedun was granted 300,000 Stock Options on April 7, 2008 exercisable into 300,000 shares of common stock at $1.17 per share with a Black Scholes valuation of $351,000. See "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." (3) Mr. Sorochan was granted 200,000 Stock Options on July 15, 2008 exercisable into 200,000 shares of common stock at $3.00 per share (re-priced) with a Black Scholes valuation of $1,162,000. (4) Ms. King Horton was granted 400,000 Stock Options on August 18, 2008 exercisable into 400,000 shares of common stock at $3.00 per share (re-priced) with a Black Scholes valuation of $2,596,000. Ms. King Horton was granted a further 150,000 Stock Options on February 4, 2009 exercisable into 150,000 shares of common stock at $3.00 per share with a Black Scholes valuation of $598,500. We also paid to Ms. King Horton an aggregate of $58,840 for providing geological consulting services to the Company. See "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." (5) Mr. Viard was granted 250,000 Stock Options on November 18, 2008 exercisable into 250,000 shares of common stock at $3.00 per share (re-priced) with a Black Schole valuation of $1,185,000. We also paid to VCS an aggregate $56,724 under the terms of the Agreement. Mr. Viard is the sole director, officer and shareholder of VCS. See "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." 77
EMPLOYMENT AND CONSULTING AGREEMENTS As of the date of this Annual Report, we do not have any written contractual arrangements with our executive officers. However, we pay our President/Chief Executive Officer, Michael Newport, a month to month salary of $10,000. We pay our Treasurer/Chief Financial Officer, William Thomas, a month to month salary of $2,600. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS As of the date of this Annual Report, the following table sets forth certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. As of the date of this Annual Report, there are 39,615,000 shares of common stock issued and outstanding. PERCENTAGE OF NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(1) OWNERSHIP DIRECTORS AND OFFICERS: Robert D. Fedun 644,996(2) 1.63% 20333 State Highway 249 Suite 200 Houston, Texas 77070 Michael J. Newport 1,394,996(3) 3.52% 20333 State Highway 249 Suite 200 Houston, Texas 77070 William D. Thomas 780,000(4) 1.97% 20333 State Highway 249 Suite 200 Houston, Texas 77070 Ernest Sorochan 200,000(5) Nil 20333 State Highway 249 Suite 200 Houston, Texas 77070 Simeon King Horton 550,000(6) 1.38% 20333 State Highway 249 Suite 200 Houston, Texas 77070 Angelo Viard 250,000(7) Nil 20333 State Highway 249 Suite 200 Houston, Texas 77070 All executive officers and directors as a group (6 persons) 3,819,992(8) 9.64% BENEFICIAL SHAREHOLDERS GREATER THAN 10% Parklane Investments Inc. 8,235,000 20.79% 1 Alexander Road Kintersville, PA 18930 78
* Less than one percent. (1) Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person's actual ownership or voting power with respect to the number of shares of common stock actually outstanding as of the date of this Annual Report. As of the date of this Annual Report, there are 39,615,000 shares issued and outstanding. Beneficial ownership amounts reflect the forward stock splits effective February 2008 and May 2008. (2) This figure includes: (i) 344,996 shares of common stock; and (ii) 300,000 Stock Options to purchase 300,000 shares of our common stock at an exercise price of $1.17 per share expiring on April 7, 2018. (3) This figure includes: (i) 344,996 shares of common stock; (ii) 900,000 Stock Options to purchase 900,000 shares of our common stock at an exercise price of $1.17 per share expiring on April 7, 2018; and (iii) 150,000 Stock Options to purchase 150,000 shares of our common stock at an exercise price of $3.00 per share expiring on February 4, 2019. (4) This figure includes: (i) 30,000 shares of common stock; and (ii) 750,000 Stock Options to purchase 750,000 shares of our common stock at an exercise price of $3.00 per share expiring on July 9, 2018. (5) This figure includes 200,000 Stock Options to purchase 200,000 shares of our common stock at an exercise price of $3.00 per share expiring on July 15, 2018. (6) This figure includes: (i) 400,000 Stock Options to purchase 400,000 shares of our common stock at an exercise price of $3.00 per share expiring on July 18, 2018; and (ii) 150,000 Stock Option to purchase 150,000 shares of our common stock at an exercise price of $3.00 per share expiring on February 4, 2019. (7) This figure includes 250,000 Stock Options to purchase 250,000 shares of our common stock at an exercise price of $3.00 per share expiring November 18, 2018. (8) This figure includes: (i) 719,992 shares of common stock; and (ii) 3,100,000 Stock Options to purchase 3,100,000 shares of our common stock. 79
CHANGES IN CONTROL We are unaware of any contract, or other arrangement or provision, the operation of which may at a subsequent date result in a change of control of our company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE Except for the transactions described below, none of our directors, officers or principal stockholders, nor any associate or affiliate of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transactions, which has materially affected or will materially affect us during fiscal year ended February 28, 2009. VCS GROUP INC. AGREEMENT Effective October 2, 2008, our Board of Directors authorized the engagement of VCS Group Inc. in accordance with the terms and provisions set forth in the Agreement. We engaged VCS Group Inc. to rendered services and related reports to use in order to ensure compliance with Section 404 of the Sarbanes-Oxley Act of 2002. In accordance with the terms and provisions of the Agreement, VCS Group Inc. shall perform certain services including, but not limited to, the following: (i) re-assess our existing controls and business cycles and conduct a risk assessment on each cycle for fiscal year 2009 for audit attestation; (ii) conduct a full review of the management governance process; (iii) assemble a project team to conduct evaluations; (iv) define significant processes, materiality and fraud; (v) document and evaluate internal controls at the entity-wide level; (vi) assist management in development of policies and procedures; (vii) identify deficiencies; (viii) develop and execute independent testing procedures and (ix) summarize findings and report to Board of Directors and management. In furtherance of the terms and provisions of the Agreement, we agreed to pay VCS Group Inc. an hourly rate of $155. As of the date of this Annual Report, we have paid VCS Group an aggregate $56,724 for fees and associated expenses. One of our directors, Angelo Viard, is the sole officer, director and shareholder of VCS Group Inc. and receives compensation indirectly through VCS Group Inc. SHAREHOLDER LOAN During fiscal year ended February 29, 2008, one of our shareholders advanced $50,000 to us. During fiscal year ended February 28, 2009, we settled the amount due and owing to the shareholder pursuant to conversion into 1,500,000 shares (post-Forward Stock Splits) of our restricted common stock at $1.00 per share in accordance with the 2008 Private Placement. During fiscal year ended February 29, 2008, we arranged for a short term non-interest bearing advance in the aggregate amount of $33,239 from one of our shareholders. During fiscal year ended February 28, 2009, we settled the amount due and owing to the shareholder pursuant to an exchange of our interest in the Southwest and Sedona mineral claims. Except for the transactions described above, none of our directors, officers or principal stockholders, nor any associate or affiliate of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transactions, which has materially affected or will materially affect us during fiscal year ended February 28, 2009. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES During fiscal year ended February 28, 2009, we incurred approximately $45,500 in fees to our principal independent accountant for professional services rendered in connection with the audit of our financial statements for fiscal year ended February 28, 2009 and for the review of our financial statements for the quarters ended May 31, 2008, August 31, 2008 and November 30, 2008. During fiscal year ended February 29, 2008, we incurred approximately $13,500 in fees to our principal independent accountants ($1,500 to Dale Matheson Carr-Hilton Labonte LLP and $12,000 to De Joya) for professional services rendered in connection with the audit of our financial statements for fiscal year ended February 29, 2008 and for the review of our financial statements for the quarters ended May 31, 2007, August 31, 2007 and November 30, 2007. During fiscal year ended February 28, 2009, we did not incur any other fees for professional services rendered by our principal independent accountant for all other non-audit services which may include, but is not limited to, tax-related services, actuarial services or valuation services. 80
ITEM 15. EXHIBITS AND FINANCIAL SCHEDULES The following exhibits are filed as part of this Annual Report. EXHIBIT NO. DOCUMENT 3.1 Articles of Incorporation (1) 3.1.2 Amendment to Articles of Incorporation 3.2 Bylaws (1) 10.1 Property Agreement between Mainland Resources Inc. and Vijesh Harakh dated July 1, 2006 (1) 10.2 Trust Agreement between Mainland Resources Inc. and Vijesh Harakh dated July 1, 2006. (1) 10.3 Option Agreement between Kingsley Resources Inc. And Mainland Resources Inc. dated February 27, 2008 (2) 10.4 Letter Agreement dated July 14, 2008 between Mainland Resources Inc. and Petrohawk Energy Corporation (4) 10.5 Assignment, Conveyance and Bill of Sale between Mainland Resources Inc. and Petrohawk Energy Corporation dated August 4, 2008 (5) 10.6 Agreement dated August 4, 2008 between Mainland Resources Inc. and Petrohawk Energy Corporation 10.7 Option Agreement between Mainland Resources Inc. and Westrock Land Corp. dated September 4, 2008. 10.8 Agreement between Mainland Resources Inc. and VCS Group Inc. dated February 11, 2009. 16 Letter of Dale Matheson Carr-Hilton LaBonte LLP Chartered Accountants (6) 23 Consent of Ryder Scott Company , L.P., independent petroleum Consultants. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act. 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act. 32.1 Certification of Chief Executive Officer and Chief Financial Officer Under Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act. 99.1 Estimated Future Reserves and Income Attributable to Certain Leasehold Interests by Ryder Scott Company, L.P. 81
(1) Incorporated by reference from Form SB-2 filed with the Commission on April 11, 2007. (2) Incorporated by reference from Form 8-K filed with the Commission on February 28, 2008. (3) Incorporated by reference from Form 8-K filed with the Commission on May 9, 2008. (4) Incorporated by reference from Form 8-K filed with the Commission on July 18, 2008. (5) Incorporated by reference from Form 8-K filed with the Commission on August 8, 2008. (6) Incorporated by reference from Form 8-K filed with the Commission on February 21, 2008. 82
MAINLAND RESOURCES INC. SIGNATURES Pursuant to the requirements of the Exchange Act, the registran half by the undersigned, thereunto duly authorized. MAINLAND RESOURCES INC. Dated: March 12, 2010 By: /s/ MICHAEL J. NEWPORT _____________________________________ Michael J. Newport President/Chief Executive Officer Dated: March 12, 2010 By: /s/ MARK WITT _____________________________________ Mark Witt Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Dated: March 12, 2010 By: /s/ MICHAEL J. NEWPORT _____________________________________ Michael J. Newport Director Dated: March 12, 2010 By: /s/ MARK WITT _____________________________________ Mark Witt Director Dated: March 12, 2010 By: /s/ SIMEON KING HORTON _____________________________________ Simeon King Horton Director Dated: March 12, 2010 By: /s/ ANGELO VIARD _____________________________________ Angelo Viard Director 83