Projected crude oil production in the United States ranges from 6 to 8 million barrels per day (bbl/d) over the next 30 years in the
Annual Energy Outlook 2013
(AEO2013) Reference case projection. However, under greater supply assumptions, crude oil production is sustained at a higher level of about 10 million bbl/d between 2020 and 2040 (see chart below).[4]
In this higher resource scenario, total U.S. liquid fuels production (which includes crude oil, natural gas liquids (NGL), refinery gains, biofuels, and other liquid fuels) increases to more than 18 million bbl/d in 2040, compared to 12 million bbl/d in the Reference case. That level of domestic production reduces net imports to 7% or less of total demand compared to 40% in 2012. Production projections inevitably reflect many uncertainties regarding the actual level of crude oil resources available, the difficulty or ease in extracting them, and the evolution of the technologies (and associated costs) used to recover them.[4]
The EIA developed a High Oil and Gas Resource case as part of the AEO2013 to examine the effects of higher domestic production on energy demand, imports, and prices. This alternative case presents a scenario in which U.S. crude oil production continues to expand after 2020, driven primarily by tight oil production. This increased production results from assumed greater technically recoverable tight oil resources, as well as undiscovered resources in Alaska and the offshore Lower 48 states. In addition, the maximum penetration rate for gas-to-liquids (GTL) is increased and kerogen (oil shale) is assumed to begin development. In the High Oil and Gas Resource case, NGL production increases from 2.2 million bbl/d in 2011 to 5.0 million bbl/d in 2040, compared to just under 3 million bb/d in 2040 in the Reference case. GTL output reaches about 0.6 million bbl/d, compared to about 0.2 million bbl/d in the Reference case (see chart below).[4]
Estimates of technically recoverable resources from the rapidly developing tight oil formations are particularly uncertain and change over time as new information is gained through drilling, production, and technology experimentation. Projections embody many assumptions that might not prove to be valid over the long term and over all tight and shale formations. In the High Oil and Gas Resource case, the tight oil resources are increased by changing the estimated ultimate recovery (EUR) per well and assuming closer well spacing.[4]
[4] Source: link (current August 24, 2013): http://www.eia.gov/todayinenergy/detail.cfm?id=11691
Facts and Figures About the U.S. Oil and Natural Gas Industry
| |
9.8 million
|
Number of people directly and indirectly employed by the U.S. oil and natural gas industry in 2011.[5]
|
5.6% GDP
|
America
s oil and natural gas industry supports 5.6 percent of our nation
s GDP.[5]
|
$86 Million/day
|
Daily amount companies pay to the federal government in royalty payments, rents and bonus fees in 2010.[5]
|
$100 billion
|
Amount the U.S. oil and natural gas industry has paid to the federal government in rents, royalties and lease payments for production from 2000 to 2010.[5]
|
$176.7 billion
|
Amount the industry invested in new U.S. capital projects in 2011.[5]
|
$203.6 billion
|
Amount of wages paid to U.S. employees in 2011, plus benefits and payments to oil and natural gas leaseholders.[5]
|
$32 billion
|
Amount of dividends distributed to American shareholders in 2011.[5]
|
[
5
]
Source:
link
(current August 24, 2013)
:
http://energytomorrow.org
14
US Oil And Gas Industry Employment Growing Much Faster Than Total Private Sector Employment
From the start of 2007 through the end of 2012, total U.S. private sector employment increased by more than one million jobs, about 1%. Over the same period, the oil and natural gas industry increased by more than 162,000 jobs, a 40% increase.[6]
The Labor Department's Bureau of Labor Statistics (BLS) accounts for oil and natural gas industry employment in three categories: drilling, extraction, and support.[6]
|
·
Drilling
involves any employment related to the spudding and drilling of wells, as well as reworking of wells, and accounted for more than 90,000 jobs by the end of 2012, an increase of 6,600 jobs since 2007.[6]
|
|
·
Extraction
includes establishments primarily engaged in operating, developing, and producing oil and natural gas fields, including exploration and all production work up to the point of shipment from the producing property. Employment in the extraction category numbered more than 193,000 jobs by the end of 2012, 53,000 more jobs than in 2007.[6]
|
|
·
Support
involves performing supporting activities for oil and natural gas operations, including exploration, excavation, well surveying, casing work, and well construction. Support is the largest oil and gas industry category, and employed more than 286,000 people by the end of 2012, up more than 102,000 jobs from 2007. (BLS considers support to be for the above activities, and does not include jobs created in other industries such as manufacturing, housing, retail, education, and food services.)[6]
|
About half of the workers employed in crude oil and natural gas production are in the support category of oil and natural gas industry employment, and employment in this category accounted for the bulk of the increases seen in oil and gas industry employment. Combined, the three industry categories equal just one-half of one percent of total U.S. private sector employment.[6]
Both the support and drilling industries were heavily affected by the recession, but these industries have recovered quickly, suffering only minor effects from the temporary moratorium on offshore drilling as a result of the Deepwater Horizon spill in 2010. Between January 2007 and December 2012, monthly crude oil production increased by 39%, and monthly natural gas production increased by 25% (see chart below). Employment in the oil and gas drilling, extraction, and support industries continues to contribute to overall private sector employment as the U.S. economy recovers from the 2007-09 recession. [6]
15
Beyond within-sector employment, oil and gas industry activity also directly supports output and employment in other domestic sectors, such as suppliers of pipe, drilling equipment, and other drilling materials. In addition, as with other forms of economic activity, there are indirect employment effects stemming from purchases made by industry and employees spending of their incomes. Because employee expenditures are closely tied to their incomes, higher paying jobs, such as those in the oil and gas sector, tend to have larger indirect effects on output and employment than lower paying ones. A recent TIE article reviews the experience of North Dakota, which has seen significant gains in real gross domestic product per capita, coinciding with the development of the Bakken shale play.[6]
[6] Source: link( current August 24, 2013): http://www.eia.gov/todayinenergy/detail.cfm?id=12451
Company Operations
The Company is engaged primarily in the acquisition of producing or near producing oil and gas properties and the development of these oil and gas properties. The Company plans to acquire producing or near producing oil and gas properties that will provide cash flow and an upside for future development. Such activities are concentrated in North America onshore, primarily in the United States. We are currently scouting and evaluating properties in Texas, Oklahoma, Pennsylvania, Kansas and as well in Canada.
The implementation of our business plan will require significant capital. We do not have this capital and as a result, we will require additional financing to acquire and develop our leasehold obligations. We may use debt or equity to fund our ongoing operations. There can be no assurance that any financing will be available, and if available, will be on terms and conditions acceptable to the Company. If we rely on equity financing, our shareholders will experience significant dilution. If we rely on debt financing, we may not be able to satisfy our debt obligations.
Identification of leasehold interests.
The Company plans to acquire producing or near producing leaseholds that will provide cash flow and an upside for future development. However, it is unlikely that we will be able to exploit these leaseholds without a significant capital infusion.
The Company may acquire the leaseholds in consideration for cash or shares of the company or a combination of cash and shares of the Company and may include an Overriding Royalty. Typical Overriding Royalty
s range from 2.5% to as much as 25% depending upon the current production on the leaseholds and the potential for Oil and Gas production.
A typical leasehold grants the Company the exclusive right to explore the land (
Property
) covered by the Oil and Gas Lease by geophysical and other methods, and to operate same for and produce there from all naturally-occurring oil, gas, casing-head gas or gasoline, gas condensate and/or all other liquid or gaseous hydrocarbons and other marketable or non-marketable substances produced therewith ("Oil and Gas"); and the exclusive right to inject gas, water, brine and other fluids into subsurface strata; and rights of way and easements for laying pipelines, telephone, telegraph and power lines, and the right to erect or install power stations, compressor stations, roadways, storage tanks or other storage facilities, separators and any fixtures and other structures thereon for producing, treating, processing, maintaining, storing and caring for the oil and gas; and oil and gas from other properties and any and all other
16
rights and privileges necessary, incident to, or convenient for the economical operation of the Property and other lands for the production of Oil and Gas, and the injecting of gas, water, brine and other fluids into subsurface strata.
The Company may, at any time and from time-to-time pool all or part of the Property with other properties to create one or more drilling units. The production of Oil or Gas from such a pooled unit is generally treated as though the production occurred from a well on the Property, except the Lessor shall be entitled to royalty only on its pro-rata share of such production.
It is intended that the leasehold also include all lands and interests of the Lessor, which are contiguous to or in the vicinity of the Property.
Usually the leasehold will remain in force for a term of one year from the date executed and for as long thereafter as Oil and/or Gas is produced from the Property, or as long as operations for drilling are continued or as long as operations are continued for injection of gas, water, brine and other fluids into subsurface strata.
When a well is worked over or offset well drilled, an access road is constructed to the well site or upgraded. This results in surface damages that the surface owner is compensated for the loss of property. Timber may also be cut down during construction, the Company may cut and stack the timber at a location convenient for the surface owner to sell or a value may be assessed on the timber and the surface owner compensated.
Depending upon jurisdiction of the leasehold, the state can force a "pooling" of the oil and gas interests of a landowner with the interests of other landowners where the size or condition of lands does not allow the neighbor to find a drill site while respecting distance limits from property lines. A mineral owner has five options in the context of forced pooling. They can:
1.
Lease their mineral interest.
2.
Sell their mineral interest.
3.
Participate materially in the development of the gas field.
4.
Be a non-consenting owner.
5.
Protest forced pooling.
A rework well or producing well requires maintenance by a company representative sometimes referred to as a
pumper
to insure the well(s) produce at their capacity and to monitor production. As per the terms of the lease, a gate may be installed by the well Operator to prohibit access to the Property by unauthorized personnel. The gate is typically locked and a key may be provided to the landowner. The well may require periodic maintenance by a service rig during the life of the well. Surface equipment includes a wellhead, gas meter, storage tank (for oil wells), separator, and pipeline. Lease is held-by-production during the life of the well(s).
When the well is no longer considered productive, the Company is required to plug the well under the direction of the Division of Oil and Gas inspector for the State. This involves placing cement plugs at various depths to isolate producing intervals, protect fresh water aquifers and coal seams. The site is reclaimed and vegetation is established to prevent erosion from the well site. After all wells on a lease are plugged, the lease is terminated and returned to the mineral owner.
After completion and testing of a workover well or an offset well, the well is put into production. As in the case of oil, the oil is pumped into a 100 BBL or 200 BBL tank(s). The pumper inspects the well on a daily or regular routine basis and monitors the production of oil. As the tank(s) nears capacity, the pumper will make arrangements for pickup of the oil for delivery to the Purchaser. The cost of hauling the oil to the refinery varies by distance from the well to the refinery and can range from $3 to $6 per BBL. The cost of the freight charge is borne by the Company. Oil collected or shipped during the month is paid by the Purchaser in the following month. The price paid for the produced oil is based on the average monthly market price.
Conflicts of Interest
Management is not required to commit their full time to our affairs and, accordingly, such persons may have conflicts of interest in allocating management time among various business activities. Our affiliates, officers, and directors may engage in other business activities similar and dissimilar to those we are engaged in. To the extent that management engages in such other activities, they will have possible conflicts of interest in diverting opportunities to other companies, entities, or persons with which they are or may be associated or have an interest, rather than diverting such opportunities to us. As no policy has been established for the resolution of such a conflict, we could be adversely affected should management choose to place their other business interests before ours. No assurance can be given that such potential conflicts of interest will not cause us to lose potential opportunities. Management may become aware of investment and business opportunities, which may be appropriate for presentation to us as well as the other entities with which they are affiliated. Management may have conflicts of interest in determining which entity a particular business opportunity should be presented. Accordingly, as a result of multiple business affiliations, management may have similar legal obligations relating to presenting certain business opportunities to multiple entities. In addition, conflicts of interest may arise in connection with evaluations of a particular business opportunity by the board of directors with respect to the foregoing criteria. There
17
can be no assurances that any of the foregoing conflicts will be resolved in our favor. We may consider Business Combinations with entities owned or controlled by persons other than those persons described above. There can be no assurances that any of the foregoing conflicts will be resolved in our favor.
Investment Company Act and Other Regulation
We may participate in a Business Combination by purchasing, trading, or selling the securities of such Target Business. We do not, however, intend to engage primarily in such activities. Specifically, we intend to conduct our activities so as to avoid being classified as an "investment company" under the Investment Company Act of 1940 (the "Investment Act"), and therefore to avoid application of the costly and restrictive registration and other provisions of the Investment Act, and the regulations promulgated there under.
Employees
Other than our officers and directors, we have no employees. We outsource all of our business operations as follows:
Executive, Financial and Operations:
Mr. Jerry G. Mikolajczyk
Mr. Jerry G. Mikolajczyk was appointed President, CEO, CFO, and a director of the Company on May 31, 2011. Prior to the appointments, Mr. Mikolajczyk was a key consultant to the Company who identified the opportunities available to us in Kentucky, helped negotiate our contracts, and assisted the Company with its financial reporting including SEC filings and our financial statements from February 2010 to May 2011.
Mr. Mikolajczyk has had an extensive career in the oil and gas, construction, and mining industries. Mr. Mikolajczyk has worked for Fortune 500 companies such as BP Resources (British Petroleum), SCI Group of Companies, Husky Oil, Syncrude, Bechtel, Guy F. Atkinson and INCO. He has worked as a heavy equipment operator on surface and open pit mining operations.
After completing his Business Administration diploma, Mr. Mikolajczyk went on to obtain his professional designation as a Certified General Accountant (CGA) and Certified Internal Auditor (CIA). As a professional accountant and auditor, he has been involved with planning, designing, and testing operations to ensure that the operations are efficient and effective.
In 2008, Mr. Mikolajczyk was awarded
CFO of the Year
for the application of his knowledge and expertise in a turnaround assignment for the Santa Clara Valley Transportation Authority (VTA), a $3.3 Billion asset transportation authority in Silicon Valley (San Jose, California).
Mr. Mikolajczyk has an aggregate of 41 years of experience, which include:
|
·
Twenty-two (22) years of C-Level experience.
|
·
Ten (10) years in the Oil and Gas Industry evaluating and analyzing systems and operations to improve effectiveness, increase profits, and streamline operations without compromising controls.
|
·
Eighteen (18) years in the Mining Industry with operational experience in tar sands, copper, gold, limestone and precious stones. Mines were both open pit and deep rock (shaft) as well as alluvial and placer mining operations.
|
·
Twenty Seven (27) years of experience in the Construction Industry ranging in Oil and Gas, Mining, Transportation and Housing sectors. Specialty is Project Control and Reporting.
|
Mr. Mikolajczyk, through consulting agencies, has provided various consulting services to clients, which included, but not limited to:
|
·
Global Power and Water Industries, Inc.
|
·
VTA (Santa Clara Valley Transportation Authority)
·
MineCore International, Inc.
|
·
Platinum Works, Inc.
|
·
Blue Green Corp
|
·
J.M.E.L. International Inc.
|
·
Nova Petrochemicals
|
·
BP Resources
|
18
Mr. Mikolajczyk is an acknowledged speaker and presenter. He has moderated various panels on P3
s (Private Public Partnerships) projects such as the Confederation Bridge, the longest bridge in North America, joining Prince Edward Island and New Brunswick in Canada, which Mr. Mikolajczyk was involved in the bidding, award and financing of the project. Mr. Mikolajczyk also presented a paper to the 1990 Western Regional Conference of the Institute of Internal Auditors entitled: "Is Your Project Control Out of Control?" and a paper in 1991 to the Institute of Internal Auditors, Calgary Chapter, entitled: "Operational Audit of the Procurement Function".
Mr. Wayne St. Cyr
Mr. Wayne St. Cyr, our Executive Vice President, Marketing and Strategic Development since January 1, 2011, is our Corporate Secretary since July 15, 2011.
Mr. St. Cyr comes to us leaving a distinguished 10 year career with RBS Group (Royal Bank of Scotland) which includes a six-time recipient of the President's Award for exceeding company objectives. During his tenure at RBS/Citizens Financial Group, he was responsible for developing the key alliances with Citizens Bank.
Mr. St. Cyr
s education includes an Associate degree in Business Administration and a Bachelor of Science degree in Marketing.
Mr. Peter Matousek
Mr. Peter Matousek was appointed our Vice President
Investor Relations on May 31, 2011. Mr. Matousek served as the Company
s President and CEO from February 2010 to May 2011 and as a director from February 2010 to August 2011 before his term expired. He was reappointed as a director on May 25, 2013.
Mr. Matousek has worked extensively with the public markets for companies throughout the United States and Canada in the financial and natural resource sector, including oil & gas and precious metal mining. He has represented numerous companies in the capacity of Investor & Public Relations. He speaks German, Czech, English and Russian.
Dr, William D. Spier
William D. Spier, Ph.D., was appointed as Treasurer on October 23, 2012. Dr. Spier is a Board Member of the Company and Chairman of the Company's Audit Committee. Dr. Spier has been an advisor in economics and business development to private equity funds in the U.S. and Europe for the past six years. Prior to that, he was a business growth consultant to major proprietary and public institutions of higher education with 5-1 year appointments.
Dr. Spier was Senior Vice President for Whitman Medical and Executive Director for Ultrasound Technical Services, a reporting issuer, for 13 years during which he was responsible for the founding and growth of the pioneering institute for medical ultrasound training which expanded to 15 major markets in the U.S. For two years, Dr. Spier was the registered principal for Diamond Turk & Company, a specialist firm on the American Stock Exchange.
From 1969 to 1981, Dr. Spier held various positions with the New York Board of Education and was a graduate instructor at Washington University, St. Louis and Assistant Professor of Sociology at St. Louis University. Dr. Spier was a member of the United States Teacher Corps.
Dr. Spier received his Bachelor of Arts degree from Hobart College, his Masters degree from the Washington University, St. Louis and his Doctorate in Sociology with concentration in political economy from Washington University, St. Louis. Dr. Spier has an extensive history of publications and has authored more than fifty business plans for both start-ups and mature companies. He is a member of economic, education and medical societies and participates on the board of public companies.
He is often a visiting instructor at NYC and metropolitan-area institutions of higher education for graduate level teaching.
Family Relationships
There are no family relationships, by blood, marriage or adoption, among or between any of our director, officer or beneficial owners of more than five percent of our outstanding shares of common stock.
19
Availability of SEC Filings:
You may read and copy any materials we file with the U.S. Securities and Exchange Commission (the
SEC
) at the SEC
s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
Website/Available Information
Our website can be found at www.xunenergy.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed with or furnished to the SEC, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (
the Exchange Act
) can be accessed free of charge on our web site at www.xunenergy.com under the
Shareholder/Financial
section of our web site within the
SEC Filings
subsection as soon as is reasonably practicable after we electronically file such material with, or otherwise furnish it to, the SEC.
Our website has a section named Xun Forum which allows shareholders to post questions which the Company will respond within 24 to 48 hours of the post. The Company will use the Xun Forum as a media to update our shareholders with events or activities of the Company that does not warrant a press release. The Company adopts the Xun Forum as media to announce key information in compliance with Regulation Fair Disclosure. The Company, at this time, does not use Twitter or Facebook to announce key information. The link to our Xun Forum is: http://forum.xunenergy.com/.
Information contained on or connected to our web site or the Xun Forum is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.
Item 1a. Risk Factors
The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business could be materially adversely affected. In such case, the Company may not be able to proceed with its planned operations and your investment may be lost entirely.
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20
RISK FACTORS
Risks Related to Our Business
We have extremely limited assets and ceased generating revenue.
We have little assets and have had limited revenues since inception. We will not receive revenues until we complete funding through debt, equity, or Joint Venture financing.
We will, in all likelihood, sustain operating expenses without corresponding revenues, at least until the consummation of a debt, equity, or Joint Venture financing or consummate a business combination with a profitable business. This may result in our incurring a net operating loss that will increase unless we consummate an acquisition of an oil and gas producing properties that are profitable. We cannot assure you that we can identify any oil and gas properties that will be profitable at the time of its acquisition by the Company or ever.
We will need to raise additional capital.
We will require additional financing. Any debt or equity financing may be dilutive to shareholders, and debt financing, if available, would increase expenses, and may involve restrictive covenants. We may be required to raise additional capital, at times and in amounts, which are uncertain, especially under the current capital market conditions. Under these circumstances, if we are unable to acquire additional capital or are required to raise it on terms that are less satisfactory than desired, it may have a material adverse effect on our financial condition.
Risks related to our business operations:
Environmental and Occupational Regulations will impact our operations
.
We are subject to various federal, state, provincial, and local international laws and regulations concerning occupational safety and health as well as the discharge of materials into, and the protection of, the environment. Environmental laws and regulations relate to, among other things:
|
·
assessing the environmental impact of drilling, workover or construction activities;
|
·
the generation, storage, transportation and disposal of waste materials;
|
·
the emission of certain gases into the atmosphere;
|
·
the monitoring, abandonment, reclamation and remediation of well and other sites, including sites of former operations; and
|
·
the development of emergency response and spill contingency plans.
|
The costs of environmental protection and safety and health compliance are significant
.
Compliance with environmental, safety and health initiatives can be costly
.
There is no assurance that we will be able to comply with these regulations
.
If we cannot comply with these regulations, we will be forced to cease all operations in which case you will lose your entire investment
.
We cannot predict with any reasonable degree of certainty our future exposure concerning such matters.
We are subject to exploration and production regulation
Our oil and gas operations are subject to various federal, state, provincial,
tribal,
and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to:
|
·
acquisition of seismic data;
|
·
location of wells;
|
·
drilling and casing of wells;
|
·
hydraulic fracturing;
|
·
well production;
|
·
spill prevention plans;
|
·
emissions and discharge permitting;
|
·
use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations;
21
|
·
surface usage and the restoration of properties upon which wells have been drilled;
|
·
calculation and disbursement of royalty payments and production taxes;
|
·
plugging and abandoning of wells; and
|
·
transportation of production.
|
Our operations also are subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units; the number of wells that may be drilled on the Oil and Gas Lease and the unitization or pooling of oil and gas properties. In the United States, some states allow the forced pooling or integration of tracts to facilitate exploration, while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws generally limit the venting or flaring of natural gas and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to limit the amounts of oil and gas we can produce from our wells and to limit the number of wells or the locations at which we can drill.
Public policy, which includes laws, rules and regulations, can change
Our operations are generally subject to federal laws, rules and regulations. In addition, we are also subject to the laws and regulations of various states and local governments. Pursuant to public policy changes, numerous government departments and agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. Changes in such public policy have affected, and at times in the future could affect, our operations. Political developments can restrict production levels, enact price controls,
and change
environmental protection requirements, and increase taxes, royalties and other amounts payable to governments or governmental agencies. Existing laws and regulations can also require us to incur substantial costs to maintain regulatory compliance. Our operating and other compliance costs could increase further if existing laws and regulations are revised or reinterpreted or if new laws and regulations become applicable to our operations. Although we are unable to predict changes to existing laws and regulations, such changes could significantly
affect
our profitability, financial
condition,
and liquidity, particularly changes related to hydraulic fracturing, income taxes and climate change as discussed below.
Hydraulic Fracturing
The U.S. Congress is currently considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural-gas industry in the hydraulic-fracturing process. Currently, regulation of hydraulic fracturing is primarily conducted at the state level through permitting and other compliance requirements. This legislation, if adopted, could establish an additional level of regulation and permitting at the federal level.
Environmental matters and costs can be significant
As an operator of oil and gas properties, we are subject to various federal,
state,
and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on us for the cost of pollution clean-up resulting from our operations in affected areas. Any future environmental costs of fulfilling our commitments to the environment are uncertain and will be governed by several factors, including future changes to regulatory requirements. There is no assurance that changes in or additions to public policy regarding the protection of the environment will not have a significant impact on our operations and profitability.
Insurance does not cover all risks
Exploration, development,
production,
and processing of oil and gas can be hazardous and involve unforeseen occurrence including, but not limited to blowouts,
cratering
,
fires,
and loss of well control. These occurrences can result in damage to or destruction of wells or production facilities, injury to persons, loss of life, or damage to property or the environment. We do not maintain insurance at this time against losses or liabilities in accordance with customary industry practices. However, insurance against all operational risks is not available to us.
We have generated limited revenues from operations. We have a history of losses and losses are likely to continue in the future.
We have generated limited revenues from operations. Cumulative losses as of May 31, 2012 totaled ($1,701,109). We have incurred significant losses in the past and we will likely continue to incur losses in the future unless our development program proves successful. Even if our development program produces oil and gas, there can be no assurance that we will be able to commercially exploit these resources, or generate sufficient revenues to operate profitably.
22
We will require additional financing to continue our development operations.
We will require significant working capital to continue our current development program. There can be no assurance that we will be able to secure additional funding to meet our objectives or if we are able to identify funding sources, that the funding will be available on terms acceptable to the Company. Should this occur, we will have to significantly reduce our development programs, which will limit our ability to secure additional equity participation in acquisitions of oil and gas leases or in various joint ventures.
There are no confirmed proven reserves of oil and gas reservoirs on any properties from which we may derive any financial benefit.
Neither the Company nor any independent petroleum geologist has confirmed that our leasehold interests can be commercially developed. In order to carry out additional development and/or exploration programs of any potential oil or gas deposits, we will require substantial additional funding.
We have limited history as a company engaged in oil and gas development or exploration.
We have limited history of earnings or cash flow from oil and gas operations. If we are able to proceed to production, commercial viability will be affected by factors that are beyond our control such as the particular attributes of the deposit, the fluctuation in the prices of oil and gas, the cost of construction and operating an oil or gas well, prices, and refining facilities, the availability of economic sources for energy, government regulations including regulations relating to prices, royalties, restrictions on production, quotas on exploration, as the costs of protection of the environment.
If our exploration costs are higher than anticipated, then our profitability will be adversely affected.
We are currently proceeding with development and/or exploration of our leasehold interests on the basis of estimated development/exploration costs. If our development/exploration costs are greater than anticipated we may be forced to terminate our operations until such time as we generate additional revenues to fund our operations. Factors that could cause development/exploration costs to increase are adverse weather conditions, difficult terrain, unknown or unexpected results when we re-enter a well, increased government regulation and shortages of qualified personnel.
We face many operating hazards.
The development and operation of an oil or gas well involves many risks, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. These risks include, among other things, ground fall, flooding, environmental hazards, and the discharge of toxic chemicals, explosions and other accidents. Such occurrences may result in work stoppages, delays in production, increased production costs, damage to or destruction of mines and other producing facilities, injury or loss of life, damage to property, environmental damage, and possible legal liability for such damages.
We do not maintain liability insurance.
We do not maintain liability insurance. As such, if we are found liable for any action, whether intentional or unintentional, we will be required to satisfy the liability with our own funds. Currently we have nominal assets and any monetary award would likely result in the close of our operations. Even assuming a significant increase in our assets and we secure liability insurance, the amount of the coverage may be insufficient to cover to insure against any award. Since the Company may not be able, or may elect not to insure, this may result in a material adverse change in the Company
s financial position. The nature of these risks is such that liabilities may exceed policy limits, in which event the Company would incur substantial uninsured losses.
There may be insufficient oil and gas reserves to develop any of our properties and our estimates may be inaccurate.
There is no certainty that any expenditures made in the development/exploration of any properties will result in discoveries of commercially recoverable quantities of oil or gas. Most development/exploration projects do not result in the discovery of commercially extractable deposits of oil or gas and no assurance can be given that any particular level of recovery will in fact be realized or that any identified leasehold interest will ever qualify as a commercially developed. Estimates of reserves, deposits, and production costs can also be affected by such factors as environmental regulations and requirements, weather, unexpected or unknown results when we re-enter a well, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations, and work interruptions.
Short term factors relating to reserves, such as the need for orderly development of the wells may also have an adverse effect on our development/exploration, drilling and on the results of operations. There can be no assurance the production of insignificant amounts of oil can be duplicated in a larger exploration program. Material changes in estimated reserves, development/drilling costs may affect the economic viability of any project.
23
We have no proven reserves.
All of our leasehold interests are without known bodies (reserves) of commercial oil or gas. Development of these properties will follow only upon obtaining satisfactory development/exploration results. The long-term profitability of the Company
s operations will be in part directly related to the cost and success of its development/exploration and development programs. Oil and gas development/exploration and development are highly speculative businesses, involving a high degree of risk. Few properties, which are explored, are ultimately developed into producing oil and gas fields. There is no assurance that our development/exploration and development activities will result in any discoveries of commercial quantities of oil and gas. There is also no assurance that, even if commercial quantities of oil or gas are discovered, a well can be brought into commercial production. Production/discovery of oil and gas is dependent upon a number of factors, not the least of which is the technical skill of the development/exploration personnel involved. The commercial viability of a well is also dependent upon a number of factors, many of which are beyond the Company
s control, such as worldwide economy, the price of oil and gas, government regulations, including regulations relating to royalties, allowable production, and environmental protection.
During our operations we may experience certain unanticipated conditions may arise or unexpected or unusual events may occur, including fires, floods, or earthquakes. It is not always possible to fully insure against such risks and we may decide not to take out insurance against such risks as a result of high premiums or for other reasons. Should such liabilities arise, they may reduce or eliminate any future profitability and may result in a decline in the value of the securities of the Company.
We face fluctuating oil and prices.
The price of oil and gas has experienced significant price movements over short periods of time and is affected by numerous factors beyond our control, including international economic and political trends, expectations of inflation, currency exchange fluctuations (including, the U.S. dollar relative to other currencies) interest rates, global or regional consumption patterns, speculative activities and increases in production due to improved exploration and d production methods. The supply of and demand for oil and gas are affected by various factors, including political events, economic conditions and production costs in major producing regions.
Drilling operations are hazardous, raise environmental concerns and raise insu
r
ance risks.
Drilling operations are by their nature subject to a variety of risks, such as, flooding, environmental hazards, the discharge of toxic chemicals and other hazards. Such occurrences may delay development or production, increase production costs, or result in a liability. We may not be able to insure fully or at all against such risks, due to political or other reasons, or we may decide not to take out insurance against such risks as a result of high premiums or other reasons. We intend to conduct our business in a way that safeguards public health and the environment and in compliance with applicable laws and regulations. Environmental hazards may exist on properties in which we hold an interest which are unknown to us and may have been caused by prior owners. Changes to drilling laws and regulations could require additional capital expenditures and increase operating and/or reclamation costs. Although we are unable to predict what additional legislation, if any, might be proposed or enacted, additional regulatory requirements could render certain operations uneconomic.
Our estimates of resources are subject to uncertainty. The cost of employing this technology maybe cost prohibitive or the cost may exceed the benefit.
Under current SEC standards, proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. The term
reasonable certainty
implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. Reasonable certainty can be established using techniques that have been proved effective by actual production from projects in the same reservoir or an analogous reservoir or by other evidence using reliable technology that establishes reasonable certainty. Reliable technology is a grouping of one or more technologies (including computational methods) that have been field-tested and have demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.
In order to establish reasonable certainty with respect to our leases, we would have to employ technologies that have been demonstrated to yield results with consistency and repeatability. The technical data used in the estimation of proved reserves include, but are not limited to, electrical logs, radioactivity logs, core analyses, geologic maps and available downhole and production data, seismic data and well test data. Generally, oil and gas reserves are estimated using, as appropriate, one or more of these available methods: production decline curve analysis, analogy to similar reservoirs or volumetric calculations. Reserves attributable to producing wells with sufficient production history are estimated using appropriate decline curves or other performance relationships. Reserves attributable to producing wells with limited production history and for undeveloped locations are estimated using
24
performance from analogous wells in the surrounding area and technical data to assess the reservoir continuity. In some instances, particularly in connection with exploratory discoveries, analogous performance data is not available, requiring us to rely primarily on volumetric calculations to determine reserve quantities. Volumetric calculations are primarily based on data derived from geologic-based seismic interpretation, open-hole logs, and completion flow data. When using production decline curve analysis or analogy to estimate proved reserves, they would be limited to estimates to the quantities of oil and gas derived through volumetric calculations.
The accuracy of any reserve estimate is a function of the quality of available geological, geophysical, engineering, and economic data, the precision of the engineering and geological interpretation and judgment. The estimates of reserves and future cash flows are based on various assumptions and are inherently imprecise. Even though these estimates may be reasonable and logical, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates. Also, the use of a discount factor for reporting purposes may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which the oil and natural gas industry in general are subject.
If we are unable to obtain all of our required governmental permits, our operations could be negatively impacted.
Our future operations, including exploration and development activities, required permits from various governmental authorities. Such operations are and will be governed by laws and regulations governing prospecting, development, production, exports, taxes, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. There can be no assurance that we will be able to acquire all required licenses or permits or to maintain continued operations at our properties.
We are subject to numerous environmental and other regulatory requirements.
All phases of drilling and development/exploration operations are subject to governmental regulation including environmental regulation. Environmental legislation is becoming stricter, with increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and heightened responsibility for companies and their officers, directors and employees. There can be no assurance that possible future changes in environmental regulation will not adversely affect our operations. As well, environmental hazards may exist on a property in which we hold an interest that was caused by previous or existing owners or operators of the properties and of which the Company is not aware at present.
Government approvals and permits are required to be maintained in connection with our drilling and development/exploration activities. We will require permits for our operations and there re is no assurance that delays will not occur in connection with obtaining all necessary renewals of such permits for the existing operations or additional permits for any possible future changes to the Company
s operations, including any proposed capital improvement programs. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions there under, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in drilling operations may be required to compensate those suffering loss or damage by reason of our activities and may be liable for civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permitting requirements, or more stringent application of existing laws, may have a material adverse impact on the Company resulting in increased capital expenditures or production costs, reduced levels of production at producing properties or abandonment or delays in development of properties.
There is no assurance that there will not be title or boundary disputes
.
Although we have investigated the right to explore and exploit our properties and obtained records from government offices, this should not be construed as a guarantee of title. Other parties may dispute the title to any of our properties or that any property may be subject to prior unregistered agreements and transfers. The title may be affected by undetected encumbrances or defects or governmental actions.
Local infrastructure may impact our development/exploration activities and results of operations.
Our activities depend, to one degree or another, on adequate infrastructure. Reliable roads, bridges and power and water supplies are important determinants that affect capital and operating costs. Unusual or infrequent weather phenomena sabotage or government or other interference in the maintenance or provision of such infrastructure could adversely affect the activities and profitability of the Company.
25
There may be challenges to our title in our properties.
While we intend to conduct our own due diligence prior to committing significant funds to any project, oil and gas properties may be subject to prior unregistered agreements, transfers or claims and title may be affected by undetected defects. Should this occur, we face significant delays, costs and the possible loss of any investments or commitment of capital.
Because of the speculative nature of completing development programs and drilling for oil and gas, there are significant risks that our business will fail.
Oil and gas development/exploration is extremely risky. We cannot provide any assurances that our activities will result in commercially exploitable reserves of oil and gas. Development/exploration for oil and gas is a speculative venture necessarily involving substantial risk. Any expenditure that we make may not result in the discovery of commercially exploitable reserves.
The market for oil and gas is volatile. This will have a direct impact on the Company
s revenues (if any) and profits (if any) and will probably have an adverse effect on our ongoing operations.
The price of both oil and gas has fluctuated significantly over the past few years. This has contributed to the renewed interest in oil and gas exploration. However, in the event that the price of either oil or gas falls, the interest in exploratory ventures may decline and the value of the Company
s business could be adversely affected.
Government regulation or changes in such regulation may adversely affect the Company
s business.
The Company intends to engage experts to assist it with respect to its operations. The Company deals with various regulatory and governmental agencies and the rules and regulations of such agencies. No assurances can be given that it will be successful in its efforts or dealings with these agencies. Further, in order for the Company to operate and grow its business, it needs to continually conform to the laws, rules, and regulations of such jurisdiction. It is possible that the legal and regulatory environment pertaining to the development/exploration and development of oil and gas properties will change. Uncertainty and new regulations and rules could increase the Company
s cost of doing business or prevent it from conducting its business.
We are in competition with companies that are larger, more established and better capitalized than we are.
Many of our potential competitors have:
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greater financial and technical resources;
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longer operating histories and greater experience in oil and gas
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We may not be able to generate revenue sufficient to maintain operations
To date, we have generated limited revenue. We have incurred significant losses since inception and there can be no assurance that we will be able to reverse this trend. Even if we are able to successfully identify commercially exploitable oil and gas reserves, there is no assurance that we will have sufficient financing to exploit these reserves, generate revenues, or find a willing buyer for the properties.
We have no proven reserves, extremely limited operations and no operating revenues.
We currently have no revenues from operations and no proven reserves. Reserves, by definition, contain mineral deposits in a quantity and in a form from which oil and gas may be economically and legally extracted or produced. We have not established that either oil or gas exists in any quantity in the property, which is the focus of our exploration efforts, and unless or until we do so, we will have nominal revenues.
Development/Exploration for economic deposits of oil and gas is speculative.
Our business is very speculative since there is generally no way to recover any of the funds expended on development/exploration unless the existence of commercially exploitable reserves are established and the Company can exploit those reserves by either commencing drilling operations, selling or leasing its interest in the property, or entering into a joint venture with a larger e company that can further develop the property. Unless we can establish and exploit reserves before our funds are exhausted, we will have to discontinue operations, which could make our stock valueless.
26
Our operations are subject to environmental risks.
Our operations are subject to strict environmental rules and regulations. There can be no assurance that we will be able to comply with these rules. Environmental legislation is evolving in some jurisdictions in a manner, which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect our projects
The oil and gas industry is highly competitive and the success and future growth of our business depend upon our ability to remain competitive in identifying and developing properties with sufficient reserves for economic exploitation.
The oil and gas industry is highly competitive and fragmented with limited barriers to entry, especially at the exploratory stages. We compete in national, regional, and local markets with large multi-national corporations and against start-up operators hoping to identify an oil or gas property. Some of our competitors have significantly greater financial resources than we do. This puts us at a competitive disadvantage if we choose to further exploit development opportunities.
The loss of key members of our senior management team could adversely affect the execution of our business strategy and our financial results.
We believe that the successful execution of our business strategy and our ability to move beyond the exploratory stages depends on the continued employment of key members of our senior management team. If any members of our senior management team become unable or unwilling to continue in their present positions, our financial results and our business could be materially adversely affected.
We operate in a regulated industry and changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce our revenues.
Our organization is subject to extensive and complex, federal and state laws and regulations. If we fail to comply with the laws and regulations that are directly applicable to our business, we could suffer civil and/or criminal penalties or be subject to injunctions or cease and desist orders.
We will hire third party companies to undertake our development programs.
We will have to hire employees or retain independent companies to oversee or perform our development operations. We currently do not have sufficient funds for either. As such, even with exploitable deposits of oil or gas, we may not be able to develop our leasehold interests.
Risks Related to Our Stockholders and Shares of Common Stock
Our stock price may be volatile.
The market price of our common stock has been volatile. We believe investors should expect continued volatility in our stock price. Such volatility may make it difficult or impossible for you to obtain a favorable selling price for our shares.
We have a large number of authorized but unissued shares of our common stock.
We have a large number of authorized but unissued shares of common stock, which our management may issue without further stockholder approval, thereby causing dilution of your holdings of our common stock. Our management will continue to have broad discretion to issue shares of our common stock in a range of transactions, including capital-raising transactions, mergers, acquisitions and in other transactions, without obtaining stockholder approval, unless stockholder approval is required. If our management determines to issue shares of our common stock from the large pool of authorized but unissued shares for any purpose in the future, your ownership position would be diluted without your further ability to vote on that transaction.
Shares of our common stock may continue to be subject to price volatility and illiquidity because our shares may continue to be thinly traded and may never become eligible for trading on a national securities exchange
.
While we may at some point be able to meet the requirements necessary for our common stock to be listed on a national securities exchange, we cannot assure you that we will ever achieve a listing of our common stock on a national securities exchange. Our shares are currently only eligible for quotation on the Over-The-Counter Bulletin Board, which is not an exchange. Initial listing on a national securities exchange is subject to a variety of requirements, including minimum trading price and minimum public
float
requirements, and could also be affected by the general skepticism of such markets concerning companies that are the result of mergers with inactive publicly-held companies. There are also continuing eligibility requirements for companies listed on public trading markets. If we are unable to satisfy the initial or continuing eligibility requirements of any such market, then our stock may not
27
be listed or could be delisted. This could result in a lower trading price for our common stock and may limit your ability to sell your shares, any of which could result in you losing some or all of your investments.
The market valuation of our business may fluctuate due to factors beyond our control and the value of your investment may fluctuate correspondingly.
The market valuation of emerging growth companies, such as us, frequently fluctuate due to factors unrelated to the past or present operating performance of such companies. Our market valuation may fluctuate significantly in response to a number of factors, many of which are beyond our control, including:
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changes in securities analysts
estimates of our financial performance, although there are currently no analysts covering our stock;
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fluctuations in stock market prices and volumes, particularly among securities of emerging growth companies;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;
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variations in our quarterly operating results;
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fluctuations in related commodities prices; and
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additions or departures of key personnel.
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As a result, the value of your investment in us may fluctuate.
Investors should not look to dividends as a source of income.
In the interest of reinvesting initial profits back into our business, we do not intend to pay cash dividends in the foreseeable future. Consequently, any economic return will initially be derived, if at all, from appreciation in the fair market value of our stock, and not as a result of dividend payments.
Our common stock may be subject to penny stock regulations, which may make it difficult for investors to sell their stock.
The Securities and Exchange Commission 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 (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). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules; deliver a standardized risk disclosure document prepared by the Commission, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and salesperson 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; 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 a stock that becomes subject to the penny stock rules. If our common stock becomes subject to the penny stock rules, holders of our shares may have difficulty selling those shares.
We have never paid dividends on our common stock.
We have never paid cash dividends on our common stock and do not presently intend to pay any dividends in the foreseeable future. We anticipate that any funds available for payment of cash dividends will be re-invested into the Company to further our business strategy.
We expect to issue more shares in an equity financing, which will result in substantial dilution
.
Our Articles of Incorporation authorize the Company to issue 5 billion shares of common stock. Any equity financing effected by the Company may result in the issuance of additional securities without stockholder approval and may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. Moreover, our common stock issued in any equity financing transaction may be valued on an arbitrary or non-arm
s-length basis by our management, resulting in an additional reduction in the percentage of common stock held by our then existing stockholders. Our board of directors has the power to issue any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of common stock or preferred stock are issued in connection with a business combination or otherwise, dilution to the interests of our stockholders will occur and the rights of the holders of common stock might be materially adversely affected.
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Our
Reserve Equity Financing Agreement could dilute the current shareholders.
The Company is registering 79,081,633 shares pursuant to a reserve equity financing agreement by and between AGS Capital Group, LLC (
AGS
), and the Company, dated July 11, 2013 (the
Drawdown Agreement
) and (ii) 4,081,633 commitment shares of our common stock we paid to AGS as a fee for providing the credit facility, which has a total drawdown amount of fifteen million dollars ($15,000,000) (the
Commitment Amount
). Pursuant to the Drawdown Agreement, the Company has the right to sell to AGS, at its sole discretion, and AGS has the obligation to purchase through advances to the Company, the Company's common stock through draw-down notice requests (each, a
Notice
) issued by the Company. The number of shares of common stock that AGS shall purchase shall be determined by dividing the dollar amount requested, by the purchase price. No fractional shares will be issued.
It is anticipated that AGS will sell these shares of common stock from time to time in one or more transactions, in negotiated transactions or otherwise, at prevailing market prices or at prices otherwise negotiated. We will not receive any proceeds from the sale of shares by AGS. However, we will receive the sale price of any common stock that we sell to AGS under the Drawdown Agreement.
AGS is an
underwriter
within the meaning of the Securities Act of 1933, as amended (the
Securities Act
) in connection with the resale of our common stock under the equity line of credit. AGS will pay us 90% of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately following our delivery of our Notice to AGS of our election to exercise our "put" right. The offering will terminate upon the earlier of (i) the first day of the month next following the 36-month anniversary of the date the registration statement, to which this prospectus is made a part, is declared effective by the SEC and (ii) the date on which AGS shall have made payment of advances in the aggregate amount of the Commitment Amount. Each issuance pursuant to a Notice shall dilute the current issued and outstanding shares which may decrease the value of the shares of common stock currently held by our shareholders.
Risks of Purchasing Shares:
Possible loss of entire investment.
The Offering is intended for investors who can accept the applicable risks. Prospective investors should not subscribe unless they can readily bear the consequences of the loss of their entire investment.
Exchange fluctuations.
Shares will be priced in US dollars, and persons investing by converting foreign currency will bear the risk of such conversion. The value of such investments may be affected favorably or unfavorably by fluctuations in exchange currencies. In addition, prospective investors whose assets and liabilities are primarily denominated in currencies other than US Dollars should take into account the potential risk of loss arising from fluctuations in the rate of exchange between the currency of the investment and such other currency.
Additional dilution as additional shares are issued which may decrease the market price of our common stock.
Additional offerings will likely have to be made in the future to raise capital to meet operating cash flow needs. Such offerings may include warrants for issuance of additional common stock, further diluting the number of shares of common stock outstanding from time to time. An increase in the number of our shares of common stock from these events or others may result in a decrease of the market price for our common stock and will dilute the ownership interest of current shareholders.
Shares eligible for future sale under Rule 144 may adversely affect the market for our securities.
From time to time, certain of our stockholders who hold restricted securities may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, subject to certain limitations. Although current stockholders may have no current intention or ability to sell their shares, any substantial sales by holders of our common stock in the future pursuant to Rule 144 may have a material adverse effect on the market price of our securities.
The price of our common stock is subjected to volatility.
The market for the Company
s common stock is highly volatile. The trading price of the Company
s common stock is subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, and general economic
29
and market conditions. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to their markets or relating to the Company could result in an immediate and adverse effect on the market price of our common stock. The highly volatile nature of the Company
s stock prices may cause investment losses for their shareholders. If securities class action litigation is brought against the Company, such litigation could result in substantial costs while diverting management's attention and resources.
Disruptions in global financial markets and deteriorating global economic conditions could cause lower returns to investors.
Disruptions in global financial markets and deteriorating global economic conditions could adversely affect the value of the Company
s common stock. The current state of the economy and the implications of future potential weakening may negatively impact market fundamentals, resulting in lower revenues and values for the Company
s business opportunities and investments.
If securities or industry analysts do not publish research or reports about the Company
s business or if they issue an adverse or misleading opinion regarding the Company's stock, its price and trading volume could decline.
The trading market for the Company
s common stock will be influenced by the research and reports that industry or securities analysts publish about the Company or its business, if any.
Our shares will be deemed to be "penny stocks" as defined in the Securities Exchange Act of 1934, as amended, and, as a result, will be subject to various eligibility and disclosure requirements on broker-dealers engaged in the resale of these shares.
The shares offered in this prospectus will be "penny stocks" as that term is defined in the Securities Exchange Act of 1934, as amended, (the
Exchange Act
) to mean, among other definitions, equity securities with a price of less than $5.00 per share. Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or an accredited investor must make a special suitability determination regarding the purchaser and provide special disclosure documents to the purchaser. The imposition of these suitability standards and special disclosures could reduce an investor's ability to resale the shares at a time or price desired. See the section "Market for Common Equity and Related Stockholder Matters."
If we fail to remain Current on our reporting requirements, we could be removed from quotation by the OTCBB, which would limit the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market.
Companies quoted on the OTCBB must be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges on the OTCBB. If we fail to remain current on our reporting requirements, we could be removed from the OTCBB. As a result, the market liquidity for our securities could be adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market.
Risks Related to the equity line of credit:
AGS will pay less than the then-prevailing market price of our common stock which could cause the price of our common stock to decline.
Our common stock to be issued under the Drawdown Agreement will be purchased at a ten percent (10%) discount or 90% of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately following our delivery of our Notice to AGS of our election to exercise our "put" right.
AGS has a financial incentive to sell our shares immediately upon receiving the shares to realize the profit between the discounted price and the market price. If AGS sells our shares, the price of our common stock may decrease. If our stock price decreases, AGS may have a further incentive to sell such shares. Accordingly, the discounted sales price in the Drawdown Agreement may cause the price of our common stock to decline.
We are registering an aggregate of 79,081,633shares of common stock to be issued under the equity line of credit. The sale of such shares could depress the market price of our common stock.
We are registering an aggregate of 79,081,633 shares of common stock under the registration statement of which this prospectus forms a part for issuance pursuant to the equity line of credit. The sale of these shares into the public market by AGS could depress the market price of our common stock.
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We may not have access to the full amount under the equity line of credit.
For the five consecutive trading days prior to September 9, 2013, the lowest closing trade price of our common stock was $0.0008. There is no assurance that the market price of our common stock will increase substantially in the near future. The entire commitment under the equity line of credit is $15,000,000. The aggregate number of shares of common stock necessary to raise the entire $15,000,000 at $0.0008 per share is 18.5 Billion. The number of common shares that remains issuable is lower than the number of common shares we need to issue in order to have access to the full amount under the equity line of credit. Therefore, we may not have access to the remaining commitment under the equity line of credit unless the market price of our common stock to increase substantially. The Company may have to restructure the common stock through a common stock reverse split to meet its minimum price of $0.50 per share of common stock.
Our common stock price may decline by our draw on our equity line of credit.
Effective July 11, 2013, we entered into the Drawdown Agreement with AGS. Pursuant to the Drawdown Agreement, when we deem it necessary, we may raise capital through the private sale of our common stock to AGS at a price equal to 90% of the average of the three (3) lowest closing bid prices of our common stock during the ten (10) consecutive trading days immediately following the date our Notice is delivered. Because the put price is lower than the prevailing market price of our common stock, to the extent that the put right is exercised, your ownership interest may be diluted.
There may not be sufficient trading volume in our common stock or price of our common stock to permit us to acquire adequate funds which may adversely affect our liquidity.
The Drawdown Agreement provides that the dollar value that we will be permitted to request from AGS in each Notice may be up to $250,000, provided that the number of shares sold pursuant to each Notice shall not exceed 200% of the average daily trading volume for the previous 10 trading days. If the average daily trading volume in our common stock is too low, it is possible that we may not be permitted to draw the full amount of proceeds of the drawdown request, which may not provide adequate funding for our planned operations and may materially decrease our liquidity.
We may draw on our equity line of credit to the extent that a change of control occurs.
The Company may continue to make drawdown requests while the AGS holds shares of common stock or sells shares to a specific party, thereby causing the AGS or such purchasing party to gain control of the Company. This could jeopardize the execution of the Company
s business plan and may disrupt operations.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties.
Executive Offices:
Our executive offices are currently located at 12759 NE Whitaker Way, #C453, Portland, Oregon, 97230, an office leased by Peter Matousek, one of our executives. Mr. Matousek provides this office to the Company at a charge of $150.00 per month. This office space is currently sufficient for our needs and we expect it to be sufficient for the foreseeable future or until such time as we acquire a target company or have sufficient revenues to cover the costs of leasing or purchase office space.
Oil and Gas Leases
The Company owns 30 oil well locations on three oil and gas leases in Venango County, Pennsylvania as of May 31, 2013.
The Company has no oil and gas leases as of May 31, 2012.
Item 3. Legal Proceedings
On May 10, 2011, the Company accepted an Offer to Purchase from Lea Kennedy d/b/a LuxemBarings (
Purchaser
) to purchase $10 million of the Company
s common stock based on the average of 5 consecutive trading day
s close prior to date of closing. The Offer to Purchase was scheduled to close on or before June 24, 2011. The Purchaser failed to complete the transaction, after mutually agreed extensions of the closing date. The Company has retained legal counsel to take legal action against the Purchaser for failing to complete the purchase transaction and for damages to the Company as a result of the failure to complete the transaction. The Company has recognized losses, at cost, in the financial statements for the period ended May 31, 2012 and legal costs for the fiscal year ending May 31, 2013.
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On March 23, 2013 The United States District Court For The Southern District Of Illinois granted summary judgment on Xun Energy
s breach of contract claim against Lea Kennedy d/b/a/ LuxemBarings. The amount of damages remains an issue to be resolved in the case and the Company's "fraud in the inducement claim" alleged in its complaint remains pending.
Subsequent to May 31, 2013, on July, 8, 2013, the Company was awarded a judgment dismissing, without prejudice, the legal action between Xun Energy, Inc., as Plaintiff and Lea Kennedy, an individual, d/b/a LUXEMBARINGS, as Defendant. The Company filed for a voluntary dismissal without prejudice on the legal action, refer to NOTE 23: SUBSEQUENT EVENTS of the Notes to the Financial Statements.
Item 4. Submission of Matters to a Vote of the Security Holders.
None
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PART II
Item 5.
Market for Registrant
s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
A.
Market Information
Our common stock trades on the Over-the-Counter-Bulletin Board under the symbol ("XNRG"). There is a very limited market for our common stock, with very limited trading activities. Until October 2009 there was no posted bid or ask price for our common stock. The following table shows the high and low closing sales prices for our Common Stock for the two most recent fiscal years. The quotations reflect inter dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The information is derived from information received from online stock quotation services.
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|
|
| |
|
Year ended May 31, 2013
|
|
Year ended May 31, 2012
|
|
HIGH
|
LOW
|
|
HIGH
|
LOW
|
First Quarter
|
$0.0800
|
$0.0250
|
|
$0.140
|
$0.011
|
Second Quarter
|
$0.0440
|
$0.0035
|
|
$0.015
|
$0.002
|
Third Quarter
|
$0.0240
|
$0.0040
|
|
$0.120
|
$0.020
|
Fourth Quarter
|
$0.0180
|
$0.0059
|
|
$0.080
|
$0.010
|
*The price of the common stock has been adjusted to reflect an 80:1forward split of our common stock in August 2010.
B.
Holders
As of May 31, 2013, the Company had 63 active shareholders of record. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name.
C.
Transfer Agent
Our transfer agent is
Holladay Stock Transfer, Inc. whose address is 2939 N. 67
th
Place #C, Scottsdale, Arizona 85251 and their telephone number is (480)481-3940.
D.
Dividends
Holders of our common stock are entitled to receive such dividends as our Board may declare from time to time from any surplus that we may have. We have not paid dividends on our common stock since the date of our incorporation and we do not anticipate paying any common stock dividends in the foreseeable future. We anticipate that any earnings will be retained for development and expansion of our businesses and we do not anticipate paying any cash dividends in the foreseeable future. Future dividend policy will depend upon our earnings, financial condition, contractual restrictions and other factors considered relevant by our Board and will be subject to limitations imposed under Nevada law.
E.
Equity Compensation Plan
Executive and Board Compensation
The Company entered in a Management and Financial Service Agreement with Mr. Wayne St. Cyr as the Executive Vice President, Marketing and Strategic Development on December 21, 2010 for a ten day period ending December 31, 2010 which was extended for a 12 month term to December 31, 2011, whereby the Executive Vice President, Marketing and Strategic Development is paid $10,000 per month. The Company has not renewed the contract with Mr. Ct. Cyr and has retained Mr. St. Cyr on a month to month basis. In addition to his duties as Executive Vice President, Marketing and Strategic Development, Mr. St. Cyr is the Corporate Secretary for the Company. Mr. St Cyr is paid $10,000 per month.
The Company entered into a Management and Financial Service Agreement for Mr. Jerry G. Mikolajczyk for a 12-month period commencing on June 1, 2011 and ending May 31, 2012. Mr. Mikolajczyk is hired through a service company, and will be paid $120,000 in cash payments for the services of Mr. Mikolajczyk. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000. The Company has not renewed the contract with Mr. Mikolajczyk. Mr. Mikolajczyk continues to work for the Company on a month-to-month basis and is paid $10,000 per month.
33
The Company entered into a Management and Financial Service Agreement with Mr. Peter Matousek for a 12-month period commencing June 1, 2011 and ending May 31, 2012 whereby Mr. Matousek will be paid $90,000 in cash payments. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000. The Company has not renewed the contract with Mr. Matousek. Mr. Matousek continues to work for the Company on a month-to-month basis and is paid $7,500 per month.
The Company entered into Board Member Compensation Agreements with Mr. Kevin M. Grapes and Mr. Jerry G. Mikolajczyk as directors of the Company for a term of one (1) year ending August 31, 2012. Both Mr. Grapes and Mr. Mikolajczyk will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses.
On May 21, 2012, Mr. Kevin M. Grapes resigned as a Board member.
On May 22, 2012, Company entered into a Board Member Compensation Agreement with Dr. William D. Spier as a director of the Company for a term of one (1) year ending May 31, 2013. Dr. Spier will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses.
On May 25, 2012, Company entered into a Board Member Compensation Agreement with Mr. Peter Matousek as a director of the Company for a term of one (1) year ending May 31, 2013. Mr. Matousek will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses.
The Company authorized and approved an aggregate of 136,129 shares for the period ended May 31, 2012 with an average price of $0.0333 per share to the Board pursuant to a Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Kevin M. Grapes, Mr. Peter Matousek and Dr. William D. Spier. The Company issued 105,000 of the 136,129 shares to the Board as of May 31, 2012. The balance, 31,129 shares, cost of $2,106 for the period March 1, 2012 to May 31, 2012, were issued to the Board on June 25, 2012.
The Company authorized and approved an aggregate of 45,000 shares for the period ended August 31, 2012 with an average price of $0.04033 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier. The 45,000 shares were issued to the Board on October 26, 2012.
On August 31, 2012, Jerry G. Mikolajczyk was re-appointed as a director by the Board of Directors of the Company for another one-year term ending August 31, 2013. In consideration for Mr. Mikolajczyk
s service as director, the Company will issue 5,000 shares per month of the Company
s stock, which will be valued based on the average of the five trading day close price prior to each month end. In addition, the Company will reimburse Mr. Mikolajczyk for the preapproved cost of airfare, travel expenses and disbursements made on behalf of the Company.
The Company authorized and approved an aggregate of 45,000 shares for the period ended November 30, 2012 with an average price of $0.01228 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier.
The Company authorized and approved an aggregate of 45,000 shares for the period ended February 28, 2013 with an average price of $0.01093 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier.
On May 30, 2013, the Board of Directors renewed the Board Member Compensation Agreement with Dr. William D. Spier as a director of the Company for a term of one (1) year ending May 31, 2014. Mr. Spier will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5 million.
On May 30, 2013, the Board of Directors renewed the Board Member Compensation Agreement with Mr. Peter Matousek as a director of the Company for a term of one (1) year ending May 31, 2014. Mr. Matousek will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5 million.
34
On May 31, 2013, the Company entered into a Management and Financial Service Agreement with Dr. William D. Spier as Treasurer of the Company for a 12-month period commencing June 1, 2013 and ending May 31, 2014 whereby Dr. Spier will be paid $90,000 in cash payments. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5 million.
The Company authorized and approved an aggregate of 45,000 shares for the quarter ending May 31, 2013 with an average price of $0.01033 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier.
The Schedule of Board Compensation below represents the shares issued or approved to the Board with the 5-Day Average Share Closing Price for each month during the fiscal year ending May 31, 2013:
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|
|
| |
Schedule of Board Compensation
|
|
|
|
|
|
Month
|
Board Shares Approved, Not Issued
|
Board Shares Issued
|
5 Day Average Share Closing Price
|
Amount
|
June
|
0
|
15,000
|
$0.03800
|
$
570.00
|
July
|
0
|
15,000
|
$0.04400
|
$
660.00
|
August
|
0
|
15,000
|
$0.03900
|
$
585.00
|
Quarter Total
|
0
|
45,000
|
$0.04033
|
$
1,815.00
|
September
|
0
|
15,000
|
$0.02320
|
$
348.00
|
October
|
0
|
15,000
|
$0.00770
|
$
115.60
|
November
|
0
|
15,000
|
$0.00590
|
$
89.10
|
Quarter Total
|
0
|
45,000
|
$0.01228
|
$
552.70
|
December
|
0
|
15,000
|
$0.00774
|
$
116.10
|
January
|
0
|
15,000
|
$0.00982
|
$
147.30
|
February
|
0
|
15,000
|
$0.01522
|
$
228.30
|
Quarter Total
|
0
|
45,000
|
$0.01093
|
$
491.70
|
March
|
0
|
15,000
|
$0.01392
|
$
208.80
|
April
|
0
|
15,000
|
$0.01028
|
$
154.20
|
May
|
0
|
15,000
|
$0.00680
|
$
102.00
|
Quarter Total
|
0
|
45,000
|
$0.01033
|
$
465.00
|
Year Total
|
0
|
180,000
|
$0.01846
|
$
3,323.50
|
F.
Sales of Unregistered Securities
We issued shares of our common stock to investors which were exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") by virtue of Section 4(2) thereof, or Regulation D or Regulation S promulgated thereunder. All recipients had adequate access, through their relationships with us, to information about us.
35
The Company authorized and approved an aggregate of 136,129 shares for the period ended May 31, 2012 with an average price of $0.0333 per share to the Executive and Board pursuant to Board Member Compensation Agreements with Mr. Peter Matousek, Mr. Donald Lynch, Mr. Jerry G. Mikolajczyk, Mr. Kevin M. Grapes and Dr. William D. Spier. The Company issued 105,000 of the 136,129 shares to the Board as of May 31, 2012. The balance of 31,129 shares was issued to the Board on June 25, 2012.
The Company issued 20 Million shares on August 31, 2012 for $1,000,000 pursuant to a twenty-four month agreement with Prodigy Asset Management, LLC.
The Company issued 11.7 Million shares on August 31, 2012 for $585,000 pursuant to a Purchase and Sales agreement with Vencedor Energy Partners for the acquisition of 30 oil and gas well locations in Venango County, Pennsylvania.
On September 20, 2012, the Company and Charles Morgan Securities Inc. ("CMS") mutually agreed to terminate the Investment Banking Agreement between the Company and CMS. The 18 Million shares issued on April 12, 2012 for $900,000 to CMS was memorialized and cancelled.
The Company issued 1,428,571 shares on October 22, 2012 for $5,000 pursuant to a Convertible Promissory Note dated October 19, 2012.
The Company issued 16.2 Million shares on October 26, 2012 for $810,000 pursuant to a twelve month Financial Consulting Services Agreement with Vaquero Private Capital, Inc. (
VPC
) effective as of June 1, 2012. On December 18, 2012, the Company issued a Notice of Termination to VPC for breach of contract by VPC, thus terminating the September 4, 2012 twelve months Financial Consulting Services Agreement. The Company has placed a Stop Order on the transference of 16.2 million shares pending resolution of the breach of contract with VPC.
The Company issued 243,103 shares on October 26, 2012 for $6,077 for interest and penalties to a 3rd party lender.
The Company issued 45,000 shares with an average price of 0.01227 per share on October 26, 2012 for Board Member Compensation Agreements with Mr. Peter Matousek, Mr. Jerry G. Mikolajczyk, and Dr. William D. Spier.
The Company issued 1,162,790 shares on November 12, 2012 for $5,000 pursuant to a Convertible Promissory Note dated October 19, 2012.
The Company issued 45,000 shares for the period ended November 30, 2012 with an average price of $0.012167 per share on December 18, 2012 for Board Member Compensation Agreements with Mr. Peter Matousek, Mr. Jerry G. Mikolajczyk, and Dr. William D. Spier.
The Company issued 54,322 shares on December 18, 2012 for $1,880 for interest and penalties to a 3rd party lender.
The Company issued 423,728 shares on April 17, 2013 for $2,500 pursuant to a Convertible Promissory Note dated October 19, 2012.
The Company issued 45,000 shares for the period ended February 28, 2013 with an average price of $0.0109267 per share on April 30, 2013 for Board Member Compensation Agreements with Mr. Peter Matousek, Mr. Jerry G. Mikolajczyk, and Dr. William D. Spier.
The Company issued 4,081,633 shares on April 30, 2013 for $40,000 pursuant to a reserve equity financing agreement dated May 7, 2013.
The Company issued 2,061,855 shares on April 30, 2013 for $10,000 pursuant to a Convertible Promissory Note dated October 19, 2012.
The Company issued 2,857,143 shares on May 2, 2013 for $12,000 pursuant to a Convertible Promissory Note dated October 26, 2012.
The Company issued 2,222,222 shares on May 8, 2013 for $10,000 pursuant to a Convertible Promissory Note dated October 19, 2012.
The Company issued 3,658,537 shares on May 9, 2013 for $15,000 pursuant to a Convertible Promissory Note dated October 26, 2012.
36
The Company issued 1,700,000 shares on May 10, 2013 for $6,800 pursuant to a Convertible Promissory Note dated October 26, 2012.
The Company issued 4,811,707 shares on May 13, 2013 for $19,728 pursuant to a Convertible Promissory Note dated October 19, 2012.
The Company issued 45,000 shares for the period ended May 31, 2013 with an average price of $0.010333 per share on May 31, 2013 for Board Member Compensation Agreements with Mr. Peter Matousek, Mr. Jerry G. Mikolajczyk, and Dr. William D. Spier.
The issuance of the common stock was exempt from registration under Section 4(2) of the Securities Act.
G.
Stock Redemption
None
Item 6.
Selected Financial Data.
Not applicable.
Item 7.
Management
s Discussion and Analysis of Financial Condition and Results of Operations.
The following management
s discussion and analysis (
MD&A
) is management
s assessment of the historical financial and operating results of the Company during the period covered by the financial statements. This MD&A should be read in conjunction with the audited consolidated financial statements and the related notes and other information included elsewhere in this Annual Report on Form 10-K.
FORWARD LOOKING STATEMENTS
The statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects upon the Company. There can be no assurance that future developments affecting the Company will be those anticipated by management. Actual results may differ materially from those included in the forward-looking statements.
Readers are also directed to other risks and uncertainties discussed in other documents filed by the Company with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.
Introduction
We are an independent oil and natural gas development and production company. Our basic business model is to increase shareholder value by finding and developing oil and gas production through the development activities, which include drilling offset oil and gas wells and re-entering oil and gas wells, that have historical oil and gas production or are currently producing oil and gas, and selling the production from these, worked over wells at a profit. To be successful, we must, over time, need to complete our goal of raising sufficient funds to drill offset wells or complete development programs over the next year and then sell the resulting production at a price that is sufficient to cover our operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment.
We have a limited operating history of oil and gas production and no proven reserves, no production and negative cash flow. To date, we have had limited revenues and have not been able to generate sustainable positive earnings on a Company-wide basis. Our management cannot provide any assurances that the Company will ever operate profitably. As a result of our limited operating history,
we are more susceptible to the numerous business, investment and industry risks that have been described in Item 1A. Risk Factors of this Annual Report on Form 10K.
37
Our longer-term success depends on, among many other factors, the production of grade oil and gas properties and on the prevailing sales prices for oil and natural gas along with associated operating expenses. The volatile nature of the energy markets makes it difficult to estimate future prices of oil and natural gas; however, any prolonged period of depressed prices would have a material adverse effect on our results of operations and financial condition.
Our acquisition of the 30 oil and gas well locations, with the option for an additional 15 oil and gas well locations, in Venango County, Pennsylvania on August 31, 2012 will require $7,500,000 to complete the drilling and completions program. We have not completed our financing to be able to pay for the 30 oil and gas well drilling and completions program. We have an agreement with AGS Capital Group, LLC for a $15 Million Reserve Equity Financing (REF) which requires the Company to register 75 Million shares with the SEC. There is no guarantee that the Company will be successful in registering the 75 Million shares with the SEC or any guarantee that the Company will be successful in drawing down on the REF.
We have also applied for a $5 Million Small Business Administration (SBA) loan for the 30 oil and gas well program in Venango County, Pennsylvania. There is no guarantee that the Company will be approved for an SBA Loan or close on a SBA loan.
Our operations are focused on identifying and evaluating prospective oil and gas properties and funding projects that we believe have the potential to produce oil or gas in commercial quantities subject to the Company obtaining the necessary funding for the offset drilling or development programs.
Our inability to generate revenue for the 12 month period ending May 31, 2013 is due primarily to difficulties in our ability to raise sufficient funds necessary to close on the financing to commence drilling and completions on the 30 oil and gas well locations in Venango County, Pennsylvania during the fiscal year. There are no assurances that the Company will be successful in raising sufficient funds to accomplish our goals and objectives.
Results of Operations for Fiscal Year Ended May 31, 2013 as compared to May 31, 2012.
Revenues
We generated no revenue for the fiscal period ending May 31, 2013 and for the period ending May 31, 2012. Our operations to date have been financed by the sale of our common stock and third party loans. Operating expenses increased for the year ended May 31, 2013 which totalled $1,620,461 as compared to $557,330 for the year ended May 31, 2012. Our largest single operating expense to date has been professional fees totalling $1,577,002 for the year ended May 31, 2013 as compared to $540,033 for the year ended May 31, 2012. Most of these expenses have been incurred in connection with our attempts to establish field operations and in connection with ongoing corporate activities. General and Administrative expenses, including professional fees, totalled $1,620,461 and $557,330 respectively.
We incurred a net loss of $1,752,791 for the period ending May 31, 2013 compared to the net loss of $985,517, which includes a one-time impairment charge of $399,743, for the period ending May 31, 2012.
Until we obtain additional funding to complete our oil and gas well development program, we do not anticipate generating additional revenues, and any revenues that we generate may not be sufficient to cover our operating expenses. In which case we may have to cease operations and you may lose your entire investment.
Liquidity and Capital Resources
Assets and Liabilities
Our primary financial resource is our base of our unproven oil and gas leases. Our ability to fund our capital expenditure program is dependent upon the availability of capital resource financing. In the next fiscal year, we plan on spending approximately $7,500,000 in new capital investments for a 30 well offset drilling program including exercising our option for an additional 15 oil and gas wells. However our actual expenditures may vary significantly from this estimate if our plans for to obtain financing changes during the year. Factors such as changes in operating margins due to changes in the price of oil and gas and the availability of capital resources could increase or decrease our ultimate level of expenditures during the next fiscal year.
38
The changes in our capital resources at May 31, 2013 compared with May 31, 2012 are:
|
|
|
|
|
|
| |
|
|
May 31, 2013
|
|
May 31, 2012
|
|
Increase (Decrease)
|
Percentage Change
|
|
|
|
|
|
|
|
|
Cash
|
$
|
23,400
|
$
|
-
|
$
|
23,400
|
23400.00%
|
Current Assets
|
$
|
1,004,400
|
$
|
833,274
|
$
|
171,126
|
20.54%
|
Total Assets
|
$
|
2,482,970
|
$
|
833,964
|
$
|
1,649,006
|
197.73%
|
Current Liabilities
|
$
|
3,021,901
|
$
|
1,456,318
|
$
|
1,565,584
|
107.50%
|
Total Liabilities
|
$
|
3,021,901
|
$
|
1,582,128
|
$
|
1,439,774
|
91.00%
|
Working Capital Deficit
|
$
|
2,017,502
|
$
|
623,044
|
$
|
1,394,458
|
223.81%
|
Our working capital deficit increased by $1,394,458, from ($623,044) as of May 31, 2012 to ($2,017,502) as of May 31, 2013. This increase in the deficit was due to the amount of resources that was expended to source financing for the drilling and completions of our 30 oil and gas leases in Venango County, PA, and complete all the necessary SEC filings.
Over the last year, we better positioned our Company to better meet our corporate goals and objectives with the sourcing of the $15 Million REF, which have allowed us to move forward with our goals and objectives of being an oil and gas producing company. Our business is capital intensive. Our ability to grow is dependent upon favorably obtaining outside debt and capital and generating cash flows from operating activities necessary to fund our investment activities. There is no assurance that we will be able to achieve profitability. Since our future operations will continue to be dependent on successful development activities and our ability to seek and secure capital from external sources, should we be unable to achieve sustainable profitability this could cause any equity investment in the Company to become worthless.
Major sources of funds in the past for us have included the debt or equity markets. We will have to rely on these capital markets to fund future operations and growth. Our business model is focused on the development of our properties. Our ability to generate future revenues and operating cash flow will depend on successful completion of our planned programs and the acquisition of oil and gas producing properties, which may very likely require us to continue to raise equity or debt capital from outside sources.
The Company has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future development programs on certain leases or the loss of the lease itself. These ongoing capital commitments require us to seek capital from sources outside of the Company. The current uncertainty in the credit and capital markets, and the economic downturn, may restrict our ability to obtain needed capital.
Cash Flows
Changes in the net funds provided by or (used in) each of our operating, investing and financing activities are set forth in the table below:
|
|
|
|
|
|
| |
|
|
May 31, 2013
|
|
May 31, 2012
|
|
Increase (Decrease)
|
Percentage Change
|
Net cash provided by (used in) operating activities
|
$
|
175,841
|
$
|
(360,147)
|
$
|
535,988
|
148.82%
|
Net cash provided by (used in) investing activities
|
$
|
(835,000)
|
$
|
(70)
|
$
|
(834,930)
|
1,192,757%
|
Net cash provided by (used by) financing activities
|
$
|
682,559
|
$
|
335,149
|
$
|
347,410
|
103.66%
|
Cash Flow Used in Operating activities:
Cash flow from operating activities is derived from the limited production of our oil and changes in the balances of payables, or other non-oil property asset account balances. For the year ended May 31, 2013, we had a positive cash flow from operating activities of $175,841, in comparison to a cash flow of ($360,147) for the year ended May 31, 2012. The increase of $535,988 was the result of an increase in our payables balance. Variations in cash flow from operating activities may affect our level of development expenditures. Our expenditures consist primarily of our General and Administrative (G&A) expenses, which consist of consulting and professional services, employee compensation, legal, accounting, travel and other G&A expenses, which we have incurred in order to address necessary organizational activities.
39
Cash Flow from Investing Activities:
Cash flow from investing activities is derived from the acquisitions of our oil and gas property, plant and equipment and Other Assets. Cash used in investing activities for the year ended May 31, 2013 was ($835,000), an increase of $834,930 from the ($70) for the year ended May 31, 2012.
Cash Flow from Financing activities:
Cash flow from financing activities is derived from long-term liability account balances or in equity, account balances excluding retained earnings. Cash flow provided by financing activities was $682,559 for the year ended May 31, 2013. This is in comparison to $335,149 provided by financing activities for the year ended May 31, 2012. The increase of $347,410 in funds was borrowed for the acquisition of oil and gas leases and for our G&A expenses. We anticipate it will be necessary to rely on additional funding from the debt financing and from capital markets in the current fiscal year.
Our business is capital intensive. Our ability to grow is dependent upon favorably obtaining outside capital and generating cash flows from operating activities necessary to fund our investment activities. There is no assurance that we will be able to achieve profitability. Since our future operations will continue to be dependent on successful development activities and our ability to seek and secure capital from external sources, should we be unable to achieve profitability this could cause any equity investment in the Company to become worthless.
We have no ongoing revenues to satisfy our ongoing liabilities. Our auditors have issued a going concern opinion. Unless we secure equity, debt financing or Joint Venture partners, of which there can be no assurance, or identify a profitable acquisition candidate, we will not be able to continue any operations.
Plan of Operation For Fiscal Year 2013
We will attempt to continue to source equity or debt financing, or Joint Venture partners for our operating costs and for our oil and gas well drilling programs or attempt to identify a profitable acquisition candidate. Our REF agreement with AGS Capital Group, LLC for $15 Million requires the Company to register 75 Million shares of our stock with the SEC. This will take time to become effective. There is no guarantee that the Company will be successful in registering the 75 Million shares with the SEC. We have had discussions with several companies and individuals for funding and/or Joint Ventures. However, we have not come to terms with any company or individual as of May 31, 2013. We will attempt to finance our operating expenses with additional debt or through equity financing.
Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission (the
SEC
), encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The Company
s financial statements include a summary of the significant accounting policies and methods used in the preparation of the financial statements. Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the financial statements.
Use of Estimates - Management
s discussion and analysis or plan of operation is based upon the Company
s financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable and long-lived assets. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We review the carrying value of property and equipment for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on the Company's financial position, results of operations or cash flows.
40
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements. We do not anticipate entering into any off-balance sheet arrangements during the next 12 months.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
N/A
Item 8.
Financial Statements and Supplementary Data.
Our financial statements have been examined to the extent indicated in its reports by Weinberg & Baer LLC, Certified Public Accountants, and have been prepared in accordance with generally accepted accounting principles and pursuant to Regulation S-X as promulgated by the SEC and are included herein:
41
REPORT OF REGISTERED INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Xun Energy, Inc.
We have audited the accompanying balance sheets of Xun Energy, Inc. and subsidiaries (a Nevada corporation in the development stage) as of May 31, 2013 and 2012, and the related statements of operations, stockholders
equity, and cash flows for the years ended May 31, 2013 and 2012, and from inception (December 20, 2007) through May 31, 2013. These financial statements are the responsibility of the Company
s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company
s internal control over financial reporting. Accordingly, we express no such opinion. 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 Xun Energy, Inc. and subsidiaries as of May 31, 2013 and 2012, and the results of its operations and its cash flows for the years ended May 31, 2013 and 2012, and from inception (December 20, 2007) through May 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 6 to the financial statements, the Company is in the development stage, and has not established any source of revenue to cover its operating costs. As such, it has incurred an operating loss since inception. Further, as of May 31, 2013, the cash resources of the Company were insufficient to meet its planned business objectives. These and other factors raise substantial doubt about the Company
s ability to continue as a going concern. Management
s plan regarding these matters is also described in Note 6 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Respectfully submitted,
Weinberg & Baer LLC
Baltimore, Maryland
September 2, 2012
42
|
XUN ENERGY, INC. AND SUBSIDIARIES
|
(A DEVELOPMENT STAGE COMPANY)
|
CONSOLIDATED BALANCE SHEETS
|
As of MAY 31, 2013 and MAY 31, 2012
|
(Expressed in U.S. dollars)
|
|
|
|
| |
ASSETS
|
|
2013
|
|
2012
|
Current Assets:
|
|
|
|
|
Cash
|
$
|
23,400
|
$
|
-
|
Other Current Assets
|
$
|
981,000
|
$
|
833,274
|
Total Current Assets
|
$
|
1,004,400
|
$
|
833,274
|
Fixed Assets:
|
|
|
|
|
Property, Plant and Equipment
|
|
942,250
|
|
-
|
Total Property, Plant and Equipment
|
$
|
942,250
|
$
|
-
|
Other Assets:
|
|
|
|
|
Intangible Assets - Legal and Contractual
|
|
|
|
|
Rights - Oil and Gas Leases
|
$
|
536,250
|
$
|
-
|
Trademarks
|
$
|
-
|
$
|
20
|
Incorporation Costs
|
$
|
70
|
$
|
170
|
Total Legal and Contractual
|
$
|
536,320
|
$
|
190
|
Total Intangible Assets
|
$
|
536,320
|
$
|
190
|
Other Long Term Assets
|
|
|
|
|
Bonds
|
$
|
-
|
$
|
500
|
Total Other Long Terms Assets
|
$
|
-
|
$
|
500
|
Total Other Assets
|
$
|
536,320
|
$
|
690
|
Total Assets
|
$
|
2,482,970
|
$
|
833,964
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
2,083,338
|
$
|
1,036,669
|
Loans payable
|
$
|
544,746
|
$
|
419,649
|
Convertible Promissory Notes, net of discount
|
$
|
393,818
|
$
|
-
|
Total Current Liabilities
|
$
|
3,021,901
|
$
|
1,456,318
|
Long Term Liabilities:
|
|
|
|
|
Notes - 3 Years and Less
|
$
|
-
|
$
|
116,374
|
Notes - 3 Years and Less Related Party
|
$
|
-
|
$
|
9,436
|
Total Long Term Liabilities
|
$
|
-
|
$
|
125,810
|
Total Liabilities
|
$
|
3,021,901
|
$
|
1,582,128
|
|
|
|
|
|
Stockholders' Equity (Deficit):
|
|
|
|
|
Preferred Stock, par value $0.0001, 50,000,000 shares authorized,
|
|
|
|
|
none issued and outstanding
|
$
|
-
|
$
|
-
|
Common Stock, par value $0.0001, 5,000,000,000 shares authorized,
|
|
|
|
|
385,460,240 and 330,643,500 shares issued and outstanding, respectively
|
$
|
38,546
|
$
|
33,064
|
Paid in Capital
|
$
|
2,876,422
|
$
|
919,881
|
Accumulated Deficit
|
$
|
(3,453,899)
|
$
|
(1,701,109)
|
Total Stockholders' Equity (Deficit)
|
$
|
(538,932)
|
$
|
(748,164)
|
Total Liabilities and Stockholders' Equity (Deficit)
|
$
|
2,482,970
|
$
|
833,964
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
43
|
XUN ENERGY, INC. AND SUBSIDIARIES
|
(A DEVELOPMENT STAGE COMPANY)
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
FOR THE YEAR ENDED MAY 31, 2013 AND May 31, 2012
|
AND CUMULATIVE FROM INCEPTION (DECEMBER 20, 2007)
|
(Expressed in U.S. dollars)
|
|
|
|
|
|
| |
|
|
For the year ended
May 31, 2013
|
|
For the year ended
May 31, 2012
|
|
December 20, 2007 (Inception) To
May 31, 2013
|
Revenue
|
|
|
|
|
|
|
Revenue - Operations
|
$
|
-
|
$
|
-
|
$
|
4,637
|
Total Revenue
|
$
|
-
|
$
|
-
|
$
|
4,637
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
$
|
-
|
$
|
-
|
$
|
1,653
|
|
|
|
|
|
|
|
Gross Profit
|
$
|
-
|
$
|
-
|
$
|
2,984
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
General and Administrative
|
$
|
1,620,461
|
$
|
557,330
|
$
|
2,893,073
|
Loss before income taxes
|
$
|
(1,620,461)
|
$
|
(557,330)
|
$
|
(2,890,089)
|
|
|
|
|
|
|
|
Other income (expense)
|
$
|
(132,330)
|
$
|
(428,187)
|
$
|
(563,810)
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
$
|
-
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
Net (Loss)
|
$
|
(1,752,791)
|
$
|
(985,517)
|
$
|
(3,453,899)
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
|
|
|
|
(Loss) per Common Shares
|
|
A
|
|
a
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of Common Shares*1
|
|
354,002,196
|
|
313,943,234
|
|
|
|
|
|
|
|
|
|
a = Less than ($0.01) per share
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
44
| |
XUN ENERGY, INC.
AND SUBSIDIARIES
|
|
(A DEVELOPMENT STAGE COMPANY)
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 20, 2007) THROUGH MAY 31, 2013
|
|
(Expressed in U.S. dollars)
|
The consideration for one (1) Series A Preferred Share is set at $0.50.
On April 29, 2013, the Board of Directors of the Company approved the authorization of seven hundred fifty thousand (750,000) Preferred Shares, designated as Series B Preferred Shares (Series B Shares), with a value of fifty cents ($0.50) per Series B Preferred Share, each with the following rights:
1.
May be converted by the holder into Company common stock. The conversion ratio is such that if the full 750,000 Series B Shares are issued, convert into Company common shares representing 70% of the fully diluted outstanding common shares outstanding after the conversion (which includes all common shares outstanding plus all common shares potentially issuable upon the conversion of all derivative securities not held by the holder).
2.
If the full 750,000 Series B Shares are not issued, the issued Series B Shares divided by 750,000 multiplied by 70% will represent the percentage of the fully diluted outstanding common shares outstanding after the conversion (which includes all common shares outstanding plus all common shares potentially issuable upon the conversion of all derivative securities not held by the holder). For example: 500,000 Series B Shares issued will result in the holder having 46.67% (500,000/750,000 X 70% = 46.67%) of the fully diluted outstanding common shares.
3.
The holder of Series B Shares may cast the number of votes at a shareholders meeting or by written consent that equals the number of common shares into which the Series B Shares are convertible on the record date for the shareholder action.
4.
In the event the Board of Directors declares a dividend payable to Company common shareholders, the holders of Series B Shares will receive the dividend that would be payable if the Series B Shares were converted into Company common shares prior to the dividend.
5.
In the event of a liquidation of the Company, the holders of Series B Shares will receive a preferential distribution of $0.001 per share, and will share in the distribution as if the Series B Shares had been converted into common shares.
The Series B Preferred Shares would be offered by the discretion of the President to existing shareholders holding more than 10% of the issued and outstanding shares of the Company or to directors of the Company. The subscribers for the Series B Shares will agree to execute a Series B Shares Unanimous Shareholders Agreement which will include right of first refusal to buy or sell the Series B Shares between the Series B Share holders or directors of the Company.
ISSUED AND OUTSTANDING
On December 20, 2007, the Company issued 400,000,000 (post forward split) common shares to its Directors for cash of $5,000.
Since inception (December 20, 2007) to November 30, 2009, the Company accepted subscriptions for 110,416,000 (post forward split) common shares from 37 investors under a private placement which closed on March 31, 2008. The private placement was not subject to any minimum investment and was priced at $0.0005 per share (post forward split). The Company accepted the subscriptions on various dates throughout the year.
The Company issued 1,259,000 common shares on November 30, 2010 for $62,950 for Accounts Receivable assignment.
The Company issued 741,000 common shares on November 30, 2010 for $37,050 cash in a negotiated transaction with an investor to fund the ongoing operations of the Company.
The Company issued 10,000 common shares on February 28, 2011 for $1,100 pursuant to an Oil and Gas Field Operations Services agreement with the Company.
The Company redeemed on March 28, 2011, 140 million shares of the Company
s common stock at a price of $87,500 or $0.000625 per share from Peter Matousek, the Company
s president and director, at the time. Also on March 28, 2011, the Company redeemed 60 million shares of the Company
s common stock from four shareholders. The purchase price for the 60 million totaled $37,500 or $0.000625 per share. With the redemption of the 200 million shares, the Company reduced its issued and outstanding shares to 312,501,000 shares of common stock as of March 28, 2011.
The Company authorized and approved an aggregate of 112,500 shares for the period ending May 31, 2011 with an average price of $0.1263 per share to the Executive and Board pursuant to a Management and Financial Service Agreement with Mr. Peter Matousek and a Board Member Compensation Agreement with Mr. Peter Matousek and Mr. Donald Lynch. During the fiscal year ending May 31, 2011, the Company issued 75,000 of the 112,500 shares to the Executive and Board with the remaining 37,500 shares issued on June 6, 2011.
The Company issued 18 Million shares on April 12, 2012 for $900,000 pursuant to a twenty-four month agreement with Charles Morgan Securities Inc. On September 20, 2012, the Company and CMS mutually agreed to terminate the IBA agreement between the Company and CMS and the 18 Million shares were cancelled.
The Company authorized and approved an aggregate of 136,129 shares for the period ended May 31, 2012 with an average price of $0.0333 per share to the Executive and Board pursuant to Board Member Compensation Agreements with Mr. Peter Matousek, Mr. Donald Lynch, Mr. Jerry G. Mikolajczyk, Mr. Kevin M. Grapes and Dr. William D. Spier, refer to NOTE 17: EXECUTIVE AND BOARD COMPENSATION for additional detail. The Company issued 105,000 of the 136,129 shares to the Board as of May 31, 2012. The balance, 31,129 shares, cost of $2,106 for the period March 1, 2012 to May 31, 2012, were issued to the Board on June 25, 2012.
The Company issued 20 Million shares on August 31, 2012 for $1,000,000 pursuant to a twenty-four month agreement with Prodigy Asset Management, LLC.
The Company issued 11.7 Million shares on August 31, 2012 for $585,000 pursuant to a Purchase and Sales agreement with Vencedor Energy Partners for the acquisition of 30 oil and gas well locations in Venango County, Pennsylvania.
The Company issued 1,428,571 shares on October 22, 2012 for $5,000 pursuant to a Convertible Promissory Note dated October 19, 2012.
The Company issued 16.2 Million shares on October 26, 2012 for $810,000 pursuant to a twelve month Financial Consulting Services Agreement with Vaquero Private Capital, Inc. effective as of June 1, 2012.
The Company issued 243,103 shares on October 26, 2012 for $6,077 for interest and penalties to a 3rd party lender.
The Company authorized and approved 45,000 shares for the period ended August 31, 2012 with an average price of $0.04033 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier, refer to NOTE 17: EXECUTIVE AND BOARD COMPENSATION for additional detail. The 45,000 shares were issued to the Board on October 26, 2012.
The Company issued 1,162,790 shares on November 12, 2012 for $5,000 pursuant to a Convertible Promissory Note dated October 19, 2012.
The Company authorized and approved 45,000 shares for the period ended November 30, 2012 with an average price of $0.012167 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier, refer to NOTE 17: EXECUTIVE AND BOARD COMPENSATION for additional detail. The 45,000 shares were issued to the Board on December 18, 2012.
The Company issued 54,322 shares on December 18, 2012 for $1,880 for interest and penalties to a 3rd party lender.
The Company issued 423,728 shares on April 17, 2013 for $2,500 pursuant to the conversion of a Convertible Promissory Note dated October 19, 2012.
The Company issued 45,000 shares on April 30, 2013 for the period ended February 28, 2013 with an average price of $0.0109267 per share for Board Member Compensation Agreements with Mr. Peter Matousek, Mr. Jerry G. Mikolajczyk, and Dr. William D. Spier.
The Company issued 4,081,633 shares on April 30, 2013 for $40,000 as incentive to enter into a reserve equity financing agreement dated May 7, 2013.
The Company issued 2,061,855 shares on April 30, 2013 for $10,000 pursuant to the conversion of a Convertible Promissory Note dated October 19, 2012.
The Company issued 2,857,143 shares on May 2, 2013 for $12,000 pursuant to the conversion of a Convertible Promissory Note dated October 26, 2012.
The Company issued 2,222,222 shares on May 8, 2013 for $10,000 pursuant to the conversion of a Convertible Promissory Note dated October 19, 2012.
The Company issued 3,658,537 shares on May 9, 2013 for $15,000 pursuant to the conversion of a Convertible Promissory Note dated October 26, 2012.
The Company issued 1,700,000 shares on May 10, 2013 for $6,800 including $1,300 for interest pursuant to the conversion of a Convertible Promissory Note dated October 26, 2012.
The Company issued 4,811,707 shares on May 13, 2013 for $19,728 including $2,228 for interest pursuant to the conversion of a Convertible Promissory Note dated October 19, 2012.
The Company issued 45,000 shares on May 31, 2013 for the period ended May 31, 2013 with an average price of $0.010333 per share for Board Member Compensation Agreements with Mr. Peter Matousek, Mr. Jerry G. Mikolajczyk, and Dr. William D. Spier.
NOTE 11: RECENT ACCOUNTING PRONOUNCEMENTS
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 12: CHANGE OF CONTROL
On February 9, 2010 certain shareholders sold and transferred an aggregate of 400,000,000 (post forward split) shares of Common Stock representing approximately 78.37% of the issued and outstanding shares of the Company to certain buyers (
Buyers
), at
$0.000625 per share, post forward split, for an aggregate purchase price of $250,000 (the
Purchase Price
). Such transaction is hereinafter referred to as the
Takeover
or the
Transaction
.
The table below represents the ownership and percentage of control by each of the new shareholders:
|
|
| |
Schedule of Ownership and Percentage of Control
|
|
Name of
Beneficial Owner
|
Class of Voting Stock
|
Number of Shares (Post Forward Split) of Voting Stock Beneficially Owned
|
Percentage of Class [1]
|
Donald Lynch
|
Common Stock
|
80,000,000
|
15.67%
|
Peter Matousek
|
Common Stock
|
320,000,000
|
62.69%
|
All Officers & Directors As a Group (2 Persons)
|
Common Stock
|
400,000,000
|
78.37% [1]
|
[1] Note 1 - Based on 510,416,000 (post forward split) shares of Common Stock issued and outstanding.
|
In connection with the Agreement, there was a change in the majority of the Company
s Board of Directors. Upon the consummation of the Takeover, Marina Karpilovski President and Director, and Michael Zazkis, Secretary, Treasurer & Director resigned and Mr. Donald Lynch was appointed as Director and Executive Officer of the Company and Mr. Peter Matousek was appointed as Director and Executive Officer of the Company.
On May 31, 2011, Mr. Jerry G. Mikolajczyk, the Company's President, CEO and Director, acquired 180,000,000 common stock shares of the Company from Mr. Peter Matousek, former President, CEO and Director of the Company. The acquisition by Mr. Mikolajczyk gave him control of 57.6% of the issued and outstanding shares of the Company. Subsequent to May 31, 2011, Mr. Mikolajczyk acquired additional shares directly and indirectly in the Company. As of Mr. Mikolajczyk
s last Form 4 filed with the SEC on August 27, 2012, Mr. Mikolajczyk is beneficial owner of 188,534,421
(48.92
%) of the issued and outstanding shares of the Company.
NOTE 13: LOANS PAYABLE
SHORT TERM LOANS
The Company has loans in the amount of $398,249, non-interest bearing and unsecured, with our President, CEO and Director, Jerry G. Mikolajczyk d/b/a Lighthouse Investments.
The Company has a loan in the amount of $20,000, is non-interest bearing and unsecured, with our President, CEO and Director, Jerry G. Mikolajczyk.
Our President, CEO and Director, Jerry G. Mikolajczyk, acquired 100% interest in Womack Holdings, Inc. on July 15, 2011. Womack Holdings, Inc. holds a unsecured Note Payable by the Company. The Note Payable is in the amount of $9,375. The principal, $9,375, will accrue interest at the rate of 0.55% (IRS Short Term AFR
April 2011) per annum, until March 31, 2014 (the
Maturity Date
). Principal plus all accrued interest will be due on the Maturity Date. The Company accrued $112 interest as of May 31, 2013.
On March 28, 2011, the Company entered into Redemption Agreement with Peter Matousek, the Company
s president and director, which provides in part for the Company to redeem from Mr. Matousek a total of 140 million shares of the Company
s common stock at a price of $87,500 or $0.000625 per share. On May 31, 2011, Mr. Matousek assigned the unsecured Note Payable to Comtax Services, Inc. The terms of the stock redemption, agreement is a non-callable 3-year note. The principal will accrue interest at the rate of 0.55% (IRS Short Term AFR
April 2011) per annum, until March 31, 2014 (the
Maturity Date
). Principal plus all accrued interest will be due on the Maturity Date. The Company accrued $1048 interest as of May 31, 2013.
On March 28, 2011, the Company entered into redemption agreements with four shareholders, which in total provided for the redemption of 60 million shares of the Company
s common stock. The purchase price for the 60 million totaled $37,500 or $0.000625 per share. The terms of the stock redemption, agreement is a non-callable 3-year note. The principal will accrue interest at the rate of 0.55% (IRS Short Term AFR
April 2011) per annum, until March 31, 2014 (the
Maturity Date
). Principal plus all accrued interest will be due on the Maturity Date. The Company accrued $337 interest on the three Promissory Notes (face value - $28,125) as of May 31, 2013.
CONVERTIBLE PROMISSORY NOTES (CPN
)
CPN#3 -
The Company issued an unsecured 9 month 8% Convertible Promissory Note (CPN#3) on December 6, 2012 due on September 10, 2013 for $37,500. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 55% of the Market Price. "Market Price" means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. "Trading Price" means, for any security as of any date, the closing bid price on the Over-the-Counter Bulletin Board or applicable trading market as reported by a reliable reporting service designated by the note holder. The note holder is limited to owning 4.99% of the Company
s issued and outstanding shares. Default interest is 22% per annum should the Company default on the CPN#3. The Company may prepay CPN#3 at any time for the period beginning on the date of the CPN#3 and ending on the date which is ninety (90) days following the date of the CPN#3, the CPN#3 may be prepaid by the Company upon payment to the note holder of an amount equal to the outstanding principal amount of the CPN#3 multiplied by 125% together with accrued and unpaid interest thereon. At any time during the period beginning on the ninety (91) day from the date of the CPN#3 and ending on the date which is one hundred twenty (120) days following the date of CPN#3, the Company may prepay the CPN#3 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#3 multiplied by 135% together with accrued and unpaid interest thereon. At any time during the period beginning on the date which is one hundred twenty one (121) days from the date of the CPN#3 and ending on one hundred eighty (180) days following the date of this CPN#3, the Company may prepay the CPN#3 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#3 multiplied by 145% together with accrued and unpaid interest thereon. After the expiration of one hundred eighty (180) days following the date of the CPN#3, the Company shall have no right of prepayment. On January 9, 2013, CPN#3 was amended to have a floor price of $0.00005. As of May 31, 2013, the Company accrued interest of $690.
CPN#4 -
The Company has loans in the amount of $231,160, non-interest bearing, with Comtax Services, Inc. The loans from Comtax Services, Inc. have been provided to the Company as working capital. On January 12, 2013 the Company amended the
Promissory Notes with Comtax Services, Inc. and issued an unsecured one year 10% Convertible Promissory Note (CPN#4) effective October 19, 2012 due on October 18, 2013 for $231,160. The principal and accrued interest is convertible up to 509,520 Series A Preferred Shares at a strike price of $0.50 per Series A Preferred Share with the following rights:
1.
Convertible to one hundred (100) common shares of the Company for each one (1) Series A Preferred Share; and
2.
Voting rights equal to one hundred (100) votes for each Series A Preferred Share.
On April 30, 2013, Comtax Services, Inc. assigned $75,000 of the principal of CPN#4 reducing the Company's obligations for CPN#4 to $156,160. As of May 31, 2013, the Company accrued interest of $16,262.
CPN#5 -
The Company has a loans in the amount of $62,000, non-interest bearing, with Comtax Services, Inc. The loans from Comtax Services, Inc. have been provided to the Company as working capital. On January 12, 2013 the Company amended the Promissory Notes for $62,000 with Comtax Services, Inc. and issued an unsecured one year 10% Convertible Promissory Note (CPN#5) effective December 1, 2012 due on November 30, 2013 for $62,000. The principal and accrued interest is convertible up to 136,400 Series A Preferred Shares at a strike price of $0.50 per Series A Preferred Share with the following rights:
1.
Convertible to one hundred (100) common shares of the Company for each one (1) Series A Preferred Share; and
2.
Voting rights equal to one hundred (100) votes for each Series A Preferred Share.
As of May 31, 2013, the Company accrued interest of $3,092.
CPN#6
- On February 14, 2012, the Company issued a Promissory Note for $100,000 and is carrying a contingent liability of $30,000, with Altmann Revocable Living Trust, Rlt. (ALRT), totaling $130,000 which became due December 31, 2012 with interest calculated at 8% per annum. The Company amended the $100,000 Promissory Note plus accrued interest of $7,036 to an unsecured one year 8% Convertible Promissory Note (CPN#6) effective January 1, 2013 due on January 1, 2014 for $100,000 with accrued interest of $7,036. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at the Conversion Price which shall be the greater of: (i) the Variable Conversion Price and (ii) the Fixed Conversion Price (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company's securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The "Variable Conversion Price is 80% of the Market Price. "Market Price" means the average of the Closing Prices (as defined below) for the Common Stock during the five (5) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent by the Holder to the Company via facsimile (the "Conversion Date"). "Closing Price" means, for any security as of any date, the closing price on the OTCQB (or such other OTC Markets or OTC Tiers, stock markets or stock exchange upon which the Company
s common stock is listed or traded). The note holder is limited to owning 4.99% of the Company
s issued and outstanding shares. The Company may prepay CPN#6 in advance in full or in part at any time and from time to time without premium or penalty. "Fixed Conversion Price" shall mean $0.0001. As of May 31, 2013, the Company accrued interest of $10,345.
CPN#7
- On June 25, 2012, the Company issued an unsecured Promissory Note for $25,000 to a 3rd party due on July 16, 2012 with a default penalty of $2,500, default interest at 20% per annum plus late fees. The Promissory Note was renegotiated with a due date of December 31, 2012. The Company paid the 3rd party $7,958.04 in interest, default fees and late fees for the period June 25, 2012 and December 31, 2012. The Company amended the $25,000 Promissory Note plus default penalty of $2,500 to an unsecured one year 20% Convertible Promissory Note (CPN#7) effective January 1, 2013 due on August 1, 2013. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder at the Conversion Price which shall be the greater of: (i) the Variable Conversion Price and (ii) the Fixed Conversion Price (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company's securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The "Variable Conversion Price is 80% of the Market Price. "Market Price" means the average of the Closing Prices (as defined below) for the Common Stock during the five (5) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent by the Holder to the Company via facsimile (the "Conversion Date"). "Closing Price" means, for any security as of any date, the closing price on the OTCQB (or such other OTC Markets or OTC Tiers, stock markets or stock exchange upon which the Company
s common stock is listed or traded). The note holder is limited to owning 4.99% of the Company
s issued and outstanding shares. The Company may prepay CPN#7 in advance in full or in part at any time and from time to time without premium or penalty. "Fixed Conversion Price" shall mean $0.0001. As of May 31, 2013, the Company accrued interest of $2,275.
CPN#8 -
On April 30, 2013, the Company issued an amended unsecured one year 8% Convertible Promissory Note (CPN#8) for $75,000 previously issued on October 19, 2012, assigned from CPN#4, due on October 19, 2013. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder. The Conversion Price (the
Conversion Price
) shall be the greater of: (i) the Variable Conversion Price (as defined herein) and (ii) the Fixed Conversion Price (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company
s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events).
58
The
Variable Conversion Price
shall mean 50% multiplied by the Market Price (as defined herein) (representing a discount rate of 50%).
Market Price
means the average of the lowest three (3) Closing Prices (as defined below) for the Common Stock during the five (5) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent by the Holder to the Company via facsimile (the
Conversion Date
).
Closing Price
means, for any security as of any date, the closing price on the Over-the-Counter Bulletin Board (the
OTCBB
) as reported by a reliable reporting service (
Reporting Service
) mutually acceptable to Company and Holder, or, if the OTCBB is not the principal trading market for such security, the closing price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no closing price of such security is available in any of the foregoing manners, the average of the closing prices of any market makers for such security that are listed in the
pink sheets
by the National Quotation Bureau, Inc. If the Closing Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Company and the holders of a majority in interest of the Notes being converted for which the calculation of the Closing Price is required in order to determine the Conversion Price of such Notes.
Trading Day
shall mean any day on which the Common Stock is traded for any period on the OTCBB, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. The
Fixed Conversion Price
shall mean $0.0001. The Company shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full, of an amount in cash (the
Prepayment Amount
) equal to 150%, multiplied by the sum of: (a) the then outstanding principal amount of CPN#8
plus
(b) accrued and unpaid interest on the unpaid principal amount of CPN#8 to the Prepayment Date
plus
(c) Default Interest, if any, on the amounts referred to in clauses (a) and (b). As of May 31, 2013, the Company accrued interest of $510.
CPN#9 -
The Company issued an unsecured 9 month 8% Convertible Promissory Note (CPN#9) on May 2, 2013 due on February 6, 2014 for $32,500. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder. The Conversion Price shall be the greater of: (i) the Variable Conversion Price (as defined herein) and (ii) the Fixed Conversion Price (subject, in each case, to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company
s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The "Variable Conversion Price" shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). "Market Price" means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. "Trading Price" means, for any security as of any date, the closing bid price on the Over-the-Counter Bulletin Board or applicable trading market as reported by a reliable reporting service designated by the note holder. The note holder is limited to owning 4.99% of the Company
s issued and outstanding shares. Default interest is 22% per annum should the Company default on the CPN#9. The Company may prepay CPN#9 at any time for the period beginning on the date of the CPN#9 and ending on the date which is ninety (90) days following the date of the CPN#9, the CPN#9 may be prepaid by the Company upon payment to the note holder of an amount equal to the outstanding principal amount of the CPN#9 multiplied by 125% together with accrued and unpaid interest thereon. At any time during the period beginning on the ninety (91) day from the date of the CPN#9 and ending on the date which is one hundred twenty (120) days following the date of CPN#9, the Company may prepay the CPN#9 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#9 multiplied by 135% together with accrued and unpaid interest thereon. At any time during the period beginning on the date which is one hundred twenty one (121) days from the date of the CPN#9 and ending on one hundred eighty (180) days following the date of this CPN#9, the Company may prepay the CPN#9 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#9 multiplied by 145% together with accrued and unpaid interest thereon. After the expiration of one hundred eighty (180) days following the date of the CPN#9, the Company shall have no right of prepayment. The floor price of $0.00005. As of May 31, 2013, the Company accrued interest of $207.
CPN#10 -
The Company issued an unsecured 9 month 8% Convertible Promissory Note (CPN#10) on May 13, 2013 due on February 17, 2014 for $42,500. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder. The Conversion Price shall be the greater of: (i) the Variable Conversion Price and (ii) the Fixed Conversion Price (subject, in each case, to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company
s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The "Variable Conversion Price" shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). "Market Price" means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. "Trading Price" means, for any security as of any date, the closing bid price on the Over-the-Counter Bulletin Board or applicable trading market as reported by a reliable reporting service designated by the note holder. The note holder is limited to owning 4.99% of the Company
s issued and outstanding shares. Default interest is 22% per annum should the Company default on the CPN#10. The Company may prepay CPN#10 at any time for the period beginning on the date of the CPN#10 and ending on the date which is ninety (90) days following the date of the CPN#10, the CPN#10 may be prepaid by the Company upon payment to the note holder of an amount equal to the outstanding principal amount of the CPN#10 multiplied by 125% together with accrued and unpaid interest thereon. At any time during the period beginning on the ninety (91) day from the date of the CPN#10 and ending on the date which is one hundred twenty (120) days following the date of CPN#10, the Company may prepay the CPN#10 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#10 multiplied by 135% together with accrued and unpaid interest thereon. At any time during the period beginning on the date which is one hundred twenty one (121) days from the date of the CPN#10 and ending on one
59
hundred eighty (180) days following the date of this CPN#10, the Company may prepay the CPN#10 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#10 multiplied by 145% together with accrued and unpaid interest thereon. After the expiration of one hundred eighty (180) days following the date of the CPN#10, the Company shall have no right of prepayment. The floor price of $0.00005. As of May 31, 2013, the Company accrued interest of $168.
CPN#11 - The Company issued an unsecured 9 month 8% Convertible Promissory Note (CPN#11) on May 29, 2013 due on March 1, 2014 for $37,750. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder. The conversion price (the
Conversion Price
) shall equal the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company
s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The "Variable Conversion Price" shall mean 57.5% multiplied by the Market Price (as defined herein) (representing a discount rate of 42.5%).
Market Price
means the average of the lowest three (3) Trading Prices (as defined below) for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.
Trading Price
means, for any security as of any date, the closing bid price on the Over-the-Counter Bulletin Board (the
OTCBB
), OTCQB or applicable trading market as reported by a reliable reporting service (
Reporting Service
) designated by the Holder or, if the OTCBB is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no closing bid price of such security is available in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the
pink sheets
by the National Quotation Bureau, Inc. In the case that the Company
s Common Stock is not deliverable by DWAC, an additional 5% discount will apply. In the case that the Company
s Common Stock is
chilled
for deposit into the DTC system and only eligible for clearing deposit, an additional 7.5% discount shall apply. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Company and the holders of a majority in interest of the Notes being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Notes.
Trading Day
shall mean any day on which the Common Stock is tradable for any period on the OTCBB, OTCQB or on the principal securities exchange or other securities market on which the Common Stock is then being traded.
Fixed Conversion Price
shall mean $0.00005. The Company may prepay the amounts outstanding hereunder pursuant to the following terms and conditions: (I) at any time during the period beginning on the Issue Date and ending on the date which is thirty (30) days following the Issue Date, the Company shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of CPN#11 to prepay the outstanding CPN#11 (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 125%, multiplied by the sum of: (w) the then outstanding principal amount of CPN#11 plus (x) accrued and unpaid interest on the unpaid principal amount of CPN#11 plus (y) Default Interest; (II) at any time during the period beginning the day which is thirty one (31) days following the Issue Date and ending on the date which is sixty (60) days following the Issue Date, the Company shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of CPN#11 to prepay the outstanding CPN#11 (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 130%, multiplied by the sum of: (w) the then outstanding principal amount of CPN#11 plus (x) accrued and unpaid interest on the unpaid principal amount of CPN#11 plus (y) Default Interest; (III) at any time during the period beginning the day which is sixty one (61) days following the Issue Date and ending on the date which is ninety(90) days following the Issue Date, the Company shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of CPN#11 to prepay the outstanding CPN#11 (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 135%, multiplied by the sum of: (w) the then outstanding principal amount of CPN#11 plus (x) accrued and unpaid interest on the unpaid principal amount of CPN#11 plus (y) Default Interest; (IV) at any time during the period beginning the day which is ninety one (91) days following the Issue Date and ending on the date which is one hundred twenty (120) days following the Issue Date, the Company shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of CPN#11 to prepay the outstanding CPN#11 (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 140%, multiplied by the sum of: (w) the then outstanding principal amount of CPN#11 plus (x) accrued and unpaid interest on the unpaid principal amount of CPN#11 plus (y) Default Interest; (V) at any time during the period beginning the day which is one hundred twenty one (121) days following the Issue Date and ending on the date which is one hundred fifty (150) days following the Issue Date, the Company shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of CPN#11 to prepay the outstanding CPN#11 (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 145%, multiplied by the sum of: (w) the then outstanding principal amount of CPN#11 plus (x) accrued and unpaid interest on the unpaid principal amount of CPN#11 plus (y) Default Interest; (VI) at any time during the period beginning the day which is one hundred fifty one (151) days following the Issue Date and ending on the date which is one hundred eighty (180) days following the Issue Date, the Company shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of CPN#11 to prepay the outstanding CPN#11 (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 150%, multiplied by the sum of: (w) the then outstanding principal amount of CPN#11 plus (x) accrued and unpaid interest on the unpaid principal amount of CPN#11 plus (y) Default Interest; (VII) after the expiration of one hundred eighty (180) following the date of CPN#11, the Company shall have no right of prepayment. As of May 31, 2013, the Company accrued interest of $17.
60
ASC DISCLOSURE
In accordance with ASC 470-20 Debt with Conversion and Other Options, the Company recorded total debt discounts of $379,486, and $-0- for the variable conversion feature of the convertible debts incurred during the fiscal year ended May 31, 2013 and year ended May 31, 2012, respectively. The discount will be amortized to debt discount over the term of the debentures using the effective interest method. The Company recorded $116,950 and $-0- of debt discount expense pursuant to the amortization of the convertible promissory note discounts during the fiscal year ended May 31, 2013 and May 31, 2012, respectively. The Company recorded $33,564 and $-0- of accrued interest payable for convertible promissory notes the during the fiscal year ended May 31, 2013 and May 31, 2012, respectively.
In accordance with ASC 815-15, the Company determined that the variable conversion feature and shares to be issued are not embedded derivative features, and these are included in Loan Payable on the balance sheet.
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS
Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company
s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company could realize in a current market exchange.
As of May 31,2012 and 2011,the carrying value of accounts payable and loans approximated fair value due to the short-term nature and maturity of these instruments.
NOTE 16: CORPORATE ACTION
A Certificate of Amendment to the Certificate of Incorporation was authorized by the Company
s Board of Directors on May 15, 2010 and approved by the written consent of the holders of a majority of the Company
s shareholders owning a majority of the outstanding issued and outstanding voting shares. The Certificate of Amendment provided for the Company to:
·
Change its name from Real Value Estates, Inc. to Xun Energy, Inc.;
·
Increase the number of authorized shares of its common stock from 100 million shares $0.0001 par value to 5 billion shares of common stock, $0.0001 par value; and
·
An 80:1 forward split of the Company
s issued and outstanding common stock.
On July 20, 2010, the Company filed a Certificate of Amendment to the Company
s certificate of incorporation with the Nevada Secretary of State to effect the name change to Xun Energy, Inc. and to increase the authorized common stock to 5 billion shares of common stock, $0.0001 par value.
On August 3, 2010, the corporate action became effective whereby the 6,380,200 issued and authorized shares of common stock were forward split resulting in 510,416,000 issued and outstanding shares of common stock.
61
NOTE 16: COMMITMENTS
The Company entered in a Management and Financial Service Agreement with Mr. Wayne St. Cyr as the Executive Vice President, Marketing and Strategic Development on December 21, 2010 for a ten day period ending December 31, 2010 which was extended for a 12 month term to December 31, 2011, whereby the Executive Vice President, Marketing and Strategic Development is paid $10,000 per month. The Company has not renewed the contract with Mr. Ct. Cyr and has retained Mr. St. Cyr on a month to month basis. In addition to his duties as Executive Vice President, Marketing and Strategic Development, Mr. St. Cyr is the Corporate Secretary for the Company. Mr. St Cyr is paid $10,000 per month.
The Company entered into a Management and Financial Service Agreement for Mr. Jerry G. Mikolajczyk for a 12 month period commencing on June 1, 2011 and ending May 31, 2012. Mr. Mikolajczyk is hired through a service company, and will be paid $120,000 in cash payments for the services of Mr. Mikolajczyk. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000. The Company has not renewed the contract with Mr. Mikolajczyk. Mr. Mikolajczyk continues to work for the Company on a month-to-month basis and is paid $10,000 per month.
The Company entered into a Management and Financial Service Agreement with Mr. Peter Matousek for a 12 month period commencing June 1, 2011 and ending May 31, 2012 whereby Mr. Matousek will be paid $90,000 in cash payments. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000. The Company has not renewed the contract with Mr. Matousek. Mr. Matousek continues to work for the Company on a month-to-month basis and is paid $7,500 per month.
The Company entered into a Management and Financial Service Agreement with Dr. William D. Spier for a 7.25-month period commencing October 23 and ending May 31, 2013 whereby Dr. Spier was paid $29,032 in cash payments. The agreement was renewed for an additional 12 months at $7,500 per month ending May 31, 2014. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000.
NOTE 17: EXECUTIVE AND BOARD COMPENSATION
The Company entered in a Management and Financial Service Agreement with Mr. Wayne St. Cyr as the Executive Vice President, Marketing and Strategic Development on December 21, 2010 for a ten day period ending December 31, 2010 which was extended for a 12 month term to December 31, 2011, whereby the Executive Vice President, Marketing and Strategic Development is paid $10,000 per month. The Company has not renewed the contract with Mr. Ct. Cyr and has retained Mr. St. Cyr on a month to month basis. In addition to his duties as Executive Vice President, Marketing and Strategic Development, Mr. St. Cyr is the Corporate Secretary for the Company. Mr. St Cyr is paid $10,000 per month.
The Company entered into a Management and Financial Service Agreement for Mr. Jerry G. Mikolajczyk for a 12-month period commencing on June 1, 2011 and ending May 31, 2012. Mr. Mikolajczyk is hired through a service company, and will be paid $120,000 in cash payments for the services of Mr. Mikolajczyk. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000. The Company has not renewed the contract with Mr. Mikolajczyk. Mr. Mikolajczyk continues to work for the Company on a month-to-month basis and is paid $10,000 per month.
The Company entered into a Management and Financial Service Agreement with Mr. Peter Matousek for a 12-month period commencing June 1, 2011 and ending May 31, 2012 whereby Mr. Matousek will be paid $90,000 in cash payments. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000. The Company has not renewed the contract with Mr. Matousek. Mr. Matousek continues to work for the Company on a month-to-month basis and is paid $7,500 per month.
The Company entered into Board Member Compensation Agreements with Mr. Kevin M. Grapes and Mr. Jerry G. Mikolajczyk as directors of the Company for a term of one (1) year ending August 31, 2012. Both Mr. Grapes and Mr. Mikolajczyk will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses.
On May 21, 2012, Mr. Kevin M. Grapes resigned as a Board member.
62
On May 22, 2012, Company entered into a Board Member Compensation Agreement with Dr. William D. Spier as a director of the Company for a term of one (1) year ending May 31, 2013. Dr. Spier will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses.
On May 25, 2012, Company entered into a Board Member Compensation Agreement with Mr. Peter Matousek as a director of the Company for a term of one (1) year ending May 31, 2013. Mr. Matousek will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses.
The Company authorized and approved an aggregate of 136,129 shares for the period ended May 31, 2012 with an average price of $0.0333 per share to the Board pursuant to a Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Kevin M. Grapes, Mr. Peter Matousek and Dr. William D. Spier. The Company issued 105,000 of the 136,129 shares to the Board as of May 31, 2012. The balance, 31,129 shares, cost of $2,106 for the period March 1, 2012 to May 31, 2012, were issued to the Board on June 25, 2012.
The Company authorized and approved an aggregate of 45,000 shares for the period ended August 31, 2012 with an average price of $0.04033 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier. The 45,000 shares were issued to the Board on October 26, 2012.
On August 31, 2012, Jerry G. Mikolajczyk was re-appointed as a director by the Board of Directors of the Company for another one-year term ending August 31, 2013. In consideration for Mr. Mikolajczyk
s service as director, the Company will issue 5,000 shares per month of the Company
s stock, which will be valued based on the average of the five trading day close price prior to each month end. In addition, the Company will reimburse Mr. Mikolajczyk for the preapproved cost of airfare, travel expenses and disbursements made on behalf of the Company.
The Company authorized and approved an aggregate of 45,000 shares for the period ended November 30, 2012 with an average price of $0.01228 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier.
The Company authorized and approved an aggregate of 45,000 shares for the period ended February 28, 2013 with an average price of $0.01093 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier.
On May 30, 2013, the Board of Directors renewed the Board Member Compensation Agreement with Dr. William D. Spier as a director of the Company for a term of one (1) year ending May 31, 2014. Mr. Spier will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5 million.
On May 30, 2013, the Board of Directors renewed the Board Member Compensation Agreement with Mr. Peter Matousek as a director of the Company for a term of one (1) year ending May 31, 2014. Mr. Matousek will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5 million.
On May 31, 2013, the Company entered into a Management and Financial Service Agreement with Dr. William D. Spier as Treasurer of the Company for a 12-month period commencing June 1, 2013 and ending May 31, 2014 whereby Dr. Spier will be paid $90,000 in cash payments. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5 million.
The Company authorized and approved an aggregate of 45,000 shares for the period ended May 31, 2013 with an average price of $0.01033 per share to the Board pursuant to Board Member Compensation Agreements with Mr. Jerry G. Mikolajczyk, Mr. Peter Matousek and Dr. William D. Spier.
63
The Schedule of Board Compensation below represents the shares issued or approved to the Board with the 5-Day Average Share Closing Price for each month during the fiscal year ending May 31, 2013:
|
|
|
|
| |
|
Schedule of Board Compensation
|
|
|
|
|
|
Month
|
Board Shares Approved, Not Issued
|
Board Shares Issued
|
5 Day Average Share Closing Price
|
Cost Base
|
June
|
0
|
15,000
|
$ 0.03800
|
$ 570.00
|
July
|
0
|
15,000
|
$ 0.04400
|
$ 660.00
|
August
|
0
|
15,000
|
$ 0.03900
|
$ 585.00
|
Quarter Total
|
0
|
45,000
|
$ 0.04033
|
$ 1,815.00
|
September
|
0
|
15,000
|
$ 0.02320
|
$ 348.00
|
October
|
0
|
15,000
|
$ 0.00770
|
$ 115.60
|
November
|
0
|
15,000
|
$ 0.00590
|
$ 89.10
|
Quarter Total
|
0
|
45,000
|
$ 0.01228
|
$ 552.70
|
December
|
0
|
15,000
|
$ 0.00774
|
$ 116.10
|
January
|
0
|
15,000
|
$ 0.00982
|
$ 147.30
|
February
|
0
|
15,000
|
$ 0.01522
|
$ 228.30
|
Quarter Total
|
0
|
45,000
|
$ 0.01093
|
$ 491.70
|
March
|
0
|
15,000
|
$ 0.01392
|
$ 208.80
|
April
|
0
|
15,000
|
$ 0.01028
|
$ 154.20
|
May
|
0
|
15,000
|
$ 0.00680
|
$ 102.00
|
Quarter Total
|
0
|
45,000
|
$ 0.01033
|
$ 465.00
|
Year Total
|
0
|
180,000
|
$ 0.01846
|
$ 3,323.50
|
The following Schedules of Executive Compensation discloses compensation paid/accrued during the fiscal years ended May 31, 2013 and 2012 to the Company
s Officers and the most highly compensated executive officer whose total compensation exceeded $100,000 for the fiscal year ended May 31, 2013 (Collectively, the
Named Executive Officers
). No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the table below, were paid/accrued to the Named Executive Officers during these fiscal years.
|
|
|
|
| |
2013 Schedule of Executive Compensation
|
|
Name and Principal Position
|
Salary[2]
|
Bonus
|
StockAward
|
Option Awards
|
Total Salary
|
Jerry G. Mikolajczyk, President/CEO/CFO
|
$120,000
|
0
|
0
|
0
|
$120,000
|
Wayne St. Cyr, Executive Vice President
|
$120,000
|
0
|
0
|
0
|
$120,000
|
Peter Matousek, VP-Investor Relations[1]
|
$90,000
|
0
|
0
|
0
|
$90,000
|
Dr. William D. Spier, Treasurer
|
$29,032
|
0
|
0
|
0
|
$29,032
|
|
|
|
|
|
|
|
|
|
|
| |
2012 Schedule of Executive Compensation
|
|
Name and Principal Position
|
Salary[2]
|
Bonus
|
StockAward
|
Option Awards
|
Total Salary
|
Jerry G. Mikolajczyk, President/CEO/CFO
|
$120,000
|
0
|
0
|
0
|
$120,000
|
Wayne St. Cyr, Executive Vice President
|
$120,000
|
0
|
0
|
0
|
$120,000
|
Peter Matousek, VP-Investor Relations[1]
|
$90,000
|
0
|
0
|
0
|
$90,000
|
|
|
|
|
|
|
NOTE 18: COMMON SHARES PURCHASE LITIGATION
On May 10, 2011, the Company accepted an Offer to Purchase from Lea Kennedy d/b/a LuxemBarings (
Purchaser
) to purchase $10 million of the Company
s common stock based on the average of 5 consecutive trading day
s close prior to date of closing. The Offer to Purchase was scheduled to close on or before June 24, 2011. The Purchaser failed to complete the transaction, after mutually agreed extensions of the closing date. The Company has retained legal counsel to take legal action against the Purchaser for failing to complete the purchase transaction and for damages to the Company as a result of the failure to complete the transaction. The Company
has recognized losses, at cost, in the financial statements for the period ended May 31, 2012 and legal costs for the fiscal year ending May 31, 2013.
64
On March 23, 2013 The United States District Court For The Southern District Of Illinois granted summary judgment on Xun Energy
s breach of contract claim against Lea Kennedy d/b/a/ LuxemBarings. The amount of damages remains an issue to be resolved in the case and the Company's "fraud in the inducement claim" alleged in its complaint remains pending.
Subsequent to May 31, 2013, on July, 8, 2013, the Company was awarded a judgment dismissing, without prejudice, the legal action between Xun Energy, Inc., as Plaintiff and Lea Kennedy, an individual, d/b/a LUXEMBARINGS, as Defendant. The Company filed for a voluntary dismissal without prejudice on the legal action, refer to NOTE 23: SUBSEQUENT EVENTS.
NOTE 19: EXECUTIVE AND BOARD CHANGES
On May 31, 2011, Mr. Matousek, our President and CEO, advised that the roles and responsibilities are increasing for the Company and that Mr. Jerry G. Mikolajczyk, while as consultant to the Company, has been instrumental in developing and building the Company to its current status including funding and operations. Mr. Matousek advised that it is in the best interests for the Company and the Shareholders that Mr. Mikolajczyk have authority to continue developing the Company and have authority to make decisions at an Executive Level of the Company. Subsequently, Mr. Matousek resigned as President, CEO and CFO and the Company
appointed Jerry G. Mikolajczyk as Interim President, CEO and CFO until a permanent President and CEO is recruited and a permanent CFO is recruited. The Company entered into a Management and Financial Service Agreement for Mr. Jerry G. Mikolajczyk for a 12-month period commencing on June 1, 2011 and ending May 31, 2012. Mr. Mikolajczyk is hired through a service company, and will be paid $120,000 in cash payments for the services of Mr. Mikolajczyk. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000. The Company has not renewed the contract with Mr. Mikolajczyk. Mr. Mikolajczyk continues to work for the Company on a month-to-month basis and is paid $10,000 per month.
The Company also appointed Mr. Peter Matousek as the Company
s Vice-President of Investor Relations. The Company entered into a Management and Financial Service Agreement with Mr. Peter Matousek for a 12-month period commencing June 1, 2011 and ending May 31, 2012 whereby Mr. Matousek will be paid $90,000 in cash payments. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5 million. The Company has not renewed the contract with Mr. Matousek. Mr. Matousek continues to work for the Company on a month-to-month basis and is paid $7,500 per month.
On August 31, 2011, directors Peter Matousek, Donald Lynch and Jerry G. Mikolajczyk termed out. On September 1, 2011, the Company obtained the written consent of the stockholders holding a majority, 86.51%, of the outstanding voting rights of the Company (the "Consent"). The Consent approved the election of Kevin M. Grapes and Jerry G. Mikolajczyk as directors of the Company for a term of one (1) year ending August 31, 2012.
On May 21, 2012, Mr. Kevin M. Grapes resigned as a Board member.
On May 22, 2012, Company entered into a Board Member Compensation Agreement with Dr. William D. Spier as a director of the Company for a term of one (1) year ending May 31, 2013.
On May 25, 2012, Company entered into a Board Member Compensation Agreement with Mr. Peter Matousek as a director of the Company for a term of one (1) year ending May 31, 2013.
On August 31, 2012, Company entered into a Board Member Compensation Agreement with Mr. Jerry G. Mikolajczyk as a director of the Company for a term of one (1) year ending August 31, 2013.
Each Board member will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5 million.
NOTE 20: VENANGO 30 WELL LOCATION
On August 31, 2012 the Company entered into an Oil and Gas Well Location Agreement with Vencedor Energy Partners (Assignor). The agreement allows the Company to drill 30 offset oil and gas wells on 3 producing oil and gas leases in Venango County, Pennsylvania.
The Company paid $585,000 in the form of 11,700,000 shares of common stock (Shares) of the Company for the rights.
The Company will have 100% working interest in the wells and Net Revenue Interest as follows:
| |
Lease Name
|
Net Revenue Interest Breakdown
|
Rice
|
Master Lease Lessor - 12.5% Royalty, Master Lease Lessee 2.5% Override royalty interest, Assignor - 2.5% Override royalty interest; and the Company - 82.5% royalty interest;
|
|
|
Lalley
|
Master Lease Lessor - 12.5% Royalty, Master Lease Lessee 2.5% Override royalty interest, Assignor - 2.5% Override royalty interest; and the Company - 82.5% royalty interest; and
|
|
|
Corse
|
Master Lease Lessor - 15.0% Royalty, Master Lease Lessee 2.5% Override royalty interest, Assignor - 2.5% Override royalty interest; and the Company - 80.0% royalty interest.
|
65
The Agreement allows the Company to have the exclusive right to explore, operate, produce all naturally-occurring oil, gas, casing-head gas or gasoline, gas condensate and/or all other liquid or gaseous hydrocarbons and other marketable or non-marketable substances produced (Oil and Gas) from Oil and Gas deposits contained within and under the well location and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of the well location and other lands for the production of Oil and Gas to the Company. A well location is defined as a circle having a radius of l50 feet with the well, to a depth as allowed in the Master Lease, at the center thereof.
The Company owns the rights and may select up to 30 well locations from the following:
|
| |
Lease Name
|
Locations
|
Rights
|
Rice
|
Up to 10
|
One well per location, to a depth from the surface through the Speechley sands which depth is approximately 2,200 feet on the Premises alone for producing oil and gas by any means, and all rights necessary convenient and incident thereto, granted pursuant to the Master Rice Lease.
|
|
|
|
Lalley
|
Up to 8
|
One well per location, to a depth from the surface through the Speechley sands which depth is approximately 2,200 feet on the Premises alone for producing oil and gas by any means, and all rights necessary convenient and incident thereto, granted pursuant to the Master Lalley Lease.
|
|
|
|
Corse
|
Up to 15
|
One well per location, to a depth from the surface through the Speechley sands which depth is approximately 2,000 feet on the Premises alone for producing oil and gas by any means, and all rights necessary convenient and incident thereto, granted pursuant to the Master Corse Lease.
|
If Company does not begin or provide proof of funds or funding for the first well on or before January 31, 2013, subject to our operator, Vencedor Energy Partners, obtaining the necessary permits to allow the Company to commence drilling and completions operations, and does not begin or provide proof of funds or funding for 3 more wells on or before March 31, 2013, then the Company will have forfeited its rights and the Agreement shall terminate and unwind and the Assignor agrees to return the Shares (11,700,000) to the Company.
On January 29, 2013, pursuant to a letter agreement between the Company and the Assignor, the Company acknowledged and agreed to the notice of the delay of the permits up to 4 weeks beyond January 31, 2013.
After completing 8 wells and if Company does not complete any of the remaining 22 well drilling provision set forth in the Agreement within the 2 years from the date of the execution of the Agreement, then the Company will forfeit its rights to the well locations not completed. The Company will retain its rights for the well locations completed and will retain an Override Royalty of Seven and one half per cent (7.5%) on the well locations forfeited.
The Company has 2 years from the date of execution of the Agreement to complete the drilling of the 30 well locations and has the option to acquire an additional 15 well locations for the same terms and conditions of the Agreement after the first 30 wells locations have been completed.
The Company will provide funding in groups of 4 to 6 wells to optimize economies of scale, with the exception of the first 4 wells which can be funded on an individual basis.
The Company agreed, the Participation and Operating Agreement (the "POA"), to have Assignor the designated Operator (the "Operator") of the Oil and Gas Well Locations which includes all the responsibilities as a designated operator in the State of Pennsylvania which includes the duties of managing and supervising the drilling and completions of the Oil and Gas Locations.
On December 18, 2012, pursuant to the POA, the Operator invoiced the Company $835,000 for the drilling and completion of five oil wells on the Rice lease. The Company has recorded the transaction capitalizing the drilling and completions as work in progress. The liability is included in the Company's Accounts Payable.
On March 18, 2013, pursuant to a letter agreement, Amendment #3, between the Company and Vencedor Energy Partners, the Company has agreed to delete Section 4a (financing conditions) of the Oil and Gas Well Location Assignment dated August 31, 2012 between Xun Energy, Inc. and Vencedor Energy Partners.
On March 30, 2013, the Company's operator, Vencedor Energy Partners, began site work on the Rice lease.
66
THE COMPANY WILL NEED TO RAISE ADDITIONAL FUNDS TO DRILL THE OIL AND GAS WELLS AND THERE IS NO GUARANTEE THAT THE COMPANY WILL BE SUCCESSFUL IN RAISING THE FUNDS NECESSARY TO COMPLETE 1 OR ANY OF THE 30 OFFSET OIL AND GAS WELLS.
NOTE 21: TERMINATION OF FINANCIAL CONSULTING SERVICES AGREEMENT
On December 18, 2012, the Company issued a Notice of Termination to
Vaquero Private Capital, Inc. (
VPC
) for breach of contract by VPC, terminating the September 4, 2012 twelve month Financial Consulting Services Agreement (the
Agreement
) effective as of June 1, 2012, pursuant to which VPC would provide consulting services in connection with the Company
s business affairs and assist the Company in raising capital. In consideration of the services to be provided by VPC, the Company paid VPC a prepaid fee of $810,000 in the form of 16.2 million common shares of the Company.
The Company has placed a Stop Order on the transference of 16.2 million shares pending resolution of the breach of contract by VPC.
NOTE 22: FINANCING AGREEMENTS
On May 7, 2013, Xun Energy, Inc., (the
Company
) entered into a reserve equity financing agreement (the
Financing Agreement
) with AGS Capital Group, LLC, (
AGS
). Pursuant to the Financing Agreement, the Company has the right, but not the obligation, to issue $15,000,000 of the Company
s common stock to AGS over the course of 3 years.
The Company has full control and discretion over the timing and amount of any shares that they sell to AGS when the Market Price, as defined in the Financing Agreement, is $0.50 or higher per share. For each advance, the Company may issue an amount of stock up to $250,000. Such advance will not exceed more than 200% of the average daily trading volume for the previous 10 trading days. The purchase price of the shares shall be set at ninety percent (90%) of the average of the three (3) lowest closing bid prices of the stock during the ten (10) consecutive weekday trading days (the
Pricing Period
) immediately after the date on which the Company provides an advance notice. The Company, at its option, may select a safety net price for any specified advance which the Company will not sell shares to AGS under that advance when the Purchase Price (Market Price less 10% discount) falls below such safety net price during the Pricing Period. The Company issued 4,081,633 shares of common stock as a commitment fee deposit towards the commitment fee of $40,000 to be deducted from the first advance.
On May 7, 2013, the Company entered into a registration rights agreement with AGS (the
RRA,
and along with the Financing Agreement, the
Agreements
). According to the RRA, the Company must file a registration statement on Form S-1, registering the shares of common stock which may be issued to AGS pursuant to the Financing Agreement within thirty (30) days of the date of the RRA.
Prior to the date of the Agreements, AGS had no material interaction, other than the negotiation of the Agreements, with the Company.
On May 29, 2013, the Company filed a Registration Statement, Form S-1, registering the shares of common stock of the Company as follows:
1.
75,000,000 shares of the Company's common stock (the
Put Shares
) that the Company will put to AGS pursuant to Financing Agreement between AGS and the Company, dated May 7, 2013, and
2.
4,081,633 commitment shares of the Company's common stock the Company paid to AGS as a fee for providing the facility.
In the event of stock splits, stock dividends, or similar transactions involving the common stock, the number of common shares registered shall, unless otherwise expressly provided, automatically be deemed to cover the additional securities to be offered or issued pursuant to Rule 416 promulgated under the Securities Act of 1933, as amended (the
Securities Act
). In the event that adjustment provisions of the Drawdown Agreement require the registrant to issue more shares than are being registered in this registration statement, for reasons other than those stated in Rule 416 of the Securities Act of 1933, as amended, the Company will file a new registration statement to register those additional shares.
NOTE 23: SUBSEQUENT EVENTS
On June 5, 2013, the Company issued an unsecured Convertible Promissory Note (CPN#12) for $250,000 plus accrued and unpaid interest and other fees with a $25,000 original issue discount (the
OID
). The Note Holder paid $25,000 consideration on closing of CPN#12 (CPN#12A). The Note Holder may pay additional consideration to the Company in such amounts and at such dates as Note Holder may choose in its sole discretion. The Maturity Date is one year from the effective date of each payment (the
Maturity Date
) and is the date upon which the Principal Sum of the Note, as well as any unpaid interest and other fees, shall be due and payable. The Conversion Price is the lesser of $0.006 or 60% of the average of the two lowest trade prices in the 25 trading days previous to the conversion, but no lower than $0.00005 (in the case that conversion shares are not deliverable by DWAC an additional 10% discount will apply; and if the shares are ineligible for deposit into the DTC system and only eligible for Xclearing deposit an additional 5%
67
discount shall apply; in the case of both an additional cumulative 15% discount shall apply). Unless otherwise agreed in writing by both parties, at no time will the Note Holder convert any amount of the Note into common stock that would result in the Note Holder owning more than 4.99% of the common stock outstanding. The Company may repay the CPN at any time on or before 90 days from the effective date, after which the Company may not make further payments on the CPN prior to the Maturity Date without written approval from Note Holder. If the Company repays the CPN on or before 90 days from the effective date, the Interest Rate shall be zero percent (0%). If the Company does not repay the CPN on or before 90 days from the effective date, a one-time Interest charge of 12% shall be applied to the Principal Sum. Any interest payable is in addition to the OID, and that OID (or prorated OID, if applicable) remains payable regardless of time and manner of payment by Borrower. CPN#12 is structured to be advanced to the Company at the discretion of the Note Holder. The Company has drawn down $25,000 of the $225,000 allowable and is obligated to $2,778 of the OID ($25,000/$225,000 x $25,000 (OID)).
On June 25, 2013, the Company incorporated a wholly owned subsidiary, Xun Oil of Pennsylvania Corporation, in the Commonwealth of Pennsylvania, USA.
On July 1, 2013, the Company requested the withdrawal of the Registration Statement, Form S-1 (Registration No. 333-188906) because the related reserve equity financing agreement with AGS contained provisions that result in the selling stockholder not being irrevocably bound to purchase the shares that the Company elects to sell under the agreement. No securities were sold pursuant to the Registration Statement.
On July 2, 2013, the Company issued an unsecured 9 month 8% Convertible Promissory Note (CPN#13) due on April 8, 2014 for $32,500. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder. The Conversion Price shall be the greater of: (i) the Variable Conversion Price and (ii) the Fixed Conversion Price (subject, in each case, to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company
s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The "Variable Conversion Price" shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). "Market Price" means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. "Trading Price" means, for any security as of any date, the closing bid price on the Over-the-Counter Bulletin Board or applicable trading market as reported by a reliable reporting service designated by the note holder. The note holder is limited to owning 4.99% of the Company
s issued and outstanding shares. Default interest is 22% per annum should the Company default on the CPN#13. The Company may prepay CPN#13 at any time for the period beginning on the date of the CPN#13 and ending on the date which is ninety (90) days following the date of the CPN#13, the CPN#13 may be prepaid by the Company upon payment to the note holder of an amount equal to the outstanding principal amount of the CPN#13 multiplied by 125% together with accrued and unpaid interest thereon. At any time during the period beginning on the ninety (91) day from the date of the CPN#13 and ending on the date which is one hundred twenty (120) days following the date of CPN#13, the Company may prepay the CPN#13 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#13 multiplied by 135% together with accrued and unpaid interest thereon. At any time during the period beginning on the date which is one hundred twenty one (121) days from the date of the CPN#13 and ending on one hundred eighty (180) days following the date of this CPN#13, the Company may prepay the CPN#13 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#13 multiplied by 145% together with accrued and unpaid interest thereon. After the expiration of one hundred eighty (180) days following the date of the CPN#13, the Company shall have no right of prepayment. The floor price of $0.00005.
On July, 8, 2013, the Company was awarded a judgment dismissing, without prejudice, the legal action between Xun Energy, Inc., as Plaintiff and Lea Kennedy, an individual, d/b/a LUXEMBARINGS, as Defendant. The Company filed for a voluntary dismissal without prejudice on the legal action.
On July 11, 2013, the Company entered into a amended and restated reserve equity financing agreement (the
Financing Agreement
) with AGS Capital Group, LLC, (
AGS
). Pursuant to the Financing Agreement, the Company has the right, but not the obligation, to issue $15,000,000 of the Company
s common stock to AGS over the course of 3 years.
The Company has full control and discretion over the timing and amount of any shares that they sell to AGS when the Market Price, as defined in the Financing Agreement, is $0.50 or higher per share. For each advance, the Company may issue an amount of stock up to $250,000. Such advance will not exceed more than 200% of the average daily trading volume for the previous 10 trading days. The purchase price of the shares shall be set at ninety percent (90%) of the average of the three (3) lowest closing bid prices of the stock during the ten (10) consecutive weekday trading days (the
Pricing Period
) immediately after the date on which the Company provides an advance notice. The Company, at its option, may select a safety net price for any specified advance which the Company will not sell shares to AGS under that advance when the Purchase Price (Market Price less 10% discount) falls below such safety net price during the Pricing Period. The Company issued 4,081,633 shares of common stock as a commitment fee deposit towards the commitment fee of $40,000 to be deducted from the first advance. Prior to the date of the Agreement, AGS had no material interaction with the Company, other than the negotiation of the Agreement and the negotiation and execution of the original reserve equity financing agreement and registration rights agreement.
On July 11, 2013, the Company also entered into a registration rights agreement with AGS (the
RRA,
and along with the Financing Agreement, the
Agreements
). According to the RRA, the Company must file a registration statement on Form S-1, registering the
68
shares of common stock which may be issued to AGS pursuant to the Financing Agreement within thirty (30) days of the date of the RRA. Prior to the date of the Agreement, AGS had no material interaction with the Company, other than the negotiation of the Agreement and the negotiation and execution of the original reserve equity financing agreement and registration rights agreement.
On August 1, 2013, the Company issued an unsecured 7 month 8% Convertible Promissory Note (CPN#14) due on March 1, 2014 for $15,000 for value of services rendered. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder. The note holder may convert all or a portion of the principal amount of CPN#14 into shares of Common Stock at a Conversion Price for each share of Common Stock equal to the higher of (a) $0.0001 subject to adjustment for any future stock splits, reverse stock split, stock dividend, etc., or (b) the Current Market Price multiplied by sixty percent (60%) (the "Conversion Price"). "Current Market Price" means the average of the three lowest closing bid price for the Common Stock as reported by Bloomberg, LP or, if not so reported, as reported on the over-the-counter market, for the five (5) trading days ending on the trading day immediately before the relevant Conversion Date. The Company may prepay CPN#14 without any penalty.
On August 26, 2013, the Company's operator, Vencedor Energy Partners (VEP), completed the drilling, casing and cementing of our first oil well of the 30 well drilling program. Rice oil well number 15 was drilled to the Target Depth of 1,050' on the Rice lease, in Venango County, PA. Samples were taken during the drilling program for analysis. Petroleum odors were emitted at the 720', 745', and 915' levels of the wellbore, indicating oil presence at these depths. The review of the drill cuttings (samples) from the Rice #15 supported the need for a wire line log to be conducted on the well. VEP's geologist confirmed that the samples taken on August 26, 2013 revealed a well formed zone in the Venango 2 and also potential lenses in the Venango 1 and Red Valley sequence. Oil saturation is estimated at 30-35% for the Venango sequence with a strong show in the Red Valley sequence. The log will provide enough details to determine other key factors in determining whether or not the oil well should be put into production.
On August 29, 2013, the Company issued an unsecured 9 month 8% Convertible Promissory Note (CPN#15) due on June 3, 2014 for $32,500. The principal and accrued interest is convertible into shares of common stock at the discretion of the note holder. The Conversion Price shall be the greater of: (i) the Variable Conversion Price and (ii) the Fixed Conversion Price (subject, in each case, to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company
s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The "Variable Conversion Price" shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). "Market Price" means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. "Trading Price" means, for any security as of any date, the closing bid price on the Over-the-Counter Bulletin Board or applicable trading market as reported by a reliable reporting service designated by the note holder. The note holder is limited to owning 4.99% of the Company
s issued and outstanding shares. Default interest is 22% per annum should the Company default on the CPN#15. The Company may prepay CPN#15 at any time for the period beginning on the date of the CPN#15 and ending on the date which is ninety (90) days following the date of the CPN#15, the CPN#15 may be prepaid by the Company upon payment to the note holder of an amount equal to the outstanding principal amount of the CPN#15 multiplied by 125% together with accrued and unpaid interest thereon. At any time during the period beginning on the ninety (91) day from the date of the CPN#15 and ending on the date which is one hundred twenty (120) days following the date of CPN#15, the Company may prepay the CPN#15 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#15 multiplied by 135% together with accrued and unpaid interest thereon. At any time during the period beginning on the date which is one hundred twenty one (121) days from the date of the CPN#15 and ending on one hundred eighty (180) days following the date of this CPN#15, the Company may prepay the CPN#15 to the note holder upon payment of an amount equal to the outstanding principal amount of the CPN#15 multiplied by 145% together with accrued and unpaid interest thereon. After the expiration of one hundred eighty (180) days following the date of the CPN#15, the Company shall have no right of prepayment. The floor price of $0.00005.
On August 31, 2013, the Board of Directors renewed the Board Member Compensation Agreement with Mr. Jerry G. Mikolajczyk as a director of the Company for a term of one (1) year ending August 31, 2014. Mr. Mikolajczyk will receive 5,000 shares per month of the Company
s common stock in consideration for them serving on the Company
s Board of Directors. The common stock will be valued based on the average of the 5 trading day close price prior to each month end. This amount includes all costs related to the engagement Director of the Company except 3
rd
party or travel expenses. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5 million.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
On March 11, 2009, we dismissed the auditing firm of Moore & Associates, Chartered Independent Registered Public Accounting Firm (
Moore and Associates
) and approved the engagement of Weinberg & Associates LLC, Certified Public
69
Accountants. During the fiscal year ended May 31, 2008 and the subsequent interim periods until the change, there were no disagreements with Moore & Associates, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Moore & Associates, would have caused them to make reference in connection with their report to the subject matter of the disagreement, and Moore & Associates, Chartered has not advised the Company of any reportable events.
Item 9A.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act
) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer have reviewed the effectiveness of our disclosure controls and procedures as of May 31, 2013 and, based on their evaluation, and, have concluded that the disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the year ended May 31, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management
s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive and principal financial officer, we assessed, as of May 31, 2013, the effectiveness of our internal control over financial reporting. This assessment was based on criteria established in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using those criteria, management concluded that our internal control over financial reporting as of May 31, 2013, was effective.
Internal control over financial reporting is defined as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel 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, and includes those policies and procedures that:
|
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
·
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
|
|
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
This Annual Report on Form 10-K does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this Annual Report on Form 10-K.
70
Evaluation of Changes in Internal Controls over Financial Reporting
There was no change in the internal control over financial reporting that occurred during the fiscal quarter ended May 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Company
s internal control over financial reporting.
Item 9B.
Other Information.
On April 16, 2013, the Company entered into a Non Compete, Non Circumvention Agreement (
NDANCA
) with several parties, each of whose principal is Michael Iorlano, and with Michael Iorlano as an individual. In the NCNDA, Mr. Iorlano acknowledged that he may receive material non-public information and agreed that he will handle such material non-public information only in accordance with applicable law, including not trading based on such information. Subsequent to April 16, 2013, Mr. Iorlano was provided with non-public information about the Company's operations and financing. On each communication with him after April 16, 2013, the Company advised Mr. Iorlano of the confidentiality of the information. On June 27, 2013, Mr. Iorlano informed the Company, by email, that he sold over 3 million shares of stock of the Company, which occurred while in possession of material non-public information. Thereafter, the Company informed the SEC that it believed that Mr. Iorlano may have violated insider trading rules. No ruling has been made to date.
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71
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The following information sets forth the names of our officers and directors, their present positions, and some brief information about their background as of the date of this filing:
|
| |
Name:
|
Position:
|
Held Since:
|
Jerry G. Mikolajczyk
|
President/Chief Financial Officer/Director
|
June 2011
|
Wayne St. Cyr
|
Executive Vice President, Marketing and Strategic Development
|
January 2011
|
Peter Matousek
|
Vice President
Investor Relations/Director
|
June 2011
|
William D. Spier
|
Director
|
May 2012
|
Peter Matousek
|
Director
|
May 2012
|
Mr. Jerry G. Mikolajczyk
Mr. Jerry G. Mikolajczyk was a key consultant to the Company who identified the opportunities available to us in Kentucky, helped negotiate our contracts, and assisted the Company with its financial reporting over the two years including SEC filings and our financial statements. Mr. Mikolajczyk consulted to the Company from March 2010 to May 31, 2011. On May 31, 2011, the Board of Directors appointed Mr. Mikolajczyk as our President, CEO, CFO, and a director of the Company.
Mr. Mikolajczyk has had an extensive career in the oil and gas, construction, and mining industries. Mr. Mikolajczyk has worked for Fortune 500 companies such as BP Resources (British Petroleum), SCI Group of Companies, Husky Oil, Syncrude, Bechtel, Guy F. Atkinson and INCO. He has worked as a heavy equipment operator on surface and open pit mining operations.
After completing his Business Administration diploma, Mr. Mikolajczyk went on to obtain his professional designation as a Certified General Accountant (CGA) and Certified Internal Auditor (CIA). As a professional accountant and auditor, he has been involved with planning, designing, and testing operations to ensure that the operations are efficient and effective.
In 2008, Mr. Mikolajczyk was awarded
CFO of the Year
for the application of his knowledge and expertise in a turnaround assignment for the Santa Clara Valley Transportation Authority (VTA), a $3.3 Billion asset transportation authority in Silicon Valley (San Jose, California).
Mr. Mikolajczyk has an aggregate of 41 years of experience, which include:
|
·
Twenty-two (22) years of C-Level experience.
|
·
Ten (10) years in the Oil and Gas Industry evaluating and analyzing systems and operations to improve effectiveness, increase profits, and streamline operations without compromising controls.
|
·
Eighteen (18) years in the Mining Industry with operational experience in tar sands, copper, gold, limestone and precious stones. Mines were both open pit and deep rock (shaft) as well as alluvial and placer mining operations.
|
·
Twenty Seven (27) years of experience in the Construction Industry ranging in Oil and Gas, Mining, Transportation and Housing sectors. Specialty is Project Control and Reporting.
|
Mr. Mikolajczyk, through consulting agencies, has provided various consulting services to clients, which included, but not limited to:
|
·
Global Power and Water Industries, Inc.
|
·
VTA (Santa Clara Valley Transportation Authority)
|
·
MineCore International, Inc.
|
·
Platinum Works, Inc.
|
·
Blue Green Corp
|
·
J.M.E.L. International, Inc.
|
·
Nova Petrochemicals
|
·
BP Resources
|
72
Mr. Mikolajczyk is an acknowledged speaker and presenter. He has moderated various panels on P3
s (Private Public Partnerships) projects such as the Confederation Bridge, the longest bridge in North America, joining Prince Edward Island and New Brunswick in Canada, which Mr. Mikolajczyk was involved in the bidding, award and financing of the project. Mr. Mikolajczyk also presented a paper to the 1990 Western Regional Conference of the Institute of Internal Auditors entitled: "Is Your Project Control Out of Control?" and a paper in 1991 to the Institute of Internal Auditors, Calgary Chapter, entitled: "Operational Audit of the Procurement Function".
Mr. Wayne St. Cyr.
Mr. Wayne St. Cyr is our Executive Vice President, Marketing and Strategic Development and our Corporate Secretary.
Mr. St. Cyr comes to us leaving a distinguished 10 year career with RBS Group (Royal Bank of Scotland) which includes a six-time recipient of the President's Award for exceeding company objectives. During his tenure at RBS/Citizens Financial Group, he was responsible for developing the key alliances with Citizens Bank.
Mr. St. Cyr
s education includes an Associates degree in Business Administration and a Bachelor of Science degree in Marketing.
Mr. Peter Matousek.
Mr. Matousek is the Vice President of Investor Relations. He served as the Company
s President and CEO from February 2010 to May 2011 and as a director from February 2010 to August 2011 before his term expired.
Mr. Matousek is an international consultant and entrepreneur with a European background. He attended University of Maryland University College and Warner Pacific College, where he earned degrees in Associates of Arts and Bachelors of Business Administration.
Mr. Matousek is member of the United States Navy and a Veteran of Foreign War and recently served in Operation Iraqi Freedom. He received the Army Achievement Medal, Navy Achievement Medal and Honorable Discharge.
Mr. Matousek has worked extensively with the public markets for companies throughout the United States and Canada in the financial and natural resource sector, including oil & gas and precious metal mining. He has represented numerous companies in the capacity of Investor & Public Relations. He speaks German, Czech, English and Russian.
Mr. William D Spier, PhD
Dr. Spier has been an advisor in economics and business development to private equity funds in the U.S. and Europe for the past six years. Prior to that, he was a business growth consultant to major proprietary and public institutions of higher education with 5-1 year appointments.
Dr. Spier was Senior Vice President for Whitman Medical and Executive Director for Ultrasound Technical Services, a reporting issuer, for 13 years during which he was responsible for the founding and growth of the pioneering institute for medical ultrasound training which expanded to 15 major markets in the U.S. For two years, Dr. Spier was affiliated with Diamond Turk & Company, a specialist firm on the American Stock Exchange.
From 1969 to 1981, Dr. Spier held various positions with the New York Board of Education and was a graduate instructor at Washington University, St. Louis and Assistant Professor of Sociology at St. Louis University. Dr. Spier was a member of the United States Teacher Corps.
Dr. Spier received his Bachelor of Arts degree from Hobart College, his Masters degree from the Washington University, St. Louis and his Doctorate in Sociology with concentration in political economy from Washington University, St. Louis.
Dr. Spier has an extensive history of publications and has authored more than fifty business plans for both start-ups and mature companies. He is a member of economic, education and medical societies and participates on the board of public companies. He is often a visiting instructor at NYC and metropolitan-area institutions of higher education for graduate level teaching.
Penalties or Sanctions
To the best of our knowledge, none of our directors, officers or stockholders holding a sufficient number of securities to affect materially the control of the Company, has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority or been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor making an investment decision.
73
Personal Bankruptcies
To the best of our knowledge, none of our directors, officers or stockholders holding a sufficient number of securities to affect materially the control of the Company, nor any personal holding company of any such person has, within the last ten years become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of that person.
Compensation of Directors
Our directors do not receive cash compensation for their services as directors. However, each director receives 5,000 shares of common stock per month and will have their out of pocket expenses such as travel for Board meetings reimbursed by the Company.
Terms of Office
Our directors are appointed for one-year terms to hold office or until the next annual general meeting of the holders of our common stock or until removed from office in accordance with our by-laws.
Family Relationships
There are no family relationships among our directors and/or officers.
Section 16(a) Beneficial Ownership Reporting Compliance
For companies registered pursuant to section 12(g) of the Exchange Act, Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, for the fiscal year ended May 31, 2013, based solely on a review of the copies of reports furnished to us and written representations that no other reports were required, Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with on a timely basis for the period which this report relates.
Corporate Governance
Audit committee
While we have adopted a charter for the Audit Committee, due to the small size of the board, we do not have a separately-designated audit committee. The Board of Directors performs the functions of an audit committee. A written charter governs the actions of the Board of Directors when performing the functions that would generally be performed by an audit committee. The Board of Directors approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the Board of Directors reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.
Compensation and Nominations Committees
We currently have no compensation or nominating committee or other board committee performing equivalent functions. Currently, the member of our Board of Directors participates in discussions concerning executive officer compensation and nominations to the Board of Directors.
Finance committee
While we have adopted a charter for the Finance Committee, due to the small size of the board, we do not have a separately-designated finance committee. Currently, the members of our Board of Directors participates in discussions concerning the finances of the Company.
74
Item 11. Executive Compensation.
Mr. Jerry G. Mikolajczyk was appointed our acting president, chief executive officer and chief financial officer on May 31, 2011 effective June 1, 2011. His employment contract terminated on May 31, 2012. The Company has not renewed the contract with Mr. Mikolajczyk and has retained Mr. Mikolajczyk on a month to month basis. The Company pays Mr. Mikolajczyk $10,000 per month.
Mr. Wayne St. Cyr was appointed our Executive Vice President, Marketing and Strategic Development on January 1, 2011. His employment contract terminated on December 31, 2011. The Company has not renewed the contract with Mr. Ct. Cyr and has retained Mr. St. Cyr on a month to month basis. The Company pays Mr. Wayne St. Cyr $10,000 per month.
Mr. Peter Matousek was appointed our Vice President
Investor Relations on May 31, 2011. His employment contract terminated May 31, 2012. The Company has not renewed the contract with Mr. Matousek and has retained Mr. Matousek on a month to month basis. The Company pays Mr. Peter Matousek $7,500 per month.
Mr. William D. Spier was appointed Treasurer of the Company on October 23, 2012. The Company paid Mr. Spier $4,000 per month until May 31, 2013. Mr. Spier's appointment was renewed for another 12 months with a salary commitment of $7,500 per month.
The following table discloses compensation paid/accrued during the fiscal years ended May 31, 2013 and 2012 to the Company
s Officers and the most highly compensated executive officer whose total compensation exceeded $100,000 for the fiscal year ended May 31, 2013 (Collectively, the
Named Executive Officers
). No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the table below, were paid/accrued to the Named Executive Officers during these fiscal years.
|
|
|
|
|
| |
Name and Principal Position
|
Year
Ended
May 31
|
Salary*2($)
|
Bonus ($)
|
StockAwards($)
|
Option Awards ($)
|
Total ($)
|
Jerry G. Mikolajczyk, President/CEO/CFO
|
2013
|
$120,000
|
-0-
|
-0-
|
-0-
|
$120,000
|
Wayne St. Cyr, Executive Vice President
|
2013
|
$120,000
|
-0-
|
-0-
|
-0-
|
$120,000
|
Peter Matousek, VP-Investor Relations*1
|
2013
|
$90,000
|
-0-
|
-0-
|
-0-
|
$90,000
|
Dr. William D. Spier, Treasurer
|
2013
|
$29,032
|
-0-
|
-0-
|
-0-
|
$29,032
|
|
|
|
|
|
| |
Name and Principal Position
|
Year
Ended
May 31
|
Salary*2($)
|
Bonus ($)
|
StockAwards($)
|
Option Awards ($)
|
Total ($)
|
Jerry G. Mikolajczyk, President/CEO/CFO
|
2012
|
$120,000
|
-0-
|
-0-
|
-0-
|
$120,000
|
Wayne St. Cyr, Executive Vice President
|
2012
|
$120,000
|
-0-
|
-0-
|
-0-
|
$120,000
|
Peter Matousek, VP-Investor Relations*1
|
2012
|
$90,000
|
-0-
|
-0-
|
-0-
|
$90,000
|
|
*1 - Former President/CEO during 2011
|
*2 - Does not include stock compensation as Board members, refer to Item 5.E of this Form 10-K
|
Stock Options Granted/Exercised in Last Year
The Company has never issued any stock options.
75
Item 12. Security Ownership of Certain Beneficial Owners and Management and Relate Stockholder Matters.
The following table sets forth certain information as of May 31, 2013 respect to the beneficial ownership of the Company's Common Stock by: (i) all persons known by the Company to be beneficial owners of more than 5% of the Company's Common Stock, (ii) each current officer and director and Named Executive Officer, and (iii) by all executive officers and directors as a group.
|
| |
Name
|
No. of Shares of Common Stock (1)
|
Percent of Class (2)
|
|
|
|
Jerry G. Mikolajczyk
|
188,564,421
|
48.92%
|
Peter Matousek
|
143,629
|
0.04%
|
Dr. William D. Spier
|
61,613
|
0.02%
|
(All officers and directors as a group (3) member)
|
188,769,663
|
48.97%
|
(1)
Represents the number of issued and outstanding shares of common stock beneficially owned by the shareholder.
(2)
Based on 385,460,240 issued and outstanding shares of common stock.
.
Item 13. Certain Relationships and Related Transactions and Director Independence.
Except as described below, none of the following persons has any direct or indirect material interest in any transaction to which we are a party during the past two years, or in any proposed transaction to which the Company is proposed to be a party:
A.
any director or officer;
A.
any proposed nominee for election as a director;
A.
any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our common stock; or
A.
any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same house as such person or who is a director or officer of any parent or subsidiary.
Potential Conflict of Interest
Prior to June 1, 2011, our President, CEO and Director, Jerry G. Mikolajczyk, performed services for the Company on a consulting contract through a consulting agency, Comtax Services, Inc. (Comtax). From April 1, 2010 to February 28, 2011, Comtax charged a fixed monthly fee of $2,500, a minimum of 10 hours per month for Mr. Mikolajczyk, an aggregate of $27,500 for the 11 months for Mr. Mikolajczyk
s services to the Company. For the period March 1, 2011 to May 31, 2011, Comtax charged the Company an aggregate of $387,275 (1,106.5 hours) for the services of Mr. Mikolajczyk plus $9,656.50 in travel expenses Mr. Mikolajczyk incurred on behalf of the Company. On October 31, 2012, Comtax assigned the trade payables to Mr. Mikolajczyk d/b/a/ Lighthouse Investments, as unsecured Promissory Notes. The Promissory Notes, an aggregate of $398,248.50, are non-interest bearing. Mr. Mikolajczyk was an officer of Comtax until his resignation on May 31, 2011 and terminated his consulting contract with Comtax as of May 31, 2011 prior to accepting his executive and director positions with the Company.
Item 14. Principal Accounting Fees and Services.
AUDIT FEES. The aggregate fees for professional services rendered was $9,000 and $5,500 for the audit of our annual financial statements for the fiscal years ended May 31, 2013 and 2012 respectively, and $6,000 and $6,000 for the reviews of the financial statements included in our Forms 10-Q for the fiscal years ended May 31, 2013 and 2012 respectively.
AUDIT-RELATED FEES. The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of our financial statements and not reported under the caption "Audit Fee." There were no such fees billed for the fiscal year ended May 31, 2013 and 2012.
TAX FEES. Tax fees for each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning services was $2,500 for the fiscal year ending May 31, 2013 and $1,500 for the fiscal year ending May 31, 2012.
76
ALL OTHER FEES. Other than the services described above, there were no other services provided by our principal accountants for the fiscal years ended May 31, 2013 and 2012.
While we have adopted a charter for the Audit Committee, due to the small size of the board, we do not have a separately-designated audit committee. The Board of Directors performs the functions of an audit committee. A written charter governs the actions of the Board of Directors when performing the functions that would generally be performed by an audit committee. The Board of Directors approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the Board of Directors reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.
Our Board discussed with the auditors any relationships that may impact their objectivity and independence, including fees for non-audit services, and satisfied itself as to the auditors' independence. The Board also discussed with management and the independent auditors the quality and adequacy of its internal controls. The Board reviewed with the independent auditors their management letter on internal controls.
Our Board discussed and reviewed with the independent auditors all matters required to be discussed by auditing standards generally accepted in the United States of America, including those described in Statement on Auditing Standards No. 61, as amended, "Communication with Audit Committees". Our entire Board, acting in the capacity of the audit committee reviewed the audited financial statements of the Company as of and for the year ended May 31, 2013 and 2012 with the independent auditors. Management has the responsibility for the preparation of the Company's financial statements and the independent auditors have the responsibility for the examination of those statements. Based on the above-mentioned review and discussions with the independent auditors our Board of Directors approved the Company's audited consolidated financial statements and recommended that they be included in its Annual Report on Form 10-K for the year ended May 31, 2013, for filing with the Securities and Exchange Commission.
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77
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)
The following report and financial statements are filed together with this Annual Report:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BALANCE SHEETS AT MAY 31, 2013 AND 2012
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 2013 AND 2012 AND CUMULATIVE FROM INCEPTION (DECEMBER 20, 2007).
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MAY 31, 2013 AND 2012 AND CUMULATIVE FROM INCEPTION (DECEMBER 20, 2007).
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
NOTES TO FINANCIAL STATEMENTS
(b)
Index to Exhibits