GWPC Wholehealth Products Inc (CE)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB /A

(Amendment No. 1)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2007
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to ______

Commission file number: 01-33522

GULF WESTERN PETROLEUM CORPORATION

(Name of small business issuer in its charter)

Nevada	98-0489324
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4801 Woodway Drive, Suite 306W, Houston, Texas	77056
(Address of principal executive office)	(Zip Code)
Issuer’s telephone number (713) 355-7001
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $.001 par value	Not Applicable
(Title of Class)	(Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share

           Check whether the issuer is not required to file reports pursuant to Section 13 of 15(d) of the Exchange Act.    o

           Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

           Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.   o

           Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes o     No    x

            The issuer’s revenues for the year ended August 31, 2007 were $-0-. The aggregate market value of the common stock, par value $.001 per share, held by non-affiliates of the issuer as of April 21, 2008, was approximately $3,572,108. As of April 21, 2008, there were outstanding 57,853,107 shares of common stock, par value $.001 per share, of the issuer.

            Transitional Small Business Disclosure Format.  Yes o     No   x

 

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Explanatory Note

The changes made to this annual report on Form 10-KSB/A include (i) revising our risk factors to remove certain mitigating language, (ii) clarifying our risk factor with respect to competition, (iii) clarifying the date for which our reserves are presented, (iv) revising the corporate governance section to provide additional information on the amount of the professional time that our executive officers devote to our business, (v) providing clarifying changes to tables in the executive compensation section, (vi) revising the presentation of our consolidated financial statements and the notes thereto with respect to the accounting for transactions with related parties at fair value, (vii) additional information on our officers and directors biographies and (viii) making certain other minor corrections to this annual report.

TABLE OF CONTENTS

		Page
PART I		1
Item 1.	Description of Business	3
Item 2.	Description of Property	19
Item 3.	Legal Proceedings	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
PART II		21
Item 5.	Market for Common Stock and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities	21
Item 6.	Plan of Operations	23
Item 7.	Financial Statements	24
Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	47
Item 8A.	Controls and Procedures	48
Item 8B.	Other Information	48
PART III		49
Item 9.	Directors and Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act	49
Item 10.	Executive Compensation	52
Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	55
Item 12.	Certain Relationships and Related Transactions and Director Independence	56
Item 13.	Exhibits	58
Item 14.	Principal Accountant Fees and Services	60

PART I

Forward Looking Statements

 

We caution readers that certain important factors (including without limitation those set forth below) may affect our actual results and could cause such results to differ materially from any forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), made herein. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. You should not rely on forward-looking statements in this Form 10-KSB. Our forward-looking statements are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized. Without limiting the generality of the foregoing, words such as “may,” “expect,” “believe,” “plan,” “anticipate,” “intend,” “could,” “estimate” or “continue” are intended to identify forward-looking statements. These statements are based on our beliefs as well as assumptions we have made using information currently available to it. Some, but not all, of the factors that may cause these differences include those discussed in “Risk Factors.”

 

In particular, this Form 10-KSB contains forward-looking statements pertaining to the following:

 

·

oil and natural gas production levels;

 

·

capital expenditure programs;

 

·

the estimated quantity of oil and natural gas reserves;

 

·

projections of market prices and costs;

 

·

supply and demand for oil and natural gas;

 

·

expectations regarding the ability to raise capital and to continually add to reserves through acquisitions, exploration and development;

 

·

treatment under governmental regulatory regimes;

 

·

drilling plans; and

 

·

oil and gas reserve life.

 

The actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and elsewhere in this Form 10-KSB:

 

·

our ability to continue as a going concern;

 

·

our limited history of operations;

 

·

our need for additional external funding;

 

·

volatility in market prices for oil and natural gas;

 

·

liabilities inherent in oil and natural gas operations;

 

·

uncertainties associated with estimating oil and natural gas reserves;

 

·

competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel;

 

·

incorrect assessments of the value of acquisitions;

 

·

geological, technical, drilling and processing problems;

 

·

fluctuations in foreign exchange or interest rates and stock market volatility; and

 

·

the other factors discussed under “Risk Factors.”

 

These factors should not be considered exhaustive.

These forward-looking statements are made as of the date of this Form 10-KSB and we assume no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

 

As we are deemed a “penny stock issuer” within the meaning of the Securities Act and the Exchange Act, we are currently ineligible to rely on the safe harbor provisions of the Securities Act and the Exchange Act relating to forward-looking statements.  However, once we are no longer a “penny stock issuer,” we expect to be eligible to, and we intend to, rely on such safe harbor provisions.

Item 1.

Description of Business

 

Corporate History

 

We were incorporated in the State of Nevada on February 21, 2006 as Georgia Exploration, Inc., a Vancouver, Canada-based mineral resource exploration company with interests in 14 non-oil and gas mineral claims in British Columbia .  On January 3, 2007, we consummated a reverse merger with Wharton Resources Corp. (“Wharton” or “Wharton Corp.”).  The merger resulted in a change in control of us with Wharton’s former stockholders holding approximately 71.4% of the then issued and outstanding shares of our common stock.   On March 8, 2007, we changed our name to Gulf Western Petroleum Corporation.

 

General Overview

 

We are engaged in the acquisition, exploration and development of oil and natural gas reserves in the United States .  Upon completion of our reverse merger, Wharton’s oil and gas interests and reserves became our primary assets and our core business became the exploration and development of domestic oil and natural gas reserves in the United States .

 

We currently hold oil and gas lease interests in Texas , Kansas  and Kentucky .  We are actively engaged in the drilling of Frio formation wells in Dewitt   County  and Lavaca County , Texas .  We also hold proved undeveloped reserves in Wharton County , Texas , and we are engaged in a natural gas supply and gas gathering system development project in Southeast Kansas .  We hold oil and gas lease interests in Kentucky  that are exploratory in nature. We hope to establish commercial levels of production from our Texas Shamrock and Brushy Creek Project  wells in Dewitt and Lavaca Counties , Texas   during 2008.  We are actively pursuing financing options to initiate the drilling of our proved undeveloped natural gas and oil reserves in our Oakcrest Prospect located in Wharton County , Texas .

 

Principal Properties

 

Oakcrest Prospect (Wilcox Formation), Wharton County, Texas

 

Our Oakcrest Prospect is located in south central Texas , approximately 75 miles southwest of Houston , Texas .   We hold oil and gas lease interests in approximately 866 acres with a working interest of 95.75% and we serve as operator.  The main target of hydrocarbon production is the Wilcox formation, with secondary targets for the Oakcrest Prospect being the Frio  and Yegua formations that will be traversed while in route to the Wilcox formation during drilling. The lease acreage is adjacent to and lies immediately to the north-east of the existing Southwest Bonus Field.  The prospect is located in the central Gulf Coast Plain on the east side of the San Marcos Arch in Wharton County , Texas .   All Wilcox fields in the Gulf Coast Plain are fault-bounded and produce from simple, normal fault-bounded anticlines.  The Wilcox formation is Eocene-age and is found at a depth of approximately 11,000 to 12,500 feet.  A combination of aeromagnetic surveys and well control had originally defined the structure of the Oakcrest Prospect.  Through 2-D seismic data reprocessing and reinterpretation, two large normal faults that were previously identified were confirmed together with two smaller possible faults.

 

Initial production in the Southwest Bonus Field commenced in August 1998 with the Obenhaus Gas Unit which to date has yielded total production of approximately 4,206 MMcf.  We do not hold interests in the Southwest Bonus Field.  However in connection with the reserve evaluation of the Oakcrest Prospect, we acquired data for sixty one (61) Wilcox formation producing wells, located in the Southwest Bonus Field, that we evaluated to ascertain their estimated ultimate recoveries.  Production data through June 2007 was obtained and evaluated to develop decline curve analysis for each well in order to forecast remaining and ultimate reserves for wells that are currently producing.  For wells that were no longer producing, the cumulative natural gas and oil production were used to develop ultimate recoveries.   Median recovery from the Southwest Bonus Field offset producing wells is approximately 2,436 MMcf and 73,100 barrels of oil per well.

 

There are two productive wells in the Southwest Bonus Field within 1100 feet of the two locations where we have has ascribed proved undeveloped reserves.   The Krueger No. 9 has ultimate reserve recoveries of 3.5 Bcf and 73.8 million barrels oil (“MBO”), while the Anderson No. 6 has ultimate reserve recoveries of 2.6 Bcf and 80.0 MBO.  Additionally, there are five producing wells within 2000 feet of the two locations identified by the Company with average reserve recoveries of 2.5 Bcf and 68.7 MBO.   On an 8/8ths gross basis, we assigned proved undeveloped reserves to two locations of 2,436 MMcf and 53,348 barrels of condensate each.

Production forecasts for the Oakcrest Prospect locations were derived based on the historical behavior of the Wilcox formation offset wells in the Southwest Bonus Field.  Based on the production behavior of the offset wells, the initial gas production rate for the Oakcrest wells was plotted to be 15,000 Mcf per day with an initial decline rate of 90% per year, and a hyperbolic exponent of 0.8.

 

We engaged MHA Petroleum Consultants, Inc. (“MHA”) to make a technical evaluation our Oakcrest Prospect natural gas and oil reserves, and to formulate estimates of the proved reserves and income attributable to our interests in the prospect.   In MHA’s evaluation of the Oakcrest Prospect, 17 potential well locations were identified.  Two well locations contain reserves categorized as proved reserves.  A summary of the results of MHA’s technical evaluation of oil and natural gas reserves categorized as proved as of August 31, 2007, together with the net undiscounted cash flows, discounted future cash flows at a 10.0% discount rate (“PV10”) on a before and after tax basis are as follows:

 

Summary of Oil and Natural Gas Reserves

  (Prepared as of the Company’s Fiscal Year-End of August 31, 2007)

Oil

Natural Gas

Gross

Net

Gross

Net

(MBBL)

(MBBL)

(MMCF)

(MMCF)

Total Proved Reserves

146.2

106.7

4,872

3,308

Cash Flows and PV 10 Proved Reserves

Before (“BFIT”) and After (“AFIT”) Income Taxes

(Discounted at 10%)

 

		BFIT (in thousands)				AFIT (in thousands)
Future net revenue		$	28,610			$	28,610
Future operating costs			3,256				3,256
Future income taxes			-				2,604
Operating cash flow		$	25,354			$	22,750
Capital investment			8,693				8,693
Undiscounted future net cash flow		$	16,661			$	14,057
Discounted PV10 cash flow		$	13,066			$	11,168

 

The economics and cash flows presented in the above table are based on our 95.75% working interest and 73.0% net revenue interest in the Oakcrest Prospect.    In the absence of existing production from our Oakcrest Prospect, we were required to estimate the prevailing market price that we would have realized from the sale of August 2007 condensate and natural gas production based on similarly situated production and pricing in the proximity to the Oakcrest Prospect.  Tennessee Gas, an interstate natural gas pipeline, crosses our lease acreage and provides us access to the interstate natural gas market.   The sales rate for gas deliveries into the Tennessee Gas pipeline system can be fixed to the Henry Hub, Louisiana NYMEX contract price with an established physical location basis to Henry Hub,  Sproule Associates, a highly regarded reservoir engineering firm, prepares monthly constant price and forecasted price for commodities and its constant price forecast for the month of August 2007 at the Henry Hub, Lousiana was $7.00 per MMbtu.  We estimated that, in relationship to the Henry Hub, we would realize a minimum of at least $7.00 per Mcf for our production, less 5% for gathering and compression charges, and less a historical location basis between Tennesee Gas Texas leg and the Henry Hub of $0.20 per Mcf  (i.e., $7.00 Mcf X 95% - $0.20 / mcf) or a wellhead netback realization of $6.45 per Mcf for August 2007 sales.   Condensate sales were prepared based on a West Texas Intermediate (“WTI”) of $73.19 per barrel less $5.00 location basis (with a wellhead netback of $68.19 to us).

 

Estimated capital expenditures to drill and complete a well is approximately $4.4 million based on current rig rates, casing prices, sub-surface and surface equipment, and other ancillary services and materials required to drill and complete a Wilcox formation well.

Our current plan of operations is to secure financing to fund the drilling of a minimum of two wells.  The location for the first well to be drilled has been identified, surveyed and staked, and a preliminary drilling permit has been secured.  Under the terms of our oil and gas lease, we have an obligation to spud an initial well before September 1, 2008.  A second well also targeting reserves identified as proved undeveloped is scheduled to spud immediately following the completion of the initial well.  Upon the drilling of the first and second Wilcox wells, we will make further technical evaluations to ascertain whether reserves originally categorized as probable have shifted to proved reserves with further data assembled through the drilling of these Wilcox wells.  If successful, we plan to drill a third Wilcox formation well during 2008 leveraging off the information acquired from the first two wells.

 

Texas Shamrock and Brushy Creek Projects (Frio Formation), Dewitt and Lavaca Counties , Texas

 

Our Texas Frio formation wells that comprise our Shamrock and Brushy Creek Projects  are our first wells to commence commercial production with the first well, the Pope No. 1 (Brushy Creek V), going on line in November 2007.    In our Frio initiative, we are participating in the drilling of a minimum of twelve Frio-age natural gas wells located in Dewitt and Lavaca Counties , Texas .   All twelve wells have been identified through newly acquired 3-D seismic data.  Frio-age sediments lie below the Anahuac Shale, a detachment zone within the Post Isabel Fold Belt.  The Shamrock Project in Dewitt   County  consists of five Frio wells drilled in 2007, and our participation in the Brushy Creek Project consists of non-operated interests in seven Frio wells located in Lavaca County , Texas .  Our Texas Frio formation projects are operated by third parties.  The Shamrock Project is operated by Caskids Operating Company, and the Brushy Creek Project is operated by Suncoast Technical Services, Inc.

 

Shamrock Project

 

The Shamrock Project is a five well drilling program located in Dewitt County, Texas that is targeting Frio-age natural gas reserves that have been identified through 3-D seismic. Frio-age wells have proven to be prolific natural gas producers throughout the Texas   Gulf   Coast  region.  The target formation is the Jameson Sand at total well depth at approximately 3200 feet.   The five wells drilled and completed in the Shamrock Project are the Polinard-Lee No. 1, the Miller-Thomas No. 1, the Bushmill No. 1, the Red Breast No. 1 and the Michael Collins No. 1.   All five wells had flow rates during test of 310 – 325 Mcf per day.   We hold an average 65.0% working interest and 45.5% net revenue interest in the wells.

 

Our plan of operation for the Shamrock Project is to finish the interconnection of the wells and to effect commercial production creating operating cash flows to us.

 

Brushy Creek Project

 

The Brushy Creek Project is a 3-D seismic controlled project situated in the prolific Oligocene Frio oil and natural gas trend located in the lower Texas   Gulf   Coast .  The Brushy Creek Project was initiated in 2005, and to date has been successful in ten out of ten wells.  The first ten wells resulted in six Frio discoveries, three Miocenen discoveries and one Yegua completion.  These ten new wells entail drilling that targets several high quality amplitude anomalies similar to those that have proven to be productive in the previous drilling.   We currently hold interests in seven Brushy Creek Project wells, and are evaluating the participation in three additional Frio wells scheduled for drilling.  Our average working and net revenue interests in the existing seven drilled wells is 34.4% and 24.9%, respectively.

 

The seven wells drilled and completed during 2007 that we hold interests in are the Goodrich-Toyah No. 1, Nichol’s No. 1, Pope No. 1, Goodrich-Deleplain No. 1, Goodrich-Poindexter No. 1, O’Neal Smith No. 1 and the Williams No. 6.   These wells are in various stages of testing and interconnection.

 

Our plan of operation is to complete testing and interconnection of the seven existing Brushy Creek Frio wells, and to evaluate our further participation in the Brushy Creek Project.

Mound Branch Reserve and Infrastructure Development Project, Elk County , Kansas

 

On January 30, 2007 we purchased Orbit Energy, LLC’s (“Orbit”) working and net revenue interests in approximately 8,800 gross acres located in Elk County, Kansas together with its interests in certain drilled wells and associated equipment (the “Mound Branch Project”).  Orbit is owned by CodeAmerica Investments, LLC for which Wm. Milton Cox, our Chairman and CEO, is the Managing Member, and Paragon Capital, LLC for which Bassam Nastat, our President and a Director, serves as Manager.

 

The purchase price totaled $6.8 million, and consideration paid to Orbit was comprised of: a) $760,947 of funds that we advanced to Orbit for testing and evaluation of the existing well bores, reservoir formations and associated lease acreage; b) a thirty-six month $2.0 million 10% convertible note with principal due at maturity; and c) 4,039,053 shares of our common stock with a fair value of $1.00 per common share at the time of issuance, subject to a true up upon receipt of an independent report assessing the fair value of the assets acquired at no less than the purchase price of $6.8 million.  Should the valuation be less than the $6.8 million purchase price then the number of shares released to Orbit on January 30, 2008, the one-year anniversary of the purchase from Orbit, will be ratably reduced for the lower valuation and shares will be returned to treasury.

 

The Mound Branch Project is a natural gas reserve and gathering system development project of existing and after acquired oil and gas lease acreage, and existing wellbores previously drilled by Orbit and its working interest partners.  The Mound Branch Project consists of a three year drilling program to drill fifty wells per year and for the construction of a 15-mile low pressure gathering system.  The required gathering system would have design capacity of 8,000 Mcf per day, and is necessary for the delivery of existing and expected prospective well head production into the interstate natural gas pipeline grid in Kansas .  Orbit serves as the operator of the Mound Branch Project.

 

The Mound Branch natural gas reserves cover Cherokee Group clastic rocks over Mississippian limestones. Depth to the Mississippian basement in the Cherokee Group ranges from 0 feet at outcrops in the extreme southeastern corner of Kansas  to more than 2,500 feet (762 m) in Elk and Chautauqua   Counties  as the Mississippian and Cherokee Group rocks gradually dip to the west and southwest.  The majority of wells are expected to produce from the Mulky and Summit  coals at approximately 1,600 feet depth, with additional potential in the Mississippi Limestone.

 

Recent testing of the Mound Branch Project MT19-1 well, the first Mississippi Limestone well showed absolute open flow (i.e., the maximum flow rate that a well could theoretically deliver with zero pressure at the face of the reservoir) at 1,400 Mcf per day .    The 72 Hour Flow Test performed over three days on the MT19-1 well established initital production rates of approximately 350 to 400 MCF per day.   The flow rates in the 72 Hour Test were established by flowing the well through a two phase separator and measuring volumes thru a 2-inch orfice tester vented to the atmosphere.  Well pressures and volumes were recorded hourly, and choke setting were varied to establish production rates.   Well pressure was 610 lbs. at the commencement of the testing, and 590 lbs. at the end of the test.

Test results for the coal wells tested indicate that the wells, completed in the Cherokee coal group, will be initially produced at a rate of approximately 38-40 Mcf per day.  There are eight existing wells drilled that are expected to achieve commercial levels of production if a gathering system can be constructed.  Six of the eight of the Cherokee coal group wells had 72 Hour Flow Tests performed on them, and the range of test results were as follows:

 

Well Name	Plate Size (Inch)	Test Result Range (Mcf/d)
DB 19-3	0.375	32.1 - 43.7
DB 16-3	0.350	31.8 - 48.4
DD 16-2	0.375	25.6 - 48.6
MT 29-1	0.400	39.2 - 61.2
MT 29-1	0.375	37.5 - 47.2
MT29-2	0.375	31.1 - 47.6
DD 16-8	0.350	32.7 - 47.4
DD 16-8	0.350	36.7 - 55.5

Since our acquisition of Orbit’s interests in the Mound Branch Project we have been funding 100% of the costs incurred by Orbit for the testing and evaluation of the of the existing well bores, reservoir formations and associated lease acreage, including amounts attributable to other working interest owners in the existing wells.   The amounts paid on the behalf of other working interest owners total $198,106 through August 31, 2007, and we expect that the amounts will be charged back to the other working interest owners in the wells ratable to their working interests.

 

Orbit has advised us that the testing and evaluation procedures for the Mound Branch Project were substantially completed during October 2007. Orbit has recently advised that they recommend performing a test on one well to further evaluate the Mulberry coal formation that has not been previously tested, but has been determined to be productive for other producers in the area.

 

Our plan of operation for Mound Branch is to complete the evaluation of the Mulberry coal formation, and to continue progress on the development of the natural gas supply and gathering system project.

 

Other Prospects

 

Baxter Bledsoe Prospect, Clay   County , Kentucky

 

On February 1, 2006, we purchased the Baxter Bledsoe Prospect oil and gas lease acreage from CodeAmerica for $330,000 cash. The prospect has approximately 2,200 acres located in Clay County, Kentucky. The Baxter Bledsoe Prospect is characterized as exploratory acreage, and our plan of operation provides for the drilling of an initial exploratory well targeting the Black River Group formation during 2008.    We hold a 100% working interest in the prospect and serve as operator.

 

Bell Prospect, Bell County , Kentucky

 

On October 1, 2006, we acquired from CodeAmerica oil and gas lease interests located in Bell County , Kentucky .  We paid $314,475 to CodeAmerica for the Bell Prospect which is comprised of approximately 3,400 acres that are categorized as exploratory. Our plan of operation for the Bell Prospect is to assemble and evaluate data with respect to the prospect  once the initial exploratory well on the Baxter Bledsoe prospect is completed and the data acquired during the drilling process is assembled and evaluated .    We hold a 100% working interest in the prospect and serve as operator.

 

Market and Competition

 

Our long-term success depends on our ability to identify, acquire and develop oil and natural gas reserves in quantities and at prices that are physically and commercially competitive.  The U.S. natural gas, oil and associated product markets are highly competitive and experience extreme volatility in commodity prices, much of which are driven by factors outside our control.  Our experience is that crude oil, condensate and associated product prices are driven primarily by global geopolitics, while natural gas prices in the U.S. are primarily determined by the interaction of consumer and industrial demand and available natural gas supply .

 

A large portion of the natural gas, crude oil and associated products production in the U.S. has historically been in the states of Texas , Louisiana , Oklahoma , and in the offshore areas associated with the Gulf of Mexico .  The natural gas and crude oil production in these areas are interconnected to consuming markets through a vast network of existing developed infrastructure to move production through pipelines or via trucks to markets.

Notwithstanding increased drilling activity in the U.S. , domestic natural gas and crude oil production has not materially increased while consumer demand continues to grow.  The maturation of U.S. supply basins has resulted in declining well recoveries and higher production decline rates.  Although generally more costly than conventional supply sources, supply from non-conventional sources of natural gas, such as liquefied natural gas and coalbed methane, is becoming more prevalent and is attracting significant capital investment to explore and develop these potential non-conventional supply opportunities.  The development of non-conventional supply sources will in many instances also require capital investment to develop the infrastructure necessary to effect delivery of production into markets.

We compete with independent oil and natural gas companies for commercial prospect acquisitions/participation; equipment, drilling rigs and labor required to evaluate and develop prospects; capital resources to fund capital investments; and in the sale of production into the oil and natural gas markets in the U.S.   The volatile nature of the U.S. energy markets makes it difficult to estimate future prices of oil and natural gas, and competition for drilling rigs makes it very difficult to forecast the development costs of our prospects and the timeframe under which they can be developed.  Many of our competitors have substantially greater financial resources than we have, which may allow them to define, evaluate, acquire and develop a greater number of prospects than we can.

Regulation

In the United States , domestic development, production and sale of oil and natural gas are extensively regulated at both the federal and state levels.  These regulations include requiring permits for drilling wells; maintaining prevention plans; submitting notification and receiving permits in relation to the presence, use and release of certain materials incidental to oil and natural gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface plugging and abandoning of wells and the transporting of production.  Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden.  Also, numerous departments and agencies, both federal and state, have issued rules and regulations binding on the oil and natural gas industry and its individual members, compliance with which is often difficult and costly and some of which carry substantial penalties for failure to comply.  Inasmuch as new legislation affecting the oil and natural gas industry is commonplace, and existing laws and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with these laws and regulations.

 

State statutes and regulations require permits for drilling operations, drilling bonds and reports concerning wells. Texas and other states in which we intend to conduct operations also have statutes and regulations governing conservation matters, including the unitization or pooling of oil and natural gas properties and establishment of maximum rates of production from oil and natural gas wells.

 

Our operations are also subject to extensive and developing federal, state and local laws and regulations relating to environmental, health and safety matters; petroleum; chemical products and materials; and waste management.  Permits, registrations or other authorizations are required for the operation of certain of our facilities and for our oil and natural gas exploration and future production activities. These permits, registrations or authorizations are subject to revocation, modification and renewal.  Governmental authorities have the power to enforce compliance with these regulatory requirements, the provisions of required permits, registrations or other authorizations, and lease conditions, and violators are subject to civil and criminal penalties, including fines, injunctions or both.  Failure to obtain or maintain a required permit may also result in the imposition of civil and criminal penalties. Third parties may have the right to sue to enforce compliance.

 

Our operations are also subject to various conservation matters, including the number of wells which may be drilled in a unit and the unitization or pooling of oil and natural gas properties. In this regard, 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 natural gas properties. In addition, state conservation laws establish maximum rates of production oil and natural gas wells, 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 natural gas that we can produce from our wells and to limit the number of wells or the locations at which we can drill.

 

Our operations, as is the case in the petroleum industry generally, are significantly affected by federal tax laws. Federal, as well as state, tax laws have many provisions applicable to corporations which could affect our future tax liability.

Environmental Matters

 

Our exploration, development, and future production of oil and natural gas are subject to various federal, state and local environmental laws and regulations discussed below. Such laws and regulations can increase the costs of planning, designing, installing and operating oil and natural gas wells.  We consider the cost of environmental protection a necessary and manageable part of our business. We have been able to plan for and comply with new environmental initiatives without materially altering our operating strategies.

 

Our activities are subject to a variety of environmental laws and regulations, including but not limited to, the Oil Pollution Act of 1990 (“OPA”), the Clean Water Act (“CWA”), the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act (“RCRA”), the Clean Air Act, and the Safe Drinking Water Act, as well as state regulations promulgated under comparable state statutes. We are also subject to regulations governing the handling, transportation, storage, and disposal of naturally occurring radioactive materials that are found in our oil and natural gas operations. Civil and criminal fines and penalties may be imposed for non-compliance with these environmental laws and regulations. Additionally, these laws and regulations require the acquisition of permits or other governmental authorizations before undertaking certain activities, limit or prohibit other activities because of protected areas or species, and impose substantial liabilities for cleanup of pollution.

 

Under the OPA, a release of oil into water or other areas designated by the statute could result in us being held responsible for the costs of remediating such a release, certain OPA specified damages, and natural resource damages. The extent of that liability could be extensive, as set out in the statute, depending on the nature of the release. A release of oil in harmful quantities or other materials into water or other specified areas could also result in us being held responsible under the CWA for the costs of remediation, and civil and criminal fines and penalties.

 

CERCLA and comparable state statutes, also known as “Superfund” laws, can impose joint and several and retroactive liability, without regard to fault or the legality of the original conduct, on certain classes of persons for the release of a “hazardous substance” into the environment. In practice, cleanup costs are usually allocated among various responsible parties. Potentially liable parties include site owners or operators, past owners or operators under certain conditions, and entities that arrange for the disposal or treatment of, or transport hazardous substances found at the site. Although CERCLA, as amended, currently exempts petroleum, including but not limited to, crude oil, natural gas and natural gas liquids from the definition of hazardous substance, our operations may involve the use or handling of other materials that may be classified as hazardous substances under CERCLA. Furthermore, there can be no assurance that the exemption will be preserved in future amendments of the act, if any.

 

RCRA and comparable state and local requirements impose standards for the management, including treatment, storage, and disposal of both hazardous and non-hazardous solid wastes. We generate hazardous and non-hazardous solid waste in connection with our routine operations. From time to time, proposals have been made that would reclassify certain oil and natural gas wastes, including wastes generated during drilling, production and pipeline operations, as “hazardous wastes” under RCRA which would make such solid wastes subject to much more stringent handling, transportation, storage, disposal, and clean-up requirements. This development could have a significant impact on our operating costs. While state laws vary on this issue, state initiatives to further regulate oil and natural gas wastes could have a similar impact.

Research and Development

Our business plan is focused on the exploration and development of our oil and natural gas interests. We do not anticipate that we will expend any significant funds on research and development over the twelve months ending August 31, 2008.

Purchase of Significant Equipment

We do not intend to purchase any significant equipment over the next twelve months, other than in the ordinary course of business.

Employees

We currently have five full-time and part-time employees. We generally utilize short term contractors, consultants and professional service providers, as necessary. Our directors and officers provide services on a month to month basis pursuant to oral arrangements, but have not signed employment or consulting agreements with us. We do not expect any material changes in the number of employees over the next twelve month period. We may enter formal written service agreements with our directors and officers in the future. We expect to utilize contractors and consultants as needed to meet our staffing needs, and will continue to periodically evaluate costs and benefits of staffing our resource requirements externally or internally. We expect that the level of success of our exploration and development initiatives will drive the timing and level of employees that we may retain in the future.

Going Concern

 

Our financial statements have been prepared assuming we will continue as a going concern. We are in our development stage and, accordingly, have several capital initiatives but no revenues. We have raised limited financing and have incurred operating losses since our inception. These factors raise substantial doubt about our ability to continue as a going concern, and our ability to achieve and maintain profitability and positive cash flows are dependent on our ability to secure sufficient financing to fund the acquisition, drilling and development of profitable oil and natural gas properties. We are actively pursuing financing options which we believe would allow us to establish and sustain commercial production. There are no assurances that we will be able to obtain additional financing from investors or private lenders and, if available, such financing may not be on commercial terms acceptable to us or our stockholders. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We intend to raise financing sufficient to fund our capital expenditure and working capital requirements for the next twelve months principally through private placements and possibly public offerings.

Risks Factors

 

Risks Related to our Business

 

Without additional financing, there is substantial doubt about our ability to continue as a going concern .

 

Our audited consolidated financial statements as of August 31, 2007 and 2006 and for each of the two years ended August 31, 2007 and 2006, and from inception (January 20, 2005) to August 31, 2007 were prepared assuming that we will continue as a going concern.  We are in our development stage and have had limited operations and no revenues from our inception through August 31, 2007.  Our independent accountants in their audit report have expressed substantial doubt about our ability to continue as a going concern.  Our continued operations are dependent on our ability to achieve profitability and to generate and maintain positive operating cash flows.  This is driven by our ability to complete equity and debt financings sufficient to fund the acquisition, drilling and development of profitable oil and gas properties.  Such financings may not be available to us or may not be on reasonable terms.  Our financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

We have a very limited history of operations in oil and natural gas exploration and production and accordingly may not be successful in carrying out our business objectives .

 

We were incorporated in the State of Nevada on February 21, 2006 as Georgia Exploration, Inc., a Vancouver based mineral resource exploration company with interests in 14 non-oil and gas mineral claims in British Columbia.  On January 3, 2007, we consummated a merger with Wharton Resources Corp.  Upon completion of the merger, our core business and strategic focus became the exploration and development of oil and natural gas reserves in the United States.

 

We have raised limited financing and have incurred operating losses since our inception, with total losses of approximately $3,817,250 through August 31, 2007.  We have no track record of successful oil and gas exploration and development activities that would allow an investor to assess the likelihood of us, or guarantee that we will be successful, as an oil and natural gas exploration and production company.  We may fail to achieve or maintain successful operations, even in favorable market conditions.  There is a substantial risk that we will not be successful in our exploration activities, or if initially successful, in thereafter generating any operating revenues or otherwise achieving sustained and recurring operating cash flows.

 

We may require additional funding, and our failure to raise additional capital necessary to support and expand our operations could reduce our ability to compete and could harm our business .

 

Over the next twelve months, we plan to spend approximately $12.8 million for oil and natural gas exploration, drilling and development expenditures, and approximately $1.6 million for general and administrative, operating and public company expenses, and working capital requirements.  See “Plan of Operations” for more information.  Based on our plan of operation, our current available cash and projected operating cash flows are not sufficient to fund our capital and operating requirements over the next twelve month period.  In particular, our current and projected operating cash flows from our Frio formation oil and gas production in Dewitt and Lavaca Counties, Texas are not sufficient to repay the total $3.7 million principal balance due on September 10, 2008 under the notes issued to certain of our investors. The first six months of interest on these notes totaling $266,500 is due on March 10, 2008.  We are dependent on external financing sources to raise funds sufficient to repay the principal balance due on these notes at maturity.

 

To execute our plans, we will require substantial financing and are actively working on options to raise equity and/or debt financing through private placements and public offerings. However, in the event that we are unable to raise the financing to meet our needs, or if we are able to obtain sufficient financing from investors or private lenders but it is on commercial terms unacceptable to us or our stockholders , we will be required to scale back or slow our capital investment program. Should we raise funds through equity and debt placements, existing equity and ownership in us could be negatively affected due to the dilution of existing equity ownership of our shares.

 

The notes issued to certain of our investors mature in twelve months and are secured by substantially all of our assets, so the failure to repay the notes could cause us to cease operations .

 

As noted above, the notes issued to certain of our investors in connection with the financing that we completed in September 2007, are due on September 10, 2008 and are secured by a lien on substantially all of our assets, including our oil and gas lease interests and our equity interests in our subsidiaries.  We are dependent on external financing sources to raise funds sufficient to repay the principal due under these notes at maturity. Alternate external financing may be comprised of equity and debt, which may or may not be available to us on reasonable terms.  If we are not successful in or unable to repay the $3.7 million principal balance on the maturity of the notes, since substantially all our assets are pledged as security to the lenders, we may be unable to continue our business and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment.

Our related party transactions may cause conflicts of interests that may adversely affect our ability to operate our business .

We have entered into and may, in the future, enter into various transactions and agreements with entities wholly or partially owned by our officer and directors, including Orbit Energy, LLC, which is owned by CodeAmerica Investments, LLC, for which Wm. Milton Cox, our Chairman and CEO, is the Managing Member, and Paragon Capital, LLC for which Bassam Nastat, our President and a Director, serves as Manager.  We believe that the transactions and agreements that we have entered into with related parties are on terms that are at least as favorable to us as could reasonably have been obtained at such time from third parties.  However, these relationships could create, or appear to create, potential conflicts of interest when members of our senior management are faced with decisions that could have different implications for us and those entities or their affiliates.

Potential conflicts of interest can exist if a related party director or officer has to make a decision that has different implications for us and the related party.  We cannot be certain as to how potentially conflicted board members or officers will evaluate their fiduciary duties or how such individuals will act under such circumstances. Furthermore, the appearance of conflicts, even if such conflicts do not materialize, might adversely affect the public's perception of us, as well as our relationship with other companies and our ability to enter into new relationships in the future, which could have a material adverse effect on our ability to do business.

Our exploration and development operations are subject to many risks which may affect our ability to profitably extract oil and natural gas reserves or achieve targeted returns.  In addition, continued growth requires that we acquire and successfully develop additional oil and natural gas reserves.  

Oil and natural gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. Production delays and declines from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees.

Our commercial success depends on our ability to find, acquire, develop and commercially produce oil and natural gas reserves.  Without the continual addition of new reserves, any existing reserves and the production therefrom will decline over time as such existing reserves are depleted.  A future increase in our reserves will depend not only on our ability to explore and develop any properties we may have from time to time, but also on our ability to select and acquire suitable producing properties or prospects.  We may not be able to continue to locate satisfactory properties for acquisition or participation.  Moreover, if such acquisitions or participations are identified, we may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations economically disadvantageous.  We also may be unable to discover or acquire commercial quantities of oil and natural gas at all.

 

Our oil and natural gas operations are subject to operating hazards that may increase our operating costs to prevent such hazards, or may materially affect our operating results if any of such hazards were to occur.

 

Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, cratering, sour gas releases and spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property and the environment or in personal injury. Oil and natural gas production operations are also subject to all the risks typically associated with such operations, including encountering unexpected formations or pressures, premature decline of reservoirs and the invasion of water into producing formations. Losses resulting from the occurrence of any of these risks could have a material adverse effect on our results of operations, liquidity and financial condition.

To date, we have not generated revenues from production of our oil and natural gas lease interests.  Our oil and natural gas exploration and development activities will be focused on the exploration and development of our oil and natural gas rights which are high-risk ventures with uncertain prospects for success.  In addition, we will not have earnings to support our activities should the wells drilled or properties acquired prove not to be commercially viable.  We may be unable to successfully produce commercial quantities of oil and natural gas as a result of our exploration and development efforts or to generate sufficient revenues from production of our reserves.

Our exploration and development activities will depend in part on the evaluation of data obtained through geophysical testing and geological analysis, as well as test drilling activity.  The results of such studies and tests are subjective, and our exploration and development activities based on positive analysis may not produce oil or natural gas in commercial quantities.  As developmental and exploratory activities are performed, further data required for evaluation of our oil and natural gas interests may become available.  The exploration and development activities that will be undertaken by us are subject to greater risks than those associated with the acquisition and ownership of producing properties.  The drilling of development wells may result in dry holes or a failure to produce oil and natural gas in commercial quantities.  Moreover, any drilling of exploratory wells is subject to significant risk of dry holes.

Sales of any production of oil or natural gas from our present or future reserves are subject to numerous factors beyond our control which could make it difficult to market and sell any oil and natural gas at price and cost levels that are acceptable or profitable to us.

The marketability of any oil or natural gas that may be discovered by us will be affected by numerous factors beyond our control, including market fluctuations, the supply and demand for natural gas, the proximity and capacity of natural gas pipelines, oil transportation, and processing equipment, as well as by government regulations, including regulations relating to the prices, taxes, royalties, land tenure, allowable production, the import and export of natural gas and environmental protection.  These factors cannot be predicted.  We are in the initial stage of negotiating contracts for the delivery and sale of oil or natural gas production from our properties.  There is no guarantee that any such contracts will be obtained or, if obtained, will be on terms which are economically viable to us.  

If we are unable to successfully compete with the large number of oil and natural gas producers in our industry, we may not be able to achieve profitable operations.

Oil and natural gas exploration is intensely competitive in all its phases and involves a high degree of risk.  We compete with numerous other participants in the search for and the acquisition of oil and natural gas properties and in the marketing of oil and natural gas.  Our competitors include oil and natural gas companies that have substantially greater financial resources, staff and facilities than us.  Our ability to increase reserves in the future will depend not only on our ability to explore and develop our existing properties, but also on our ability to select and acquire suitable producing properties or prospects for exploratory drilling.  The activities of our competitors in the marketplace may negatively impact our operations and our ability to attract quality projects.  In addition, new competitors, some of whom may have extensive experience in related fields or greater financial resources, may enter the market.  Increased competition could result in a loss of projects and market share.  Either of these results could seriously harm our business and operating results.

We are subject to various regulatory requirements, including environmental regulations, and may incur substantial costs to comply and remain in compliance with those requirements.  

Our operations in the United States are subject to regulation at the federal, state and local levels, including regulation relating to matters such as the exploration for and the development, production, marketing, pricing, transmission and storage of oil and natural gas, as well as environmental and safety matters.  Failure to comply with applicable regulations could result in fines or penalties being owed to third parties or governmental entities, the payment of which could have a material adverse effect on our financial condition or results of operations.  Our operations are subject to significant laws and regulations, which may adversely affect our ability to conduct business or increase our costs.  Extensive federal, state and local laws and regulations relating to health and environmental quality in the United States affect nearly all of our operations.  These laws and regulations set various standards regulating various aspects of health and environmental quality, provide for penalties and other liabilities for the violation of these standards, and in some circumstances, establish obligations to remediate current and former facilities and off-site locations.

Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of the applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur costs to remedy such discharge. Environmental laws may result in a curtailment of production or a material increase in the costs of production, development or exploration activities or otherwise adversely affect our financial condition, results of operations or prospects.  We could incur significant liability for damages, clean-up costs and/or penalties in the event of discharges into the environment, environmental damage caused by us or previous owners of our property or non-compliance with environmental laws or regulations. In addition to actions brought by governmental agencies, we could face actions brought by private parties or citizens groups.  Any of the foregoing could have a material adverse effect on our financial results.

Moreover, we cannot predict what legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered, enforced or made more stringent. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of the regulatory agencies, could require us to make material expenditures for the installation and operation of systems and equipment for remedial measures, all of which could have a material adverse effect on our financial condition or results of operations.

Our ability to successfully market and sell oil and natural gas is subject to a number of factors that are beyond our control, and that may adversely impact our ability to produce and sell oil and natural gas, or to achieve profitability.     

 

The marketability and price of oil and natural gas that may be acquired or discovered by us will be affected by numerous factors beyond our control.  Our ability to market our natural gas may depend upon our ability to acquire space on pipelines that deliver natural gas to commercial markets. We may also be affected by deliverability uncertainties related to the proximity of our reserves to pipelines and processing facilities, by operational problems with such pipelines and facilities, and by government regulation relating to price, taxes, royalties, land tenure, allowable production, the export of oil and natural gas and by many other aspects of the oil and natural gas business.

Our revenues, profitability and future growth and the carrying value of our oil and natural gas properties are substantially dependent on prevailing prices of oil and natural gas. Our ability to borrow and to obtain additional capital on attractive terms is also substantially dependent upon oil and natural gas prices. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors beyond our control. These factors include economic conditions, in the United States and Canada , the actions of the Organization of Petroleum Exporting Countries, governmental regulation, political stability in the Middle East and elsewhere, the foreign supply of oil and natural gas, the price of foreign imports and the availability of alternative fuel sources. Any substantial and extended decline in the price of oil and natural gas would have an adverse effect on the carrying value of our proved reserves, borrowing capacity, revenues, profitability and cash flows from operations.

Volatile oil and natural gas prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for oil and natural gas producing properties, as buyers and sellers have difficulty agreeing on such value. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation projects.

We cannot guarantee that title to our properties does not contain a defect that may materially affect our interest in those properties.

It is our practice in acquiring significant oil and natural gas leases or interest in oil and natural gas leases to retain lawyers to fully examine the title to the interest under the lease.  In the case of minor acquisitions, we rely upon the judgment of oil and natural gas lease brokers or landmen who do the field work in examining records in the appropriate governmental office before attempting to place under lease a specific interest.  As such, there may be title defects which affect lands comprising a portion of our properties which may adversely affect us.

Our business may be harmed if we are unable to retain our interests in leases .

All of our properties are held under interests in oil and gas mineral leases, some of which expire within the next twelve months. If we fail to meet the specific requirements of each lease, especially future drilling and production requirements, the lease may be terminated or otherwise expire. We may be unable to meet our obligations under each lease. The termination or expiration of our working interest relating to any lease would harm our business, financial condition and results of operations.

Our reserve estimates are subject to numerous uncertainties and may be inaccurate.

There are numerous uncertainties inherent in estimating quantities of oil or natural gas reserves and cash flows to be derived therefrom, including many factors beyond our control. The reserve and associated cash flow information set forth herein represent estimates only. In general, estimates of economically recoverable oil and natural gas reserves and the future net cash flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom prepared by different engineers, or by the same engineers at different times, may vary. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves will vary from estimates thereof and such variations could be material.

Estimates of proved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history and production practices will result in variations in the estimated reserves and such variations could be material.

The reserve quantities included herein were prepared by an independent reserve engineer, MHA Petroleum Consultants, Inc. (“MHA”), and were prepared based on fiscal year-end prices and cost estimates assuming continuation of existing economic conditions as of August 31, 2007.   Actual future net revenue will be affected by other factors such as actual production levels, supply and demand for oil and natural gas, curtailments or increases in consumption by oil and natural gas purchasers, changes in governmental regulation or taxation and the impact of inflation on costs.  The MHA reserve quantities and other calculations are based in part on the assumed success of activities we intend to undertake in future periods, including obtaining the financing required to fund the capital expenditures necessary to effect the drilling and completion of the reserves identified in the MHA reserve evaluation.  The reserves and estimated cash flows to be derived from the production of the reserves will be reduced if we are not successful in undertaking the activities required in future periods.

 

We presently do not carry our own insurance and may be exposed to significant liability should any claims arise for which we are not insured.

Our involvement in the exploration for and development of oil and natural gas properties may result in our becoming subject to liability for pollution, blowouts, property damage, personal injury or other hazards. We do not presently maintain our own insurance covering liabilities arising from our operations.  Even if we obtain insurance prior to drilling, such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities. In addition, such risks may not in all circumstances be insurable or, in certain circumstances, we may elect not to obtain insurance to deal with specific risks due to the high premiums associated with such insurance or other reasons. The payment of such uninsured liabilities would reduce the funds available to us. The occurrence of a significant event that we are not fully insured against, or the insolvency of the insurer of such event, could have a material adverse effect on our financial position, results of operations or prospects.

Some of our oil and natural gas properties are held in the form of licenses and leases.  If we default on those licenses or leases, we may lose our interest in those properties.

Our properties are held in the form of licenses and leases and working interests in licenses and leases. If we or the holder of the license or lease fail to meet the specific requirement of a license or lease, the license or lease may terminate or expire. We may not be able to maintain or otherwise meet the obligations required of each license or lease. The termination or expiration of our licenses or leases or the working interests relating to a license or lease may have a material adverse effect on our results of operations and business.

The loss or unavailability of our key personnel for an extended period of time could adversely affect our business operations and prospects.

Our success depends in large measure on certain key personnel, including our President, Chief Executive Officer and Chief Financial Officer. The loss of the services of such key personnel could have a material adverse effect on us.  We do not currently have such insurance in effect for these key individuals. In addition, the competition for qualified personnel in the oil and natural gas industry is intense and we may be unable to continue to attract and retain all personnel necessary for the development and operation of our business.

We depend on the services of third parties for material aspects of our operations, including drilling operators, and accordingly if we cannot obtain certain third party services, we may not be able to operate.

We may rely on third parties to operate some of the assets in which we possess an interest. Assuming the presence of commercial quantities of oil and natural gas on our properties, the success of the oil and natural gas operations, whether considered on the basis of drilling operations or production operations, will depend largely on whether the operator of the property properly fulfills our obligations.  As a result, our ability to exercise influence over the operation of these assets or their associated costs may be limited, adversely affecting our financial performance.  Our performance will therefore depend upon a number of factors that may be outside of our full control, including the timing and amount of capital expenditures, the operator’s expertise and financial resources, the approval of other participants, the selection of technology, and risk management practices.  The failure of third party operators and their contractors to perform their services in a proper manner could adversely affect our operations.

We will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act.  If we are unable to timely comply with Section 404 or if the costs related to compliance are significant, our profitability, stock price and results of operations and financial condition could be materially adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our annual report on Form 10-KSB for the fiscal year ending August 31, 2008, we will be required to furnish a report by management on our internal control over financial reporting.  This report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective.  This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by our management.  Beginning for the fiscal year ending August 31, 2009, this report must also contain a statement that our auditors have issued an attestation report on management’s assessment of internal control.  

We cannot be certain that we will be able to complete our assessment, testing and any required remediation in a timely fashion.  These reporting and assessment obligations will place significant demands on our management, administrative, operational, internal audit and accounting resources. We anticipate that we will need to upgrade our reporting systems and procedures, implement additional financial and management controls, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired.  In addition, during the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our system of internal control is effective. If we are unable to assert that our internal control over financial reporting is effective (or if our auditors are unable to attest that management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on our stock price.

Any failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price. In addition, expenses related to services rendered by our accountants, legal counsel and consultants will increase in order to ensure compliance with these laws and regulations. Failure to comply with Section 404 may make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance.  We may be forced to accept reduced policy limits and coverage and/or to incur substantially higher costs to obtain the same or similar coverage.  The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors, or as executive officers.

 

Risks Related to our Common Stock

 

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 .

 

The trading volume for our common stock has historically been insignificant, and an active trading market for our common stock may never develop. There currently is limited analyst coverage of our business. We do not have very many shares of common stock outstanding and the amount of shares in our public “float” will continue to be limited due to the fact that significant portions of our outstanding shares are held by our officers and directors and their affiliates. As a result of the thin trading market for our common stock, and the lack of analyst coverage, the market price for our shares may continue to fluctuate significantly, and will likely be more volatile than the stock market as a whole. There may be a limited demand for shares of our common stock due to the reluctance or inability of certain investors to buy stocks quoted for trading on the Over-The-Counter Bulletin Board (“OTCBB”), limited analyst coverage of our common stock, and a negative perception by investors of stocks traded on the OTCBB.  As a result, even if prices appear favorable, there may not be sufficient demand in order to complete a shareholder’s sell order. Without an active public trading market or broader public ownership, shares of our common stock are likely to be less liquid than the stock of most public companies, and any of our shareholders who attempt to sell their shares in any significant volumes may not be able to do so at all, or without depressing the publicly quoted bid prices for their shares.

In addition, we may never achieve a listing of our common stock on a national securities 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 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.

 

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

 

The Securities and Exchange Commission (the “SEC”) has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that (i) has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, or (ii) is not registered on a national securities exchange or listed on an automated quotation system sponsored by a national securities exchange. For any transaction involving a penny stock, unless exempt, Rule 15g-9 of the Securities and Exchange Act of 1934, as amended, requires:

 

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that a broker or dealer approve a person’s account for transactions in penny stocks; and

 

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the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

 

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obtain financial information and investment experience objectives of the person; and

 

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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:

 

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sets forth the basis on which the broker or dealer made the suitability determination; and

 

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attests that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading, and about the commissions payable to both the broker-dealer and the registered representative.  Current quotations for the securities and the rights and remedies and to be available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.  Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules.  This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

 

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 energy 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:

 

•

changes in securities analysts’ estimates of our financial performance;

 

•

fluctuations in stock market prices and volumes, particularly among securities of energy companies;

 

•

changes in market valuations of similar companies;

 

•

announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;

 

•

variations in our quarterly operating results;

 

•

fluctuations in oil and natural gas prices; and

 

•

additions or departures of key personnel.

 

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.

Item 2.

Description of Property

 

Reserves

 

Our proved natural gas and associated oil reserves have been estimated as of August 31, 2007 and presented in following table.  The reserves presented in the table are based on reserve evaluations performed by MHA Petroleum Consultants, Inc., an independent reserve engineer, and reported in their report entitled “Securities and Exchange Commission Evaluation, Oil & Natural Gas Reserves, Oakcrest Prospect, Wharton County, Texas.”   The reserve quantities were prepared based on fiscal year-end prices and cost estimates assuming continuation of existing economic conditions as of August 31, 2007.  There are numerous uncertainties inherent in estimating quantities of proved reserves and estimates of reserve quantities and values must be viewed as being subject to significant change as more data about the properties becomes available.

 

All reserves classified as proved as of August 31, 2007 are associated with our Oakcrest Prospect located in Wharton County, Texas.

 

From our inception through August 31, 2007, we have not had natural gas or oil production arising from or attributable to our oil and gas interests.

 

Drilling Activity and Productive Wells

 

Information with regard to our drilling activities during the year ended August 31, 2007, and well status at August 31, 2007 are presented in the following table:

 

		At August 31, 2007
		Gross				Net
Drilled:
Exploratory			10.0				3.6
Development			-				-
Total			10.0				3.6
Total Wells
Productive			-				-
Non-productive			-				-
Under testing and evaluation			10.0				3.6
Total			10.0				3.6

All wells drilled during the year ended August 31, 2007 were drilled in Texas in connection with the Shamrock and Brushy Creek projects. At August 31, 2007, these wells were undergoing completion operations and testing in order to make a determination of the productive status of each well.

 

We did not drill any wells during the period from our inception through the year ended August 31, 2006.

 

Acreage

 

The following table summarizes by state our developed and undeveloped acreage as of August 31, 2007. The term of the undeveloped leasehold acreage ranges from one to three years.   Our Oakcrest Prospect lease acreage located in Wharton County, Texas expires on September 1, 2008 unless we have commenced and maintain a continuous drilling schedule, initiate production or negotiate a renewal with the holder of the mineral rights.

 

Delivery Commitments

We have no significant delivery commitments.

Office Lease

We share office space in Houston , Texas with Orbit under a month-to-month arrangement.    The office space is leased by Orbit.  During the years ended August 31, 2007 and 2006, we paid rent totaling $42,994 and $38,210, respectively.

Item 3.

Legal Proceedings

 

We know of no material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

None.

PART II

Item 5.

Market for Common Stock and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

 

Market Price for Common Stock

Our common stock has been quoted on the Over The Counter Bulletin Board (“OTCBB”) since July 10, 2006.  On March 8, 2007, we changed our symbol on the OTCBB from “GXPL.OB” to “GWPC.OB” and our common stock is currently trading on the OTCBB under that symbol.

 

The following table sets forth the range of the high and low closing prices, as reported by the OTCBB, for our common stock for the periods indicated.   The quotations represent inter-dealer prices, without retail mark up or commission and may not represent actual transactions .

 

		Sales Price
		High				Low
Quarter ended November 30, 2006		$	1.30			$	0.93
Quarter ended February 28, 2007		$	1.10			$	0.84
Quarter ended May 31, 2007		$	0.93			$	0.55
Quarter ended August 31, 2007		$	0.60			$	0.22

Our authorized capital stock consists of 1,200,000,000 shares of common stock.  As of November 28, 2007, 56,603,107 shares of common stock were issued and outstanding.  As of such date, there were approximately 36 holders of record of our common stock.

 

Dividend Policy

 

We have not paid dividends on our common stock and do not anticipate paying cash dividends in the immediate future as we contemplate that our cash flows will be used for continued growth of our operations.  The payment of future dividends, if any, will be determined by the Board in light of conditions then existing, including our earnings, financial condition, capital requirements, and restrictions in financing agreements, business conditions and other factors.  However, the Nevada Revised Statutes do prohibit us from declaring dividends where, after giving effect to the distribution of the dividend we would not be able to pay our debts as they become due in the usual course of business; or our total assets would be less than the sum of our total liabilities, plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.

Securities Authorized For Issuance Under Equity Compensation Plans

 

The following table sets forth information regarding our existing equity compensation plans as of August 31, 2007.

 

		Equity Compensation Plan Information
Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)				Weighted average exercise price of outstanding options, warrants and rights (b)				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders			-				-				-
Equity compensation plans not approved by security holders (1)			3,625,000				0.74				5,375,000
Total as of August 31, 2007			3,625,000				0.74				5,375,000

(1)

Consists of the 2007 Non-Qualified Stock Option Plan (the “Plan”).  The Plan will be adopted by the Company’s stockholders prior to March 9, 2008.

Item 6.

Plan of Operations

 

The following plan of operations should be read in conjunction with “Business” and our consolidated financial statements and related notes included elsewhere in this Form 10-KSB.  In January 2007, we modified our business plan to concentrate on the acquisition, exploration, development and production of oil and natural gas projects.  We are a development stage company and we have not earned any operating revenue as of the date of this filing from our current operations in the oil and natural gas industry.  Our plan of operation is to (i) continue to secure capital funding sufficient to drill a minimum of two Oakcrest Prospect wells in Texas; (ii) to continue progress on the development of the gas supply and gathering system for the Mound Branch Project; and (iii) to complete the drilling and testing of our Frio formation wells in the Shamrock and Brushy Creek Projects, interconnect the wells and establish commercial production.  We also expect to drill a test exploration well in Kentucky on the Baxter Bledsoe Prospect.

 

During the twelve month period ending August 31, 2008, we project total cash requirements of approximately $14.4 million. Our total estimated cash requirements are comprised of approximately $12.8 million for oil and natural gas exploration, drilling, development and operating expenditures, and $1.6 million for general and administrative, operating and public company expenses, and working capital requirements.

 

In September of 2007, we issued convertible notes in an aggregate principal amount of $3.7 million to Metage Funds Limited and NCIM Limited which are due in full on September 10, 2008 unless converted into shares of our common stock prior to maturity.  These notes are secured by a lien on substantially all of our assets, including our oil and gas lease interests and our equity interests in our subsidiaries.  The stated interest in the notes is 15.0% per annum with interest for the first six months due on March 10, 2008 and monthly thereafter until maturity.

 

Based on our plan of operations, our current available cash is not sufficient to fund our capital and operating requirements over this twelve month period. To execute our plans, we will require substantial financing and are actively working on options to raise equity and/or debt financing through private placements and public offerings. However, in the event that we are unable to raise the financing to meet our needs, or if we are able to obtain sufficient financing from investors or private lenders but it is on commercial terms unacceptable to us or our stockholders, we will be required to scale back or slow our capital program. Should we raise funds through equity and debt placements, existing equity ownership in us could be negatively affected due to the dilution of existing equity ownership of our shares.  If we are not successful in or unable to repay the $3.7 million principal balance on the maturity of the notes, since substantially all our assets are pledged as security to the lenders, we may be unable to continue our business and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment.

 

Over the next twelve months, we intend to use substantially all of our available funds to continue the exploration and development of our oil and natural gas prospect opportunities, as summarized below:

 

Estimated Funding During the Twelve Months Ending August 31, 2008
Exploration, drilling, development and operating expenditures
Oakcrest Prospect – Drilling and completion of two Wilcox formation wells		$	8,900,000
Shamrock and Brushy Creek Projects – Drilling and completion of wells			1,100,000
Mound Branch Project – Development of gathering system and reserve development program			1,300,000
Baxter Bledsoe Prospect –Drill initial exploratory well			300,000
Other prospects			1,200,000
Operating, general and administrative			900,000
Public company expenses			240,000
Working capital			500,000
		$	14,440,000

 

We do not have any off balance sheet financial arrangements.

 

INDEX TO FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm	25
Consolidated Balance Sheets as of August 31, 2007 and 2006	26
Consolidated Statements of Operations for the years ended August 31, 2007 and 2006 and the period from Inception (January 20, 2005) to August 31, 2007 (Restated)	27
Consolidated Statement of Stockholders’ Equity (Deficit) for the period from Inception (January 20, 2005) to August 31, 2007	28
Consolidated Statements of Cash Flows for years ended August 31, 2007 and 2006 and the period from Inception (January 20, 2005) to August 31, 2007	30
Notes to the Consolidated Financial Statements – August 31, 2007	32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Gulf Western Petroleum Corporation

Houston , Texas

 

We have audited the accompanying consolidated balance sheets of Gulf Western Petroleum Corporation (a development stage company) as of August 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended August 31, 2007, and the period from inception (January 20, 2005) to August 31, 2007.   These consolidated financial statements are the responsibility of Gulf Western’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board ( United States ). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gulf Western Petroleum Corporation as of August 31, 2007 and 2006, and the results of operations and cash flows for the years then ended, and the period from inception (January 20, 2005) to August 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that Gulf Western Petroleum Corporation will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, Gulf Western Petroleum Corporation was formed on January 20, 2005 and has not generated any revenues since inception, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 3.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As described in Note 13 to the consolidated financial statements, the accompanying consolidated financial statements for the year ended August 31, 2007 have been restated to properly present basic and diluted net loss per share.

 

GBH CPAs, PC

www.gbhcpas.com

Houston , Texas

November 28, 2007 ( April 17, 2008 as to the effects of the restatement described in Note 13)

GULF WESTERN PETROLEUM CORPORATION

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

As of August 31, 2007 and 2006

ASSETS		2007 (Restated)				2006
Current assets
Cash		$	1,925			$	312,581
Accounts receivable – joint interest partners			198,106				-
Accounts receivable – related party			11,488				-
Total current assets			211,519				312,581
Deferred financing costs, net of amortization			56,123				-
Office equipment, net of depreciation of $6,507 and $1,350, respectively			13,185				6,022
Oil and gas properties, full cost method:
Properties subject to amortization			1,090,988				773,016
Properties not subject to amortization			10,642,207				136,987
Total assets		$	12,014,022			$	1,228,606
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable		$	1,065,092			$	630,306
Accounts payable – related parties			677,402				328,047
Stock payable			100,000				-
Advances from stockholder			120,000				-
Due to parent			-				460,231
Accrued interest			15,041				4,765
Accrued interest – related party			116,712				-
Notes payable							312,500
Convertible note payable, net of unamortized debt discount of $11,290 and $-0-, respectively			238,710				-
Total current liabilities			2,332,957				1,735,849
Convertible note – related party			2,000,000				-
Convertible notes payable, net of unamortized debt discount of $17,536 and $-0-, respectively			482,464				76,883
Asset retirement obligation			50,949				-
Total liabilities			4,866,370				1,812,732
STOCKHOLDERS’ EQUITY (DEFICIT)
Common shares, $0.001 par value, 1.2 billion shares authorized, 53,489,662 and 25,000,000 shares issued and outstanding, respectively			53,490				25,000
Additional paid-in capital			10,911,412				(24,000	)
Deficit accumulated during the development stage			(3,817,250	)			(585,126	)
Total stockholders’ equity (deficit)			7,147,652				(584,126	)
Total liabilities and stockholders’ equity (deficit)		$	12,014,022			$	1,228,606

The accompanying notes are an integral part of these consolidated financial statements.

GULF WESTERN PETROLEUM CORPORATION

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended August 31, 2007 and 2006

and the Period from Inception (January 20, 2005) through August 31, 2007

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

GULF WESTERN PETROLEUM CORPORATION

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

For the Period from Inception (January 20, 2005) through August 31, 2007

 

The accompanying notes are an integral part of these consolidated financial statements.

GULF WESTERN PETROLEUM CORPORATION

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended August 31, 2007 and 2006

and the Period from Inception (January 20, 2005) through August 31, 2007

		Year Ended August 31, 2007				Year Ended August 31, 2006				Inception through August 31, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(3,232,124	)		$	(356,382	)		$	(3,817,250	)
Adjustments to reconcile net loss to cash provided (used) by operating activities:
Depreciation			5,157				1,350				6,507
Foreign currency exchange loss			1,336				10,792				12,128
Amortization of debt discount			99,813				-				99,813
Amortization of deferred financing costs			7,015				-				7,015
Bonus shares on notes payable			400,000				-				400,000
Issuance of shares for services			390,500				-				390,500
Amortization of stock option expense			738,599				-				738,599
Net change in:
Accounts receivable – joint interest partners			(198,106	)			-				(198,106	)
Accounts receivable – related parties			(11,488	)			-				(11,488	)
Accounts payable			434,786				426,570				1,059,136
Accounts payable - related parties			349,355				177,396				677,402
Accrued interest			10,276				4,765				15,041
Accrued interest – related parties			116,712				-				116,712
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES			(888,169	)			264,491				(503,991	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			(12,320	)			(7,372	)			(19,692	)
Investment in oil and gas properties			(4,732,925	)			(329,085	)			(5,181,697	)
CASH FLOWS USED IN INVESTING ACTIVITIES			(4,745,245	)			(336,457	)			(5,201,389	)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from stockholder			120,000				-				120,000
Proceeds from private placement unit sales			4,815,000				-				4,815,000
Proceeds from convertible notes payable			700,000				72,047				772,047
Proceeds from notes payable			540,776				312,500				853,276
Repayment of notes payable			(853,018	)			-				(853,018	)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES			5,322,758				384,547				5,707,305
NET INCREASE(DECREASE) IN CASH			(310,656	)			312,581				1,925
Cash, beginning of period			312,581				-				-
Cash, end of period		$	1,925			$	312,581			$	1,925
Cash paid for:
Interest		$	22,929			$	-			$	22,929
Income taxes		$	-			$	-			$	-
Supplemental Schedule of Non-cash Investing and Financing Activities:
Issuance of founders shares		$	-			$	-			$	1,000
Assignment and rescission of oil and gas properties  from parent			(460,231	)			460,231				-
Convertible note to related party for acquisition of oil and gas interests			2,000,000				-				2,000,000
Common shares issued to acquire oil and gas properties			4,499,549				-				4,499,549
Issuance of common shares for convertible debentures			78,477				-				78,477
Asset retirement obligation incurred			50,949				-				50,949
Fair value of warrants issued with debt			66,387				-				66,387
Discount on debt for beneficial conversion feature of debentures		$	75,390			$	-			$	75,390