UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MEGAWEST ENERGY CORP.
(Exact name of registrant as specified in its charter)
| British Columbia | 7372 | N/A |
| State or jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer |
| incorporation or organization | Classification Code Number) | Identification No.) |
Suite 1000, 815 – 8th Avenue S.W., Calgary, Alberta, Canada T2P 3P2
Telephone: 403.984.6342
(Address and telephone number of registrant’s principal executive offices)
George T. Stapleton, II
Suite 1000, 815 – 8thAvenue, S.W., Calgary, Alberta, Canada T2P 3P2
Telephone: 403.984.6342
(Name, address and telephone number of agent for service)
Copies of all communications, including all communications sent to the agent for service, should be sent to:
Kelly Sledz
Suite 1000, 815 – 8th Avenue, S.W., Calgary, Alberta, Canada T2P 3P2
Telephone: 403.984.6342
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Clark Wilson LLP
c/o Jonathan C. Lotz
Suite 800, 885 West Georgia Street, Vancouver, British Columbia, Canada V6C 3H1
Telephone: 604.687.5700
Approximate date of proposed sale to the public:As soon as practicable after the registration statement becomes
effective.
If any securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule
415 under the Securities Act of 1933. [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act
of 1933., please check the following box and list the Securities Act of 1933 registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check
the following box and list the Securities Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check
the following box and list the Securities Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered | Amount to be registered(1) | Proposed maximum offering price per share | Proposed maximum aggregate offering price | Amount of registration fee(4) |
| Common Stock to be offered for resale by selling shareholders(2) | 38,048,550 | US$1.93(4) | US$73,433,701.50 | US$2,254.41 |
| Common Stock to be offered for resale by selling shareholders upon exercise of share purchase warrants | 18,592,623(3) | US$1.93(4) | US$35,883,762.39 | US$1,101.63 |
| Common Stock to be offered for resale by selling shareholders upon exercise of unit rights | 832,500 | US$1.93(4) | US$1,606,725.00 | US$49.33 |
| Total Registration Fee | US$3,405.37 | |||
(1) In the event of a stock split, stock dividend, or similar transaction involving our common stock, the number of shares registered shall automatically be increased to cover the additional shares of common stock issuable pursuant to Rule 416 under the Securities Act of 1933, as amended.
(2) Includes 4,750,000 shares of our common stock which are being held in escrow pursuant an escrow agreement (see "History and Development" in the prospectus that forms a part of this registration statement).
(3) Represents the aggregate number of shares of our common stock that may be issued upon the exercise of an aggregate of up to 18,592,623 share purchase warrants.
(4) Fee calculated in accordance with Rule 457(c) of the Securities Act of 1933. Estimated for the sole purpose of calculating the registration fee. We have based the fee calculation on the average of the last reported bid and ask price for our common stock on the OTC Bulletin Board on August 27, 2007.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON THE DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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| PROSPECTUS | Subject to Completion |
| ______________, 2007 |
MegaWest Energy Corp.
57,473,673 Shares of Common Stock of Megawest Energy Corp.
_________________________________
This prospectus registers a total of 57,473,673 shares of our common stock and relates to the resale by certain selling shareholders of our company of up to 57,473,673 shares of our common stock in connection with the resale of:
| - | up to 600,000 shares of our common stock issued pursuant to various debt settlement agreements in December 2006; | |
| - | up to 4,212,500 shares of our common stock underlying warrants to purchase an equal number of shares of our common stock at US$1.00 per share until January 5, 2008 issued in a private placement that was completed in January 2007; | |
| - | up to 27,448,550 shares of our common stock and 14,380,123 shares of our common stock underlying warrants to purchase an equal number of shares of our common stock at $1.30 per share until February 28, 2008, both issued in a private placement that was completed in March 2007; | |
| - | up to 5,000,000 shares of our common stock issued in connection with the acquisition of Kentucky Reserves, LLC in April 2007; | |
| - | up to 250,000 shares of our common stock issued in connection with the acquisition of the assets of Deerfield Energy Kansas Corp. in March 2007; | |
| - | up to 4,750,000 shares of our common stock issued in connection with the acquisition of Deerfield Energy LLC in April 2007, which are being held in escrow pursuant to an escrow agreement (see "History and Development" below in this prospectus); and | |
| - | up to 832,500 shares of our common stock underlying 555,000 unit rights. Of these unit rights, 180,000 entitle the holder to purchase up to 180,000 units at US$0.50 per unit (each unit consists of one share of our common stock and one-half of one common share purchase warrant exercisable at US$1.00 per share). The remaining 375,000 unit rights entitle the holder to purchase up to 375,000 units at US$1.00 per unit (each units consists of one share of our common stock and one-half of one common share purchase warrant exercisable at US$1.30 per share). |
The selling shareholders may offer to sell the shares of common stock being offered in this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices. Our common stock is quoted on the OTC Bulletin Board under the symbol "MGWSF". On August 27, 2007, the closing bid price for one share of our common stock on the OTC Bulletin Board was US$1.95.
Our business is subject to many risks and an investment in our common stock will also involve a high degree of risk. You should invest in our common stock only if you can afford to lose your entire investment. You should carefully consider the various Risk Factors described beginning on page 6 of this prospectus before investing in our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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The information in this prospectus is not complete and may be changed. The selling shareholders may not sell or offer these securities until this registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Please read this prospectus carefully. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information.
The date of this prospectus is ____________________, 2007.
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The following table of contents has been designed to help you find important information contained in this prospectus. We encourage you to read the entire prospectus.
TABLE OF CONTENTS
As used in this prospectus, the terms "we", "us", "our" and "company" mean MegaWest Energy Corp. and our subsidiaries.
All dollars amounts herein refer to Canadian dollars unless otherwise indicated.
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PROSPECTUS SUMMARY
Our Business
We are a development stage non-conventional oil and gas company with an initial focus on North American heavy oil. We have completed agreements and have acquired and earned in on approximately 70,000 acres in four project areas: Trinity Sands in Texas, Kentucky Reserves in Kentucky, Deerfield in Missouri and Chetopa in Kansas, none of which have proven reserves. We have never had any oil and gas operations and do not currently own any oil and gas leases with proven reserves. We are also actively assessing additional heavy oil prospects. Our company intends to acquire large blocks of oil and gas rights known to contain substantial deposits of heavy oil. Through delineation drilling and the completion of pilot production tests, we plan to establish proven and producing reserves on these development projects using thermal recovery technologies developed in Canada. The underpinning for our strategy is the convergence of the increased necessity for North American security of energy supplies and current world oil prices.
Our company is organized under the laws of the Province of British Columbia. We were originally incorporated in the Province of British Columbia under the Company Act (British Columbia) on February 8, 2000 under the name "Brockton Capital Corp.". On March 29, 2004, the Business Corporations Act (British Columbia) came into effect, replacing the Company Act. As required by the Business Corporations Act, our company was "transitioned" under the Business Corporations Act, effective June 30, 2005. At a special general meeting of shareholders of our company on February 19, 2007, our shareholders authorized our directors to remove the pre-existing company provisions applicable to our company pursuant to the Business Corporations Act and to adopt new articles for our company. The shareholders also approved a special resolution changing the name of our company to "MegaWest Energy Corp". The change of name was effected as of February 27, 2007.
Our principal executive and head offices are located at Suite 1000, 815 – 8th Avenue SW, Calgary Alberta, Canada T2P 3P2. Our telephone number is (403) 984-6342 and our facsimile number is (403) 984-6343.
Number of Shares Being Offered
This prospectus relates to the resale by certain selling shareholders named herein of up to 57,473,673 shares of our common stock. The offered shares were acquired by the selling shareholders pursuant to various private placements, settlement of debt agreement and acquisitions. All of these transactions were exempt from the registration requirements of the Securities Act of 1933. The selling shareholders may offer to sell the shares of common stock being offered in this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices. Our common stock is quoted on the OTC Bulletin Board under the symbol "MGWSF" (see "Plan of Distribution below in this prospectus).
Number of Shares Outstanding
There were 72,561,050 shares of our common stock issued and outstanding as of August 27, 2007, excluding 4,750,000 shares issued and held in trust pursuant to an escrow agreement (see "History and Development" below in this prospectus).
Use of Proceeds
We will not receive any of the proceeds from the sale of the shares of common stock being offered for sale by the selling security holders, although we may receive proceeds of up to $24,926,824 if all of the 19,425,123 shares of our common stock underlying the share purchase warrants which are offered for registration hereunder are exercised, based on the noon buying rate in New York City as certified for customs purposes by the Federal Reserve Bank of New York for the conversion of Canadian dollars into United States dollars on August 27, 2007 of US$0.9510 per Canadian dollar. If the share purchase warrants are exercised, we will use the proceeds to conduct exploration on our properties, pay consulting fees, acquire additional mineral properties, pay professional fees and rent over the next 12 months and for general working capital.
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RISK FACTORS
The shares of our common stock are considered speculative. You should carefully consider the following risks and uncertainties in addition to other information in this prospectus in evaluating our company and our business before purchasing our common stock. Our business, operating or financial condition could be harmed due to any of the following risks. The risks described below are not the only risks facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to these risks.
Risks Relating to this Offering
Sales of a substantial number of shares of our common stock into the public market by the selling shareholders may result in significant downward pressure on the price of our common stock and could affect the ability of our shareholders to realize the current trading price of our common stock.
Sales of a substantial number of shares of our common stock in the public market could cause a reduction in the market price of our common stock. There were 72,561,050 shares of our common stock issued and outstanding as of August 27, 2007, excluding 4,750,000 shares issued and held in trust pursuant to an escrow agreement (see "History and Development" below in this prospectus). When this prospectus and the registration statement of which this prospectus forms a part is declared effective, the selling shareholders may be reselling up to 57,473,673 shares of our common stock, 33,298,550 of which are included in the number of our issued and outstanding common shares as of August 27, 2007, shown above.
Any significant downward pressure on the price of our common stock as the selling shareholders sell the shares of our common stock could encourage short sales by the selling shareholders or others. Any such short sales could place further downward pressure on the price of our common stock.
Our common stock is not liquid and shareholders may be unable to sell their shares.
Our common stock is currently quoted on the OTC Bulletin Board and is thinly traded. In the past, our trading price has fluctuated widely, depending on many factors that may have little to do with our operations or business prospects. There is currently a limited market for our common stock and we can provide no assurance to investors that a liquid market will develop. If a market for our common stock does not develop, our shareholders may not be able to resell the shares of our common shares that they have purchased and they may lose all of their investment. Public announcements regarding our company, changes in government regulations, conditions in our market segment and changes in earnings estimates by analysts may cause the price of our common stock to fluctuate substantially. In addition, the OTC Bulletin Board is not an exchange and, because trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a national exchange, our shareholders may have difficulty reselling their shares.
Securities class-action litigation has often been instituted following periods of volatility in the market price of a company's securities. Such litigation, if instituted against our company, could result in substantial costs for our company and a diversion of management's attention and resources.
Risks Relating to our Financial Condition
We have yet to attain profitable operations and because we will need additional financing to fund our exploration activities, there is substantial doubt about our ability to continue as a going concern.
Our company has a limited operating history and as of the date of this prospectus is considered to be in the development stage. Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies seeking to acquire or establish new business opportunities. To date, we have identified and acquired interests in four oil and gas properties, but there can be no assurances that we will develop such properties or be able to identify, secure and complete further suitable acquisitions in the future.
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The success of our company is also significantly dependent on a successful drilling, completion and production program. Our company's operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. No assurance can be given that we may be able to operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. There can be no assurance that our business plan will prove successful, and no assurance that we may be able to operate profitably, if at all.
We cannot be sure that we will be successful in addressing these risks and uncertainties and our failure to do so could have a material adverse effect on our financial condition. In addition, our operating results are dependent to a large degree upon factors outside our control. There are no assurances that we will be successful in addressing these risks, and the failure to address such risks may adversely affect our business.
It is unlikely that we will generate significant revenues while we seek to complete our drilling, completion and production program and seek additional suitable business opportunities. Our short and long-term prospects depend upon the success of our drilling, completion and production program and our ability to select and secure suitable business opportunities. In order for our company to generate revenues, we will incur substantial expenses in the location, acquisition and development of commercially viable reserves of oil and gas. All of our projects are in the exploration stage only and are without proved reserves of oil and gas. Accordingly, we have not generated significant revenues nor have we realized a profit from our operations to date and there is little likelihood that we will generate any revenues or realize any profits in the short term. Any profitability in the future from our business will be dependent upon locating and developing economic reserves of oil and gas, which itself is subject to numerous risk factors as set out herein. Since we have not generated significant revenues, we may have to raise additional monies through the sale of our equity securities, debt and/or joint venture farmouts in order to continue our business operations and develop our projects, if determined to be commercial.
We therefore expect to incur significant losses for the foreseeable future. We recognize that if we are unable to generate significant revenues from our business activities, our entire business may fail, and we can provide no assurance to investors that we will generate any operating revenues or achieve profitable operations.
We will require additional financing to continue as a going concern.
There can be no assurance that, if required, any such financing will be available upon terms and conditions acceptable to us, if at all. Our inability to obtain additional financing in a sufficient amount when needed and upon terms and conditions acceptable to us could have a materially adverse effect upon our company. Although we believe that we have funds sufficient to meet our immediate needs, we expect to require further funds to finance the development of our company. If additional funds are raised by issuing equity securities, further dilution to existing or future shareholders is likely to result. If adequate funds are not available on acceptable terms when needed, we may be required to delay, scale back or eliminate the development of our company. Inadequate funding could also impair our ability to compete in the marketplace, which may result in the dissolution of our company.
We have not generated significant revenues and our ability to generate revenues is uncertain.
In the past, we have incurred substantial net losses. For the fiscal year ended April 30, 2007, we incurred anet loss of $6,893,052. We also had an accumulated deficit of $18,807,204 as at April 30, 2007. At this time, our ability to generate significant revenues is uncertain. Although we believe that we have sufficient funds to finance our operating costs for the next twelve months, we may require additional funds to finance the acquisition of suitable additional business opportunities or to complete business combinations. We do not expect to generate any significant revenues for the foreseeable future. Accordingly, we may require additional funds, either from equity, debt financing and/or joint venture farmouts.Obtaining additional financing is subject to a number of factors, including investor acceptance of any business we may acquire or combine with in the future and general investor sentiment. Financing, therefore, may not be available on acceptable terms, if at all. The most likely source of future funds presently available to us is through the sale of equity capital. Any sale of share capital, however, will result in the dilution of existing shareholders. If we are unable to raise additional funds when required, we may be forced to delay our plan of operation and our entire business may fail.
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Risks Relating to Oil and Gas Operations
The oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring further leases.
The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staff for suitable business opportunities, desirable oil and gas properties for drilling operations, drilling equipment and funds. There can be no assurance that the necessary funds can be raised or that any projected work will be completed.
As our Chetopa, Deerfield, Kentucky Reserves and Trinity Sands projects are in the exploration stage,there can be no assurance that we will establish commercial discoveries on these projects.
Exploration for economic reserves of oil and gas is subject to a number of risk factors. Few of the prospects that are explored are ultimately developed into producing oil and/or gas wells. Our Chetopa project in Kansas, Deerfield project in Missouri, Kentucky Reserves project in Kentucky and Trinity Sands project in Texas are all in the exploration stage only and are without proved reserves of oil and gas. There can be no assurance that we will establish commercial discoveries on any of our projects.
The potential profitability of oil and gas ventures depends upon factors beyond the control of our company, any of which may have a material adverse effect on our company.
The potential profitability of oil and gas projects is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to world-wide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance.
Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. The extent of these factors cannot be accurately predicted but the combination of these factors may result in our company not receiving an adequate return on invested capital.
Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our company. Further, exploration and production activities are subject to certain environmental regulations which may prevent or delay the commencement or continuance of our operations.
Oil and gas operations in the United States and Canada are subject to federal, state and provincial laws and regulations relating to the protection of the environment, including, but not limited to, laws regulating removal of natural resources from the ground and the discharge/release of materials into the environment. Oil and gas operations in United States and Canada are also subject to federal, state and provincial laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. No assurance can be given that environmental standards imposed by federal, state and provincial authorities will not be changed or that any such changes would not have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive
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premium costs and other reasons. Our current and anticipated exploration and drilling activities are subject to the aforementioned environment regulations. When and if we establish reserves or enter into production, we will become subject to additional regulations which do not currently pertain to us or affect our current operations.
Specifically, we are subject to legislation regarding releases into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of federal, state and provincial authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry.
Exploratory drilling involves many risks and we may become liable for pollution or other liabilities which may have an adverse effect on our financial position.
Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labour disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labour, and other risks are involved. We may become subject to liability for pollution or hazards against which we cannot adequately insure or which we may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations.
We have oil and gas leases in respect of the real property associated with our projects, but the real property may be subject to prior unregistered agreements, or transfers which have not been recorded or detected through title searches.
We have oil and gas leases with respect to the real property associated with our projects and we believe our interests are valid. However, these leases do not guarantee title against all possible claims. The real property may be subject to prior unregistered agreements, or transfers which have not been recorded or detected through title research. If the oil and gas leases to the real property associated with our projects are challenged, we may have to expend funds defending any such claims and may ultimately lose some or all of any revenues generated from the projects if we lose our interest in such leases.
Risks Relating to our Common Stock
If we complete further business opportunities or combinations, we will likely be required to issue a substantial number of shares which would dilute the stockholdings of our current shareholders and result in a change of control of our company.
We may acquire additional oil and gas property interests in the future and will likely have to issue shares of our common stock to acquire such interests. Issuing previously unissued shares of our common stock will reduce the percentage of shares owned by our existing shareholders and may result in a change in the control of our company and our management.
Shareholders' interests in our company will be diluted and investors may suffer dilution in their net book value per share if we issue additional shares or raise funds through the sale of equity securities.
Our constating documents authorize the issuance of an unlimited number of common shares, without par value, and 100,000,000 preferred shares, without par value. In the event that we are required to issue additional shares or enter into private placements to raise financing through the sale of equity securities, the interests of existing shareholders in our company will be diluted and existing shareholders may suffer dilution in their net book value per share depending on the price at which such securities are sold. If we do issue additional shares, it will cause a reduction in the proportionate ownership and voting power of all existing shareholders.
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Principal shareholders, senior management and directors have significant influence regarding share ownership. This concentration could lead to conflicts of interest and difficulties for non-insider investors effecting corporate changes, and could adversely affect our company's share price.
As of August 27, 2007, our senior management, directors and greater than five percent shareholders (and their affiliates), acting together, held approximately 21 percent of the issued and outstanding shares of our company, on a diluted basis, and have the ability to influence all matters submitted to our company's shareholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our company's assets) and to control our company's management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control of our company, impeding a merger, consolidation, takeover or other business combination involving our company or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, which in turn could have a material adverse effect on the market price of our shares.
Employee, director and consultant stock options and warrants could lead to greater concentration of share ownership among insiders and could lead to dilution of share ownership which could lead to depressed share prices.
Because the success of our company is highly dependent upon our respective employees, our company has granted to some or all of our key employees, directors and consultants stock options to purchase shares of our common stock as non-cash incentives. To the extent that significant numbers of such stock options may be granted and exercised, the interests of the other shareholders of our company may be diluted causing possible loss of investment value.
We have never declared or paid cash dividends on our common shares and do not anticipate doing so in the foreseeable future.
There can be no assurance that our board of directors will ever declare cash dividends, which action is exclusively within our discretion. Shareholders cannot expect to receive a dividend on our common stock in the foreseeable future, if at all.
Trading of our common stock may be restricted by the Securities and Exchange Commission (SEC)'s "Penny Stock" regulations which may limit a shareholder's ability to buy and sell our shares.
The SEC has adopted regulations which generally define "penny stock" to be any equity security that has a market price (as defined) less than US$5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of US$5,000,000 or individuals with a net worth in excess of US$1,000,000 or annual income exceeding US$200,000 or US$300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the share that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common shares.
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The National Association of Securities Dealer (NASD) has adopted sales practice requirements which may limit a shareholder's ability to buy and sell our shares.
In addition to the "penny stock" rules described above, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability to buy and sell our shares and have an adverse effect on the market for our shares.
Risks Relating to our Management
Our articles contain provisions indemnifying our officers and directors against all costs, charges and expenses incurred by them.
Our articles contain provisions that state, subject to applicable law, we must indemnify every director or officer of our company, subject to the limitations of the Business Corporations Act (British Columbia), against all losses or liabilities that our company's directors or officers may sustain or incur in the execution of their duties. Our company's articles further state that no director or officer will be liable for any loss, damage or misfortune that may happen to, or be incurred by our company in the execution of his duties if he acted honestly and in good faith with a view to the best interests of our company. Such limitations on liability may reduce the likelihood of litigation against our company's officers and directors and may discourage or deter our shareholders from suing our company's officers and directors based upon breaches of their duties to our company, though such an action, if successful, might otherwise benefit our company and our shareholders.
As a majority of our directors and officers are residents of countries other than the United States, investors may find it difficult to enforce, within the United States, any judgments obtained against our company or our directors and officers.
We do not currently maintain a permanent place of business within the United States. A majority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons' assets are located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against our company or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.
Key management employees may fail to properly carry out their duties or may leave, which could negatively impact our corporate operations and/or our share price.
Our company's financial condition and the success of our oil and gas operations is dependent on our ability to hire and retain highly skilled and qualified personnel, including George T. Stapleton, II, R. William Thornton and George Orr. We face competition for qualified personnel from numerous industry sources, and there can be no assurance that we will be able to attract and retain qualified personnel on acceptable terms. The loss of service of any of our key personnel could have a material adverse effect on our operations and/or financial condition, which may negatively impact our share price. We do not have key-man insurance on any of our employees and with the exception of three senior officers, R. William Thornton, George T. Stapleton, II and George Orr, we do not have written employment agreements with any of our key personnel.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Forward-looking statements are statements that relate to future events or our future performance, including our future financial performance. In some cases, you can identify
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forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", or "potential" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks enumerated in this section entitled "Risk Factors", that may cause our company's or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors" and the risks set out below, any of which may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Forward looking statements are made based on our management’s beliefs, estimates and opinions on the date the statements are made and we undertake no obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
SECURITIES AND EXCHANGE COMMISSION'S PUBLIC REFERENCE
Any member of the public may read and copy any materials filed by us with the Securities and Exchange Commission (SEC) at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
INFORMATION WITH RESPECT TO MEGAWEST AND THE OFFERING
Identity of Directors, Senior Management and Advisors
The directors and the senior management of our company as at August 27, 2007 are as follows:
| Name and Office Held | Business Address | Function |
| George T. Stapleton, II, President, Chief Executive Officer and Director | 11 Leigh Court Sugar Land, Texas 77479 USA | President, Chief Executive Officer and a director since ecember 21, 2006 As President, Chief Executive and a director, Mr. Stapleton is responsible for the financial affairs, strategic direction and development of our company and for overseeing and contributing to the management of the exploration and development functions of our company. |
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| Name and Office Held | Business Address | Function |
| F. George Orr Chief Financial Officer, Treasurer and Director | Suite 1000, 789 West Pender Street Vancouver BC V6C 1H2 Canada | Chief Financial Officer, Treasurer and director since December 21, 2006. As Chief Financial Officer, Treasurer and a director, Mr. Orr is responsible for the internal accounting, internal controls, financial statement preparation and co-ordination and financial reporting for our company and its overall strategic direction. He is also responsible for the financial affairs and compliance of our company. |
| R. William Thornton Chief Operating Officer and Director | Suite 1000, 815 – 8thAvenue, S.W. Calgary, Alberta T2P 3P2 Canada | Director since December 21, 2006 and Chief Operating Officer since January 1, 2007. As Chief Operating Officer and a director, Mr. Thornton is responsible for the day to day operations of our company, management of the exploration and development functions of our company and for helping to develop specific strategic direction. |
| Brad Kitchen Director | Suite 1000, 815 – 8thAvenue, S.W. Calgary, Alberta T2P 3P2 Canada | Director since February 19, 2003. As chair of the audit committee of our board of directors, Mr. Kitchen is responsible for ensuring that the committee functions properly and meets its obligations. |
| Brian J. Evans Director | Suite 1000, 815 – 8thAvenue, S.W. Calgary, Alberta T2P 3P2 Canada | Director since February 19, 2007. As chair of the corporate governance and compensation committee of our board of directors, Mr. Evans is responsible for ensuring that the committee functions properly and meets its obligations. Mr. Evans is also a member of our audit committee. |
| Dr. Gail Bloomer Director | Suite 1000, 815 – 8thAvenue, S.W. Calgary, Alberta T2P 3P2 Canada | Director since February 19, 2007. As an independent director, Dr. Bloomer adds his expertise to our exploration activities, as required. |
Our legal advisers are Clark Wilson LLP, Barristers & Solicitors, whose business address is Suite 800-885 West Georgia Street, Vancouver, British Columbia, V6C 3H1, Canada.
Our current auditors are KPMG LLP, whose business address is Suite 2700, Bow Valley Square II, 205 - 5th Avenue SW, Calgary, Alberta, T2P 4B9, Canada. Our former auditors, Morgan & Company, Chartered Accountants, resigned as of June 25, 2007.
Offer Statistics and Expected Timetable
The shares of common stock offered by this prospectus are being registered for the account of the selling shareholders named in this prospectus. As such, there is no expected issue price. The selling shareholders may
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offer to sell the shares of common stock being offered in this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices.
The approximate date of proposed sale to the public of the shares of common stock offered by this prospectus is as soon as practicable after this prospectus and the registration statement of which this prospectus forms a part becomes effective.
Key Information
Selected Financial Information
The following table summarizes selected financial data for our company prepared in accordance with Canadian generally accepted accounting principles (GAAP) for the five fiscal years ended April 30, 2007. Additional information is presented to show the differences which would result from the application of United States GAAP to our financial information. The data set out below for the five years ended April 30, 2007 is derived from our audited financial statements which were examined by our independent registered accountant. The data should be read in conjunction with our audited financial statements, related notes and other financial information included herein.
| Selected Financial Data (Stated in Canadian Dollars - Calculated in accordance with Canadian GAAP) | |||||
| Year Ended April 30 (Audited) | |||||
| 2007 | 2006(1) | 2005(1) | 2004(1) | 2003(1) | |
| Net Sales or Operating Revenues | - | - | - | - | - |
| Net Income (Loss)(2) | ($6,893,052) | ($222,945) | ($61,031) | ($143,489) | ($45,773) |
| Net Income (Loss) from Operations per Common Share | ($0.31) | ($0.04) | ($0.01) | ($0.05) | ($0.03) |
| Net Income (Loss) per Common Share | ($0.31) | ($0.04) | ($0.01) | ($0.08) | ($0.02) |
| Total Assets | $52,532,847 | $31,440 | $137,113 | $176,549 | $313,924 |
| Net Assets (Deficiency in Assets)(2) | $48,148,521 | ($129,422) | $93,523 | $150,054 | $293,543 |
| Capital Stock(3) | $66,955,725 | $376,092 | $376,092 | $371,592 | $371,592 |
| Number of Common Shares(4) | 72,436,050 | 6,337,500 | 6,337,500 | 1,837,500 | 1,837,500 |
| Dividends per Common Share | - | - | - | - | - |
| Weighted Average Number of Common Shares | 22,102,129 | 6,337,500 | 5,018,322 | 1,837,500 | 1,837,500 |
| Working Capital (Deficiency) | $28,152,901 | ($139,422) | ($30,087) | $150,054 | $256,095 |
| Long-Term Debt(5) | $2,928,442 | - | - | - | - |
| Notes: | ||
| (1) | April 30, 2006 through 2003 results have been restated to conform with April 30, 2007 presentation. | |
| (2) | Cumulative net loss and deficit since incorporation through April 30, 2007 was $7,398,566 and $18,807,204, respectively. The difference between the accumulated deficit and losses is an $11,408,638 adjustment related to related party acquisitions. | |
| (3) | Capital stock includes share capital, warrants, contributed surplus and equity portions of convertible promissory notes and exchange shares. | |
| (4) | Number of common shares at April 30, 2007 excludes 4,750,000 shares of our common stock issued and held in trust pursuant to an escrow agreement and 9,500,000 shares potentially issuable on the conversion of 95,000 MegaWest Energy (USA) Corp. exchange shares. | |
| (5) | Long-term debt includes convertible promissory notes and exchange shares. |
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Reconciliation to United States Generally Accepted Accounting Principles
Canadian GAAP conforms in all material respects with United States GAAP except for certain matters as described in Note 19 to our consolidated financial statements for the year ended April 30, 2007. The differences between Canadian GAAP and U.S. GAAP, which affect our financial statements for the year ended April 30, 2007, are as follows:
| - | adjust marketable securities to fair value at April 30, 2007; | |
| - | increase amount recorded for oil and gas net assets acquired and related consideration given; | |
| - | classify convertible promissory notes as a liability and adjust accretion expense; | |
| - | adjust stock-based compensation expense for stock options and warrants; and | |
| - | adjust the amount recorded for the conversion feature of warrants on private placements. |
Had we followed U.S. GAAP, certain selected financial information reported above, would have been reported in as follows (stated in Canadian dollars):
| Selected Financial Data (Stated in Canadian Dollars - Calculated in accordance with U.S. GAAP) | |||||
| Year Ended April 30 (Audited) | |||||
| 2007 | 2006 | 2005 | 2004 | 2003 | |
| Net Income (Loss) | ($18,112,762) | ($222,945) | ($61,031) | ($143,489) | ($45,773) |
| Net Income (Loss) per Common Share | ($0.81) | ($0.04) | ($0.01) | ($0.08) | ($0.02) |
| Total Assets | $74,594,937 | $31,440 | $137,113 | $176,549 | $313,924 |
| Net Assets (Deficiency in Assets) | $70,118,740 | ($129,422) | $93,523 | $150,054 | $293,543 |
| Capital Stock | $111,802,667 | $376,092 | $376,092 | $371,592 | $371,592 |
| Long-Term Debt | $3,020,313 | - | - | - | - |
The financial statements as at and for the four years ending April 30, 2006 conform in all material respects to U.S. GAAP.
Disclosure of Exchange Rate History
The following table sets out average exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for the conversion of Canadian dollars into United States dollars in effect on the last date of each month during the period, for the following periods:
| Year Ended April 30 | |||||
| 2007 | 2006 | 2005 | 2004 | 2003 | |
| Average for period | $0.8789 | $0.8423 | $0.7873 | $0.7444 | $0.6495 |
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The following table sets out the high and low exchange rates, based on the above-mentioned noon buying rate in New York City for the conversion of Canadian dollars into United States dollars, for the following periods:
| High | Low | |
| August 1 to August 27, 2007 | $0.9527 | $0.9299 |
| July 2007 | $0.9669 | $0.9344 |
| June 2007 | $0.9453 | $0.9322 |
| May 2007 | $0.9345 | $0.9019 |
| April 2007 | $0.9035 | $0.8633 |
| March 2007 | $0.8673 | $0.8467 |
| February 2007 | $0.8631 | $0.8437 |
| January 2007 | $0.8586 | $0.8457 |
On August 27, 2007, the above-mentioned noon buying rate in New York City for the conversion of Canadian dollars into United States dollars was US$0.9510 per Canadian dollar.
Capitalization and Indebtedness
The following table sets forth our capitalization as of April 30, 2007 and July 31, 2007.
Amounts below are presented in accordance with Canadian generally accepted accounting principals and are stated in Canadian dollars.
| As of April 30, | As of July 31, | |||||
| 2007 | 2007 | |||||
| (audited) | (unaudited) | |||||
| Share capital(1) | $ | 41,168,088 | $ | 41,306,788 | ||
| Warrants | 3,729,000 | 3,729,000 | ||||
| Equity Portion of exchange shares(2) | 8,599,442 | 8,599,442 | ||||
| Contributed Surplus | 13,338,629 | 13,789,189 | ||||
| Equity portion of convertible promissory notes | 120,566 | 120,566 | ||||
| $ | 66,955,725 | $ | 67,544,985 | |||
| Common shares outstanding(1) | 72,436,050 | 72,561,050 |
| Notes: | ||
| (1) | Excludes 4,750,000 shares of our common stock issued and held in trust pursuant to an escrow agreement (see "History and Development" above in this prospectus) entered into in connection with the acquisition of Deerfield Missouri. | |
| (2) | Represents 95,000 class B shares of our subsidiary, MegaWest Energy (USA) Corp., as part of the consideration given to acquire Trinity. Each class B exchange share is convertible into 100 shares of our common stock with up to 9,500,000 shares of our common stock to be issued. The holders of these MegaWest Energy (USA) Corp. shares have the right to exchange, or can receive a cash payment of US$950,000 (US$10.00 per exchange share) until July 31, 2008, after which we can implement a forced exchange of the shares. | |
| (3) | At April 30 and July 31, 2007, respectively, we had 9,669,000 and 10,159,000 stock options outstanding, exercisable into our common stock at prices from US$0.10 to US$2.25 per share, with expiry dates from March 15, 2008 through to March 15, 2012 and with various vesting terms. | |
| (4) | At April 30 and July 31, 2007, respectively, we had 19,500,000 incentive warrants outstanding that were granted to three entities (including, Endurance Energy Consulting Ltd., private company controlled by R. William Thornton, a director and the Chief Operating Officer of our company and Gladrock Energy LLC, a private company controlled by Dr. Gail Bloomer, a director of our company) that entitle such persons to purchase shares of our common stock at a price of US$0.10 per share for a period of six months after vesting if the holder thereof brings a project of merit (i.e. a project with a potential economic value in the amount of at least US$1.00 multiplied by the total number of warrants issued to the holder) to the directors of our company by December 21, 2007. Gladrock Energy LLC has been credited with identifying the Kentucky Reserves acquisition and the warrants issued to Gladrock Energy LLC have vested. | |
| (5) | At April 30 and July 31, 2007, respectively, we had 6,000,000 consulting warrants outstanding. Each warrant is exercisable into one share of our common stock at an exercise price of US$0.50 per share and expires on January 5, 2009. | |
| (6) | At April 30 and July 31, 2007, respectively, we had $2,928,442 and $2,842,665 of long-term debt outstanding. Long-term debt includes convertible promissory notes and exchange shares. | |
| (7) | At April 30, 2007 we had an accumulated deficit of $18,807,204. |
Reasons for the Offer and Use of Proceeds
The Offering
This prospectus relates to the resale by certain selling shareholders named in this prospectus of up to 57,473,673 shares of our common stock. The offered shares were acquired by the selling shareholders pursuant to various private placements, settlement of debt agreement and acquisitions. All of these transactions were exempt from the registration requirements of the Securities Act of 1933, pursuant to the provisions of Rule 903 of Regulation S, Rule 506 of Regulation D, Section 4(6) and/or Section 4(2) of the Securities Act of 1933, as applicable. For details of these transactions see "Liquidity and Capital Resources" below in this prospectus.
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The selling shareholders may offer to sell the shares of common stock being offered in this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices. We will not receive any proceeds from the resale of shares of our common stock by the selling shareholder
Use of Proceeds
The shares of common stock offered by this prospectus are being registered for the account of the selling shareholders named in this prospectus. As a result, all proceeds from the sales of the common stock will go to the selling shareholders and we will not receive any proceeds from the resale of the common stock by the selling shareholders. We may, however, receive proceeds of up to $24,926,824 if all of the 19,425,123 shares of our common stock underlying the share purchase warrants which are offered for registration hereunder are exercised, based on the noon buying rate in New York City as certified for customs purposes by the Federal Reserve Bank of New York for the conversion of Canadian dollars into United States dollars on August 27, 2007 of US$0.9510 per Canadian dollar. If the share purchase warrants are exercised, we will use the proceeds to conduct exploration on our properties, pay consulting fees, acquire additional mineral properties, pay professional fees and rent over the next 12 months and for general working capital. We will, however, incur all costs associated with this prospectus and the registration statement of which this prospectus forms a part. Our company estimates that the total costs that will be incurred by our company in connection with this prospectus and the registration statement of which this prospectus forms a part will be approximately $50,000.
Information on MegaWest Energy Corp.
History and Development
We are a corporation organized under the laws of the Province of British Columbia, Canada. We were originally incorporated under the Company Act (British Columbia) on February 8, 2000 under the name "Brockton Capital Corp.". On March 29, 2004, the Business Corporations Act (British Columbia) came into effect, replacing the Company Act. As required by the Business Corporations Act, our company was "transitioned" under the Business Corporations Act, effective June 30, 2005. At a special general meeting of our shareholders on February 19, 2007, our shareholders authorized our directors to remove the pre-existing company provisions applicable to our company pursuant to the Business Corporations Act and to adopt new articles for our company. Our name was changed from "Brockton Capital Corp." to "MegaWest Energy Corp." on February 27, 2007.
Our corporate offices are located at Suite 1000, 815 – 8th Avenue S.W., Calgary Alberta, Canada T2P 3P2. Our telephone number is (403) 984-6342 and our facsimile number is (403) 984-6343.
Our company was originally engaged in the consumer electronics market. However, due to our inability to generate revenues from our existing line of business, subsequent to our fiscal year ended April 30, 2006, new management was hired to pursue alternative business opportunities, namely non-conventional oil and gas resource exploration and development.
During the fiscal year ended April 30, 2007, we completed three private placements to provide us with the necessary working capital to evaluate and pursue non-conventional oil and gas opportunities in the United States and Canada and to establish a head office in Calgary, Alberta. The first of the private placements, an offering of 23,500,000 shares of our common stock at US$0.10 per share for aggregate proceeds of US$2,350,000 was completed in December 2006. On January 23, 2007, we completed a further private placement of 8,425,000 units, at a price of US$0.50 per unit, for aggregate proceeds of US$4,212,500, each of which units consists of one share of our common stock and one-half of one share purchase warrant (each whole warrant entitles the holder to purchase an additional share of our common stock at an exercise price of US$1.00 per share for a period of one year). On February 28, 2007, our company completed an additional private placement of 27,448,550 units, at a price of US$1.00 per unit, for aggregate proceeds of US$27,448,550, each of which units consists of one share of our common stock and one-half of one share purchase warrant (each whole warrant entitles the holder to purchase an additional share of our common stock at an exercise price of US$1.30 per share a period of one year). In conjunction with the February 28, 2007, private placement, we issued 690,848 warrants (each of which entitles the holder to purchase one share of our common stock at US$1.30 per share for a period of one year) to finders, rights to
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buy an additional 180,000 units under the same terms as the January 2007 private placement and rights to buy a further 375,000 units under the same terms as the February 2007 private placement.
In December 2006, we took our first steps to become a non-conventional oil and gas company with an initial focus on heavy oil when we entered into several non-binding letters of intent with companies involved in the business of the exploration of oil and gas resources in Kansas, Missouri, Kentucky and Texas.
On March 26, 2007, we purchased (through our subsidiary, MegaWest Energy (USA) Corp.) all of the assets of Deerfield Energy Kansas Corp. The purchased assets included certain items of equipment and fixed assets and interests in two oil and gas leases covering 392 undeveloped acres in respect of the Chetopa project near Chetopa, Kansas. The consideration given for the assets was 250,000 shares of our common stock and the assumption of a promissory note in the amount of US$500,000 payable to a private company, Agosto Corporation Limited. Pursuant to our assumption of the promissory note, we granted Agosto a conversion feature that enables the holder of the note to convert the principal amount of the loan plus accrued interest into shares of our common stock at a rate of US$0.25 per share until maturity on June 20, 2008.
As part of the Chetopa acquisition, we are obligated to pay a net revenue interest up to a maximum of US$750,000 on net revenues generated from the Chetopa project. The net revenue interest becomes payable after our company recovers 100 percent of its capital and operating costs, and will be paid quarterly from 25 percent of the project's net revenues.
On April 2, 2007, we acquired (in conjunction with MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Kentucky Reserves, LLC (Kentucky Reserves) in consideration for US$3,000,000 cash and 5,000,000 shares of our common stock. Kentucky Reserve's assets included oil and gas leases covering 27,009 undeveloped acres in the Edmonson, Warren and Butler Counties in Kentucky. Pursuant to the membership unit purchase agreement, we acquired a 62.5 percent working interest in the shallow rights in certain tar sands and a 37.5 percent interest in the certain deep rights. Furthermore, pursuant to the purchase agreement, we are committed to undertake a US$15,000,000 work program within the area covered by the leases, which work program must be completed within 30 months of the execution of the purchase agreement for the purpose of determining the most effective way of extracting heavy oil/bitumen from the leases. The work program will consist of field testing and evaluation, drilling, logging and coring of wells, formation and fluid testing, the construction of heavy oil pilot projects such as steam, water flooding, solvent injection, electro-thermal heating, or the like. Should we be unable to expend the work program commitment within the 30-month period, we will be subject to a 37.5 percent penalty on the unexpended amount of the work program commitment.
On April 5, 2007, we acquired (through MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Deerfield Energy LLC (Deerfield Missouri) in consideration for US$925,000 cash, including a change in control fee, and 4,750,000 shares of our common stock. The assets of Deerfield Missouri include rights to oil development agreements in Vernon County, Missouri covering 7,620 undeveloped acres and all of the issued and outstanding units of Deerfield Kansas. At the closing of the transaction, we paid US$625,000 of the purchase price. Owing to potential issues related to certain oil development agreements, the unpaid cash of US$300,000 and 4,750,000 shares of our common stock were placed in an escrow account, set-up for our indemnification in respect of the said claims. Pursuant to the escrow agreement, the said cash and shares can be released on a pro-rata basis to the previous unitholders of Deerfield Missouri upon either the modification of certain oil development agreements into oil and gas leases or until 4,000 acres of replacement acreage have been leased. The escrow agreement provides for an escrow period of six months subject to certain adjustments.
April 25, 2007, we acquired (in conjunction with MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Trinity Sands Energy LLC (Trinity) in consideration for US$200,000 cash and 95,000 exchange shares of MegaWest Energy (USA) Corp.. Each exchange share may be exchanged for US$10 in cash or 100 shares of our common stock during the period January 1, 2008 to July 31, 2008, after this time, we may compel the holders of the exchange shares to convert their exchange shares into shares of our common stock. The assets of Trinity consisted of a 50 percent working interest in approximately 14,948 undeveloped acres in Edwards County, Texas and an earn-in agreement to increase the said working interest to 66.67 percent and earn up to a 66.67 percent working interest in an additional 13,348 undeveloped acres in Edwards Country, Texas.
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In June 2007, we began oil production from the Chetopa project and have oil sales from the project. To date this production has not been material and has been only exploratory in nature.
In August 2007, we initiated the drilling of eight exploration wells at various strategic locations on the Kentucky Reserves lands. The objective of this drilling program is to confirm the commercial prospectivity of three Mississippian heavy oil pay zones found at depths of 200-600 feet from surface.
Business Overview
Description of Operations
We are a development stage non-conventional oil company with emphasis on North American heavy oil projects. Our company has operatorship of and owns or has the right to earn a majority interest in over 70,000 acres of prospective oil sands leases in Texas, Kentucky, Missouri and Kansas. These projects are located in proximity to refineries with excess capacity, which should allow our company to readily bring its oil to market. Our company intends to acquire blocks of oil and gas rights known to contain substantial deposits of heavy oil. Through delineation drilling and the completion of pilot production tests, we plan to establish proven and producing reserves on these development projects using thermal recovery technologies developed in Canada. The underpinning for our strategy is the convergence of the increased necessity for North American security of energy supplies and current world oil prices. We have taken the first steps to become a non-conventional oil and gas company with the acquisition of the Chetopa, Deerfield, Kentucky Reserves and Trinity Sands projects.
Prior to December 2006, we were a technology company, whose business plan was to acquire the rights to market, sell and distribute a product line of consumer electronic technology products in Canada.
Projects
We have four projects currently in the exploration stage. Our strategy is to evaluate, enhance and exploit each project through:
| - | geoscience and engineering analysis to validate each project and identify technologies which may result in economic recovery; | |
| - | perform field work including seismic, drilling and operation of pilot projects to corroborate engineering and geoscience analysis, resulting in a commercial project design and development plan; and | |
| - | engage an independent third-party to establish the value of commercial reserves, leading to farm-out, sale, or funding and execution of the commercial development plan. |
The objectives of our fiscal 2008 plan are to demonstrate commercial feasibility through the operation of pilot projects and establish reserves. We have created a plan that may ultimately lead to a thermal pilot project on each of our properties in fiscal 2008.
Chetopa
The Chetopa project is a small, heavy oil project located two miles south of Chetopa, Kansas. The assets acquired include certain oil and gas equipment and a 100 percent interest in two oil and gas leases covering 392 undeveloped acres. On 15 of these acres are 20 steam injectors, 33 producer wells and a water well which had been previously drilled, completed, equipped and tied in for production. A tank battery, steam generator and two transfer stations are also in place on the property.
The Chetopa project was originally assessed to acquire the surface equipment and steam generator at a discount for use in Missouri. However, our company elected to refurbish the facilities and has commenced production. On June 14, 2007 the first truckload of oil was shipped from the facility. While the production rates are not commercial, and our company is continuing to optimize the production process, it was a significant accomplishment for the company. It is intended that produced oil will be trucked and sold to the Coffeyville refinery located twenty miles west of Chetopa. It is expected that
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crude oil production can be sold for 85-90 percent of West Texas Intermediate posted prices. During the fiscal year ended April 30, 2008, we will evaluate the Chetopa operating results and decide if additional acreage will be developed.
As part of the Deerfield Kansas acquisition, we are obligated to pay a net revenue interest up to a maximum of US$750,000 on net revenues generated from the Chetopa project. The net revenue interest becomes payable after our company recovers 100 percent of its capital and operating costs, and will be paid quarterly from 25 percent of the project's net revenues.
Prior to our acquisition of the project, Deerfield Energy Kansas Corp. was a development stage oil and gas company that owned certain oil and gas equipment and held 100 percent working interest in 392 undeveloped acres of oil and gas leases in Kansas. As the company did not have commercial revenue or operations, it incurred a net loss from incorporation to March 27, 2007 of US$128,000.
Deerfield Missouri
The Deerfield Missouri project includes the rights to earn a 100 percent interest in oil development agreements over 7,620 undeveloped acres of land in Vernon County, Missouri. As part of the project, we have been aggressively leasing additional lands in the area, and to August 27, 2007 have acquired an additional 2,710 acres of undeveloped oil and gas leases.
We have plans to drill four exploration wells. After analysis of the drilling results, a thermal pilot project may be designed and implemented that includes approximately 60 development wells over 15 acres. The construction and commencement of thermal pilot operations may occur as early as the third quarter of the 2008 fiscal year.
Prior to our acquisition of the project, Deerfield Missouri was a development stage oil and gas company party to oil development agreements over 7,620 undeveloped acres of land in Vernon County, Missouri. As the company did not have commercial revenue or operations, it incurred a net loss for the year ended December 31, 2006 and the period from January 1, 2007 to April 5, 2007 of US$190,000 and US$32,000, respectively.
Kentucky Reserves
The Kentucky Reserves project includes a 62.5 percent working interest in the shallow rights in certain oil and gas leases and an additional 37.5 percent working interest in the deep rights, of approximately 29,800 undeveloped acres in the Edmonson, Warren and Butler counties of Kentucky.
We are committed to fund a work program over the next 30 months covering the first US$15,000,000 of exploration, testing and development expenditures on the project aimed at proving commercial recovery of the potential oil contained in the leases. Technical evaluation is ongoing and in August 2007, we initiated the drilling of eight exploration wells at various strategic locations on the Kentucky Reserves lands. The objective of this drilling program is to confirm the commercial prospectivity of three Mississippian heavy oil pay zones found at depths of 200-600 feet from surface. After analysis of the drilling results, a thermal project may be designed and implemented that may include approximately 50 development wells. The construction and commencement of thermal pilot operations is planned to occur near the end of the 2008 fiscal year.
Prior to our acquisition of the project, Kentucky Reserves was a development stage oil and gas company and did not have commercial revenue or operations. Kentucky Reserves incurred a net loss for the period from incorporation on January 14, 2005 to December 31, 2006 and the period from January 1, 2007 to April 2, 2007 of US$28,000 and US$11,000, respectively.
Trinity Sands
Currently, our interest in the project consists of, approximately, 34,000 undeveloped acres in Edwards County, Texas. Pursuant to earn-in agreements the company may earn up to a 66.67 percent working interest in all leased acreage. Included in the total undeveloped acres are 20,600 acres in which we have earned a 50 percent working interest.
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We have completed a geological study of the project. This includes compilation and evaluation of all available data, the conversion of all available logs to digital form, well curve editing and correction after digitizing, and the organization of well logs and all historical drilling, completion and core data into a structured database.
The proposed work program for fiscal 2008 includes drilling six to eight exploration wells for coring and logging. Cased-hole logging of existing wellbores, where appropriate, is also proposed. After completing the core, log and fluid analysis, a thermal pilot project may be designed and implemented consisting of two development wells to prove the recovery concept. The construction and commencement of thermal pilot operations is planned to occur in the fourth quarter of the 2008 fiscal year.
Prior to our acquisition of the project, Trinity was a development stage oil and gas company that did not have commercial revenue or operations. Trinity incurred a net loss from incorporation on October 5, 2006 to April 25, 2007 of US$37,000.
Principal Markets
The principal market that we compete in is the North American energy market, specifically the North American oil market. With the exception of the recent, limited production from the Chetopa project, we do not have, nor have we ever had, any oil and gas operations and do not currently have any interests in oil and gas leases with proved reserves.
Extraction Processes
Our business model is dependent on the use of thermal recovery technologies to recover previously uneconomic oil and gas reserves that have now been made economically viable by the recent increases in the price of oil and the development of new technologies in Canada. Our operational and head office is in Calgary, Alberta, where we have access to technical experts in the recovery of heavy oil. We have built a team with expertise in various methods of primary and thermal heavy oil recovery, including Cyclic Steam Stimulation (CSS), Steam Assisted Gravity Drainage (SAGD), steam drive, in situ combustion, ET-DSP? (a form of electro-thermal heating) and solvent processes.
Technology Summary
Heavy Oil
North America's heavy oil and bitumen deposits are estimated to contain more than 3 trillion barrels of resource, rivalling the oil reserves of Saudi Arabia. Crude oil is considered "heavy" if its API gravity is lower than 20 degrees and its viscosity is higher than 1,000 centipoise. Natural bitumens are even poorer raw materials, with API gravities lower than 10 degrees and viscosities greater than 10,000 centipoise. Heavy oil and bitumen are highly viscous requiring heat or dilution to enable significant production and recovery of reserves.
Numerous large oil sands projects, both mining andin situ have been announced and are being actively pursued to exploit this resource. The well-established North American heavy oil deposits offer world-class exploitation opportunities. We believe that the need for North American energy self-sufficiency combined with the encouraging outlook for heavy oil demand, strong prices, and easy access to refineries make this an ideal time for the re-optimization of non-conventional heavy oil supplies.
Similar to other maturing resources, primary heavy oil production in the Canadian heavy oil industry has peaked and is on decline. Encouraged by favourable economic terms and long term leases, thermal recovery is rapidly increasing and now exceeds 240,000 barrels of oil per day (bopd). There are 21 approved Steam Assisted Gravity Drainage (SAGD)projects, six approved Cyclic Steam Stimulation (CSS) projects and one approvedin situ combustion project in the Province of Alberta. Projections on the future phased developments of these projects indicate that thermal production could reach 1,500,000 bopd by 2013 if investment proceeds as planned. There is a significant and well-established commercial enhanced recovery technology industry in Canada.
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Large unconventional energy resources that are difficult to produce using today's conventional recovery methods are the focus of our company. These resources represent the key to easing energy supply concerns in the near term and the future. We are building a team to evaluate and exploit our company's projects using the best proven or emerging technologies.
In Situ Resource Recovery
Although most heavy oil or bitumen in Canada is currently produced by open pit mining, about 80 percent of the oil sands are buried too deep below the surface for this process to be applied. This oil must be recovered byin situ techniques, which heat or dilute the heavy oil, thereby lowering its viscosity and allowing it to migrate towards producing wells, where it is brought to the surface. A technical review of MegaWest's prospects will identify the most suitable technology for each resource and may include proven technologies such as Cyclic Steam Stimulation (CSS), Steam Assisted Gravity Drainage (SAGD), Steam Drive,insitu Combustion and CO2 injection or such emerging technologies as ET-DSP™ (a form of electro-thermal heating) or N-Solv (a novel solvent based technology).
We will be exploring synergistic technologies to improve capital efficiency, increase energy efficiency, reduce energy costs, reduce the requirement for water, and increase the profitability ofin situ processes. Production fromin situ processes may well replace mining as the main source of heavy oil production from tar sands, contributing significantly to energy self-sufficiency in North America
Organizational Structure
As of the date of this prospectus, we have the following, direct and indirectly-owned, subsidiaries incorporated in the United States:
Subsidiary | Acquisition Date | Ownership Percentage |
| MegaWest Energy (USA) Corp. | -(1) | 99%(2) |
| MegaWest Energy Texas Corp. (formerly Trinity Sands Energy LLC) | April 25, 2007 | 100% |
| MegaWest Energy Kentucky Corp. (formerly Kentucky Reserves, LLC) | April 2, 2007 | 100% |
| MegaWest Energy Missouri Corp. (formerly Deerfield Energy LLC) | April 5, 2007 | 100% |
| MegaWest Energy Kansas Corp. (formerly Deerfield Energy Kansas Corp.) | April 5, 2007 | 100% |
| Notes: | ||
| (1) | Incorporated on January 9, 2007. | |
| (2) | The remaining one percent ownership is held by the former unitholders of Trinity Sands Energy LLC through the exchange shares discussed in "History and Development" above in this prospectus. |
Property, Plants and Equipment
We currently rent office space located at Suite 1000, 815 8th Avenue S.W., Calgary, Alberta, Canada, T2P 3P2 for the amount of $15,500 per month. We have committed to a new office lease in Calgary commencing October 1, 2007 which will provide adequate space for our foreseeable future needs and will cost $20,000 per month.
The oil and gas acreage under lease for each of our projects and related oil and gas equipment is described in "Business Overview" above in this prospectus. Subsequent to April 30, 2007, our company acquired four used steam generators which are currently being re-furbished.
Other Oil and Gas Information
As at April 30, 2007, we did not have any reserves associated with our oil and gas properties.
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Oil and Gas Wells
At April 30, 2007 all of the wells on our company's properties were non-producing, and substantially all of the wells were drilled by prior leaseholders. The following table sets out the number of our wells, by project, as at April 30, 2007.
| Project | Gross | Net |
| United States: | ||
| Chetopa | 54.0 | 54.0 |
| Deerfield | - | - |
| Kentucky Reserves | 1.0 | 0.6 |
| Trinity Sands | - | - |
| Total | 55.0 | 54.6 |
Project Area
The following table sets out the area we have an interest in, by project, as at April 30, 2007.
| Project | Gross | Net |
| United States | ||
| Chetopa | 392 | 392 |
| Deerfield | 7,620 | 7,620 |
| Kentucky Reserves | 29,126 | 17,038 |
| Trinity Sands | 33,323 | 9,649 |
| Total | 70,461 | 34,699 |
Oil and Gas Costs
The following table summarizes the costs incurred in oil and gas property acquisition, exploration, and development activities for our company for the year ended April 30, 2007.
| Activity | Cost | ||
| Property acquisition, including equipment | $ | 20,140,324 | |
| Exploration | 616,031 | ||
| Development | - | ||
| Total | $ | 20,756,355 |
Operating and Financial Review and Prospects
The information in this section is presented in accordance with Canadian generally accepted accounting principles, and has not been reconciled to United States generally accepted accounting principles. The following discussion of our financial condition and results of operations for the five fiscal years ended April 30, 2007 should be read in conjunction with our audited financial statements, related notes and other financial information included herein.
Overview
We are a development stage non-conventional oil and gas company with an initial focus on North American heavy oil.
Critical Accounting Estimates
Our accounting policies are described in Note 1 to our consolidated financial statements for the year ended April 30, 2007. We prepare our consolidated financial statements in conformity with GAAP in Canada, which conform in all material respects to U.S. GAAP except for those items disclosed in Note 19 to our consolidated financial statements. For U.S. readers, we have detailed the differences and have also provided a reconciliation of the differences between Canadian and U.S. GAAP in Note 19 to our consolidated financial statements for the year ended April 30, 2007.
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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and other disclosures in these consolidated financial statements. Actual results may differ from those estimates.
In particular, the amounts recorded for the value of oil and gas assets are subject to a ceiling test. By their nature, these ceiling test estimates are subject to measurement uncertainty and the impact on the financial statements of future periods could be material.
We have identified the following critical accounting policies that affect the more significant judgments and estimates used in preparation of our consolidated financial statements.
Oil and Gas Operations
We follow the full cost method of accounting for oil and gas operations, whereby all costs of exploring for and developing oil and gas reserves are capitalized and accumulated in country-by-country cost centers. These capitalized costs will be depleted using the unit-of-production method based on estimates of proved reserves. The costs in cost centers from which there has been no commercial production are not subject to depletion until commercial production commences. These capitalized costs are assessed to determine whether it is likely such costs will be recovered in the future. Costs which are not likely to be recovered in the future are written-off.
We may grow our business through acquisitions. A different accounting outcome could potentially result for the cost of an acquisition if accounting for a business combination compared to an asset or development stage company acquisition, when shares are issued as consideration. For a business combination, the cost of the shares issued for the acquisition is based on the underlying share value at the time the acquisition is announced. For an asset or development stage company acquisition, the cost of the shares issued is based on underlying share value at the closing date of the transaction. Since the acquisitions we completed in fiscal 2007 are development stage companies, we valued the cost of the share consideration issued at the closing date.
Fair Value of our Company's Shares, Options and Warrants
We completed a number of share-based transactions during the year ended April 30, 2007. Under Canadian GAAP, share-based transactions are recorded at their fair values. Generally, the best indicator of fair value of a company's shares is quoted market prices, unless the market is not active or liquid, in which case fair value is determined using valuation techniques, including recent arm's length market transactions between knowledgeable, willing parties. In addition, the fair value of options and warrants granted were based on the Black-Scholes option pricing model, which uses the common share fair value on the grant date as an input. Under U.S. GAAP, share-based transactions are valued based on exchange quoted market prices.
Share based transactions impact a number of financial statement items including stock-based compensation expenses, contributed surplus, share capital, warrants, convertible promissory notes, exchange shares and deficit on related party acquisitions.
Under Canadian GAAP we used recent arm's length transactions, specifically private placements, as indicators of fair value. Under U.S. GAAP, we used the OTC exchange price as the fair value estimate for our shares. As a result, U.S. GAAP stock-based compensation expense was $11.2 million higher than reported under Canadian GAAP. In addition, the amount recorded for the Kentucky oil and gas assets and the deficit adjustment on related party acquisitions was $21.8 million and $11.9 million higher, respectively, under U.S. GAAP.
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Operating Results
The following discussion is prepared in accordance with Canadian GAAP. For differences between Canadian and U.S. GAAP related to our financial statements, refer to Note 19 to our consolidated financial statements for the year ended April 30, 2007.
We reported a net loss of $6,893,052 for the year ended April 30, 2007, compared with a net loss of $222,945 for the year ended April 30, 2006, for an aggregate net loss for the five year period ended April 30, 2007 of $7,366,290. The loss for the year ended April 30, 2007 was mainly attributable to administrative expenses of $1,624,546, stock-based compensation costs of $3,899,148 and foreign exchange loss of $1,548,840.
Stock–based compensation expense was $3,899,148 for the year ended April 30, 2007 and was attributable to the cost associated with granting stock options and warrants to new employees, consultants and directors in connection with forming a new oil and gas company.
Administrative expenses, excluding stock-based compensation, totalled $1,624,546 for the year ended April 30, 2007 compared with $104,601 for the year ended April 30, 2006. The increase was caused by new management changing our focus to oil and gas exploration in December 2006. A number of employees were hired and a new office was established in Calgary, Alberta that resulted in salary and benefit costs, professional fees and office costs.
The foreign exchange loss of $1,548,840 for the year ended April 30, 2007 resulted primarily from the translation of our U.S. dollar denominated cash balances into our Canadian dollar reporting currency. The Canadian dollar has strengthened in value compared to the U.S. dollar for the period following the private placements. We do not engage in hedging activities or use derivative instruments.
Administrative expenses totalled $104,601 for the year ended April 30, 2006 compared with $57,292 for the year ended April 30, 2005. The increase was substantially caused by the payment of $61,200 in fees to Carob Management for consulting services related to new business opportunities for our company and other administration duties.
During the year ended April 30, 2004, we advanced $109,280 plus accrued interest to Cyberhand Technologies Inc. pursuant to notes payable to fund activities pending a proposed acquisition. The balance owing on these notes and interest accrued thereon in the amount of $123,610 was assigned to Cyberhand Technologies Inc. in exchange for distribution rights pursuant to a July 5, 2004 distributor agreement, whereby we acquired the non-exclusive right to distribute peripheral computer hardware products designed, manufactured and marketed by Cyberhand Technologies Inc. Pursuant to the distributor agreement, we agreed to purchase a minimum of 15,000 units on or before July 5, 2007, and upon completion of this minimum order, to purchase 50,000 units per month or forfeit our rights under the distributor agreement. As required by the distributor agreement, we purchased an initial stocking order of 200 units at a cost of $10,735, which was written down to its net realizable value of $4,735 for the year ended April 30, 2005 and to $1.00 for the year ended at April 30, 2006. During the year ended April 30, 2006, we wrote down the distribution right granted under the distributor agreement to $10,000 to recognize the impairment of the asset primarily due to the lack of sales of the Cyberhand Technologies Inc. products.
We had interest income of $263,125, $nil and $2,261 for the years ended April 30, 2007, 2006 and 2005, respectively. The increase in interest income for the year ended April 30, 2007 is related to interest earned on cash balances generated from the private placements that raised an aggregate amount of US$34,011,050.
Liquidity and Capital Resources
As our projects are in the exploration stage and we do not have profitable oil and gas operations, existing working capital will be used to fund operations and our capital program. The ultimate development of our oil and gas projects, if proven commercial, will require additional funding. Additional capital will be required in the form of equity, debt and or joint venture farmouts. In addition to cash on hand, we have 18,627,623 common share purchase warrants outstanding that could generate up to $24.9 million (US$23.7 million) in cash during the 2008 fiscal year.
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Cash and Financial Conditions
We had working capital of $28,152,901 as at April 30, 2007 compared to a working capital deficiency of $139,422 as at April 30, 2006. Cash used in operating activities for the year ended April 30, 2007 totalled $424,158 on a $6,893,052 net loss for the year.
We had a working capital deficiency of $139,422 as at April 30, 2006 compared to a working capital deficiency of $30,087 as at April 30, 2005. Cash used in operating activities for the year ended April 30, 2006, totalled $31,724 including a $222,945 net loss for the fiscal year.
As at April 30, 2007, we had cash available of $29,328,951 which we consider sufficient to complete our 2008 work plan. Additional capital may be required thereafter or should the budget or work plan be amended for a number of reasons which include, but are not limited to, future events, possible business or property acquisitions and actual results differing from our anticipated work plan. We currently have, approximately, $24,100,000 in cash available.
Investing Activities
Cash used in investing activities was $6,932,653 for the year ended April 30, 2007 and included cash expenditures of $4,244,360 for oil and gas acquisitions (see "History and Development" above in this prospectus), $836,875 for capital expenditures, $1,851,960 for an investment in our Trinity Sands project joint venture partner Energy Finders, and $341,250 cash deposited in trust as contingent consideration for the Deerfield Missouri acquisition. Cash used in investing activities was $nil for the year ended April 30, 2006.
Financing Activities
During the fiscal year ended April 30, 2007, we completed three private placements to provide us with $38,301,221, before costs, of working capital to evaluate and pursue non-conventional oil and gas opportunities in the United States and Canada and to establish a head office in Calgary, Alberta (see "History and Development" above in this prospectus).
Our debt obligations at April 30, 2007 consist of convertible promissory notes and potential cash payout obligations on exchange shares.
The convertible promissory notes of US$1,700,000 were assumed on December 20, 2006 in connection with the proposed acquisitions of Chetopa and Trinity. The principal and interest are convertible into shares of our common stock at US$0.25 per share until June 20, 2008. The interest rate on the notes is six percent per annum.
We caused to be issued 95,000 class B shares of our subsidiary, MegaWest Energy (USA) Corp., as part of the consideration given to acquire Trinity. Each class B exchange share is convertible into 100 shares of our common stock with up to 9,500,000 shares of our common stock to be issued. The holders of these MegaWest Energy (USA) Corp. shares have the right to exchange, or can receive a cash payment of US$950,000 (US$10.00 per exchange share) until July 31, 2008, after which we can implement a forced exchange of the shares.
In December 2006, we settled $165,700 of accounts payable through the issuance of 600,000 shares of our common stock pursuant to debt settlement and subscription agreements dated December 21, 2006. The fair value of the shares was based on recent arm's length private placements.
In the year ended April 30, 2006, we borrowed $40,000 from shareholders of our company and issued $40,000 in short term, unsecured notes bearing interest at 10 percent in respect thereof. On October 20, 2006, our shareholders approved a subdivision of the issued and outstanding shares of our common stock on an up to 3 to 1 basis. This subdivision is subject to the discretion of the directors and is currently not proposed to be implemented.
We completed our initial public offering on July 5, 2001, and raised $262,500 from the sale of 1,750,000 shares of our common stock. In July 2004, we completed a private placement of 4,500,000 shares of our common stock at $0.001 per share, including 1,250,000 shares of our common stock purchased by directors and officers. As at April
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30, 2004, there were 2,250,000 shares of our common stock held in escrow, whose release was subject to the policies of the TSX Venture Exchange. On July 29, 2004, as a result of the voluntary delisting from the TSX Venture Exchange, the 2,250,000 escrowed shares were cancelled and returned to the treasury.
At April 30, 2007 we had 72,436,050 shares of our common stock issued and outstanding, excluding 4,750,000 shares issued and held in trust pursuant to an escrow agreement (see "History and Development" above in this prospectus). As of August 27, 2007, there were 72,561,050 shares of our common stock issued and outstanding, excluding 4,750,000 shares held in trust pursuant to an escrow agreement. See "Share Ownership" below in this prospectus for details on the shares outstanding and potential dilutive securities.
Research and Development, Patents and Licenses, etc.
We do not currently and did not previously have research and development policies in place. Over the past three fiscal years, no funds were expended by our company on research and development activities.
Trend Information
We do not currently know of any trends that would be material to our operations.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Tabular Disclosure of Contractual Obligations
| Contractual Obligations (in thousands of Canadian dollars) | |||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |
| Operating Leases | $1,623 | $239 | $725 | $659 | $- |
| Work Commitments(1) | $6,240 | $- | $6,240 | $- | $- |
| Convertible Promissory Notes(2) | $1,945 | $- | $1,945 | $- | $- |
| Cash Redemption on Exchange Shares(3) | $1,061 | $- | $1,061 | $- | $- |
| Employment Agreements(4) | $- | $- | $- | $- | $- |
| Total | $10,869 | $239 | $9,971 | $659 | $- |
| Notes: | ||
| (1) | As part of the acquisition of Kentucky Reserves, we are obligated to spend US$15,000,000 on the project by October 2009. In the event we do not complete this work program, we are obligated to pay 37.5 percent of the unspent balance to our joint venture partner. | |
| (2) | In the event the Agosto convertible promissory notes are not converted into shares of our common stock, we will be obligated to pay US$1,700,000 plus accrued interest at six percent on maturity, June 20, 2008. | |
| (3) | MegaWest Energy (USA) Corp. issued 95,000 exchange shares pursuant to the acquisition of Trinity, whereby, each exchange share is exchangeable, at the holder's election, into 100 shares of our common stock or into US$10 per exchange share until July 31, 2008, after which time our company can implement a forced exchange of the shares. In the event the exchange shares are not converted to shares of our common stock, we may be required to redeem the exchange shares for US$10 per share, or US$950,000. | |
| (4) | Pursuant to employment agreements we have with our Chief Executive, Operating and Financial Officers, if one of the respective individual's employment is terminated by our company without just cause or by the respective individual for constructive dismissal, then the respective individual will receive a severance payment in the amount of one year's annual salary plus $10,000 less applicable withholdings and deductions, in respect of lost benefits and notwithstanding any provisions of our company's stock plans, all stock options held by the respective individual will automatically vest. Additionally, in the event of a |
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change of control of our company, we and/or the respective individual may terminate employment with our company, in which event, we will pay to the respective individual the termination payments set out above.
In addition to the above:
as part of the Chetopa acquisition, we are obligated to pay a net revenue interest up to a maximum of US$750,000 on net revenues generated from the Chetopa project. The net revenue interest becomes payable after our company recovers 100 percent of its capital and operating costs, and will be paid quarterly from 25 percent of the project's net revenues; and | ||
as part of the Deerfield acquisition, owing to potential issues related to certain oil development agreements, there was US$300,000 of cash and 4,750,000 shares of our common stock were placed in an escrow account, set-up for our indemnification in respect of the said claims. Pursuant to the escrow agreement, the said cash and shares can be released on a pro-rata basis to the previous unitholders of Deerfield Missouri upon either the modification of certain oil development agreements into oil and gas leases or until 4,000 acres of replacement acreage have been leased. The escrow agreement provides for an escrow period of six months subject to certain adjustments. |
Safe Harbor
Not Applicable.
Directors, Senior Management and Employees
Directors and Senior Management
The following table sets out the names and business experience of each of our directors and senior officers, as of August 27, 2007:
Name and Age | Present Position with our Company | Date of Commencement of Office with our Company |
| George T. Stapleton, II(2) (3)(53) | President and Chief Executive Officer | December 21, 2006 |
| Director | December 21, 2006 | |
| George Orr(1)(2)(46) | Chief Financial Officer and Treasurer | December 21, 2006 |
| Director | December 21, 2006 | |
| R. William Thornton(2)(51) | Chief Operating Officer | January 1, 2007 |
| Director | December 21, 2006 | |
| Brad Kitchen(1)(44) | Director | February 19, 2003 |
| Brian J. Evans(1) (2)(56) | Director | February 19, 2007 |
| Dr. Gail Bloomer (72) | Director | February 19, 2007 |
| Notes: | ||
| (1) | Member of our audit committee | |
| (2) | Member of our Corporate Governance and Compensation Committee | |
| (3) | Board Chairman |
George T. Stapleton, II
Mr. Stapleton received his civil engineering degree from Georgia Institute of Technology in 1975 and has 32 years of international experience in the offshore oil construction and service industry, project development, oil and gas exploration and production and energy infrastructure related projects. Mr. Stapleton is currently the President and Chief Executive Officer of our company. He has been the Chief Operating Officer and a Director of Deerfield Energy LLC since 2005 and the President and a director of Trinity Sands Energy LLC since 2006. He was formerly the President and remains a director since 2004 of E-T Energy Ltd., a private Canadian company testing an electrothermal approach to the production of bitumen from the Athabasca tar sands. From 2000 to 2002 he was responsible for the development of simulation based training packages for the energy and industrial sectors for Simulis, LLC. He was President - Products & Services for NEOppg Ltd. from 1998 to 2000 where he was responsible for the development of the services side of the company's business plan, focusing on a proprietary multilateral system,
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heavy oil production systems and artificial lift products. Prior to that he was Vice-President, Operations for Asian Tiger Energy Company, an independent oil company developing oil and gas projects, primarily in Southeast Asia. Before Asian Tiger, Mr. Stapleton spent 19 years overseas with J. Ray McDermott in the Arabian Gulf, North Sea and Asia as Field Engineer, Operations Engineer, Project Manager, Fabrication Division Manager at Batam Island, Indonesia and finally as Division Manager – Business Development and Project Management where he oversaw project management of all turnkey projects for Southeast Asia and was responsible for business development activities throughout the region.
George Orr
Mr. Orr is a chartered accountant and has several years experience dealing with public company reporting and administrative requirements. Mr. Orr is currently a director and the Chief Financial Officer of Valcent Products Inc. a company listed on the OTC Bulletin Board that is engaged in the business of the design, development and marketing of innovative products intended for the mass consumer appeal.
R. William Thornton
Mr. Thornton received his Chemical Engineering degree from the University of Alberta in 1977 and Masters of Engineering (reservoir) 1989 from the University of Calgary. He also completed the University of Calgary Executive Development Program in 1988. He has held senior management and executive positions over the last 30 years in all aspects of oil and gas development and in particular enhanced recovery of heavy oil. He was General Manger – Petroleum Engineering with Western OilSands, Vice-President, Engineering with Petrovera Resources and Director of Primary Heavy Oil with Gulf Canada. Prior to these positions he worked for 17 years with Murphy Oil on their various enhanced recovery projects and technology development. During this time, Mr. Thornton spent 3 years working in Murphy's El Dorado, Arkansas and New Orleans, Louisiana offices overseeing engineering and operations on a large portion of Murphy's onshore U.S. production. Mr. Thornton also has international experience, having worked in drilling operations in interior Peru and as part of a team negotiating a production sharing agreement in northern Iraq.
Brad Kitchen
Mr. Kitchen is a corporate finance consultant. Since 1996, he has been the founder and President of PBK Financial Engineering Inc., a private corporate finance consulting company. After graduating from McGill University with an MBA, Mr. Kitchen became a financial product oriented investment banker where he was employed in Toronto, Ontario over an eleven-year period as a Vice-President and director at CIBC World Markets (formerly CIBC Wood Gundy Securities Inc.) and TD Securities Inc. From January 2000 to January 2001, he was Vice-President, Corporate Finance at Pacific Opportunities Company Ltd., a small merchant bank and financial services company.
From December 1998 to December 1999, he was a partner of Kitchen & Fuller Holdings Inc., a holding company for commercial real estate. From May 1998 to November 1998, he was Chief Financial Officer of Protocol Holdings Inc., a real estate investment company. Since April 2005, he has been a director of Cyberhand Technologies International Inc. Since October 2005, Mr. Kitchen has been President and director of Grenville Gold Corporation, a mining company listed on the TSX Venture Exchange; and President of Universal Energy Corporation, an oil and gas company also listed on the TSX Venture Exchange.
Brian J. Evans
Mr. Evans is a director of several public companies, including CCS Income Trust, an income trust listed on the TSX that provides energy and environmental waste management services and Tusk Energy Corporation, a company listed on the TSX that is an exploration-focused oil and gas producer with operation in western Canada. Since August 2006, Mr. Evans has served as the Executive Director of the Werklund Group, a private investment group effective August 2006 and prior to that was a partner and associate counsel with Miller Thomson LLP, a national law firm.
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Dr. Gail Bloomer
Dr. Bloomer received his doctoral degree in Geology from Harvard University and has developed his expertise in exploration and development while working for international companies including Gulf Oil and Kerr McGee.
Family Relationships
There are no family relationships between any of the directors or executive officers of our company.
There are no arrangements or understandings between any of our directors and/or executive officers and any other person pursuant to which that director and/or executive officer was selected.
Compensation
Executive Compensation
The following table provides a summary of compensation paid by us during the fiscal year ended April 30, 2007 to the senior management of our company:
| SUMMARY COMPENSATION TABLE | |||||
Name and Principal Position | Annual Compensation | Long Term Compensation | All other Compensation | ||
Salary | Bonus | Other Annual Compensation | Securities Under Options/SARs Granted | ||
| George T. Stapleton, II President and Chief Executive Officer | $89,333 (US$80,000) | $335,000 (US$300,000) | - | 1,000,000(1) | -(1) |
| George Orr Chief Financial Officer and Treasurer | $46,000 | - | - | 1,000,000(2) | - |
| R. William Thornton Chief Operating Officer | $83,333 | $295,000 | - | 1,000,000(3) | -(8) |
| Gerry Hampshire Vice President, Exploitation | $46,860 | - | - | 600,000(4) | - |
| E. Wayne Sampson Vice President, Land | $21,000 | - | - | 600,000(5) | - |
| David Sealock Vice President, Corporate Services and Corporate Secretary | $42,188 | - | - | 600,000(6) | - |
| Kelly Sledz Finance Manager and Controller | $13,009 | - | - | 300,000(7) | - |
| Notes: | ||
| (1) | Represents 1,000,000 common share stock options granted effective January 5, 2007 at an exercise price of US$0.50 per share exercisable for a period of four years that vested on grant date. See "Share Ownership" below in this prospectus for details on additional shares of our common stock and cash received from acquisitions. | |
| (2) | Represents 1,000,000 common share stock options granted effective January 5, 2007 at an exercise price of US$0.50 per share exercisable for a period of four years that vested on grant date. | |
| (3) | Represents 1,000,000 common share stock options granted effective January 5, 2007 at an exercise price of US$0.50 per share exercisable for a period of four years that vested on grant date. |
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| (4) | Represents 600,000 common share stock options granted effective January 8, 2007 at an exercise price of US$0.50 per share exercisable for a period for four years, 150,000 of which vest six months from grant and the remainder in three 150,000 tranches vesting on the first, second and third anniversary of the grant date. | |
| (5) | Represents 600,000 common share stock options granted effective March 19, 2007 at an exercise price of US$1.00 per share exercisable for a period for four years, 150,000 of which vest six months from grant and the remainder in three 150,000 tranches vesting on the first, second and third anniversary of the grant date. | |
| (6) | Represents 600,000 common share stock options granted effective January 8, 2007 at an exercise price of US$0.50 per share exercisable for a period for four years, 150,000 of which vest six months from grant and the remainder in three 150,000 tranches vesting on the first, second and third anniversary of the grant date. | |
| (7) | Represents 300,000 common share stock options granted effective February 28, 2007 at an exercise price of US$1.00 per share exercisable for a period for four years, 75,000 of which vest six months from grant and the remainder in three 75,000 tranches vesting on the first, second and third anniversary of the grant date. | |
| (8) | On December 21, 2006, 10,000,000 assignable warrants (exercisable for common shares at US$0.10 per share for a period of six months after vesting) were issued to Endurance Energy Consulting Ltd., a private company controlled by R. William Thornton, which warrants vest if the Endurance incentive warrant holders collectively bring a project of merit (i.e. a project with a potential economic value of at least US$10,000,000) to the directors of our company within one year of the award of the warrants. Subsequent to April 30, 2007, Endurance Energy Consulting Ltd. has assigned 8,250,000 of the warrants. |
Compensation of Directors
No cash compensation was paid to any of our directors for services as a director during the year ended April 30, 2007. We have no formal arrangement pursuant to which directors are compensated by us for their services in their capacity as directors, except for the granting from time to time of incentive stock options. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board. Our board may award special remuneration to any director undertaking any special services on our behalf, other than services ordinarily required of a director. No director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments for the year ended April 30, 2007.
The following table provides a summary of compensation paid by us during the year ended April 30, 2007 to our directors:
| SUMMARY COMPENSATION TABLE | |||
Name and Principal Position | Annual Compensation | Long Term Compensation | |
Cash | Special Remuneration | Securities Under Options/SARs Granted | |
| George T. Stapleton, II | - | - | 500,000(1) |
| George Orr | - | - | 500,000(2) |
| R. William Thornton | - | - | 500,000(3) |
| Brad Kitchen | - | - | 500,000(4) |
| Brian J. Evans | - | - | 500,000(5) |
| Dr. Gail Bloomer | - | - | 500,000(6) |
| Notes: | ||
| (1) | Represents 500,000 common share stock options granted effective December 21, 2006 at an exercise price of US$0.10 per share exercisable for a period of five years that vested on the grant date and were exercised on March, 23, 2007. | |
| (2) | Represents 500,000 common share stock options granted effective December 21, 2006 at an exercise price of US$0.10 per share exercisable for a period of five years that vest on the grant date. | |
| (3) | Represents 500,000 common share stock options granted effective December 21, 2006 at an exercise price of US$0.10 per share exercisable for a period of five years that vest on the grant date. | |
| (4) | Represents 250,000 common share stock options granted effective December 21, 2006 at an exercise price of US$0.10 per share exercisable for a period of five years and 250,000 common share stock options granted effective March 7, 2007 at an exercise price of US$1.00 per share exercisable for a period of four years, all of which vest on the grant dates. | |
| (5) | Represents 500,000 common share stock options granted effective February 20, 2007 at an exercise price of US$1.00 per share exercisable for a period for five years that vest on the grant date. | |
| (6) | Represents 500,000 common share stock options granted effective January 15, 2007 at an exercise price of US$0.50 per share exercisable for a period of five years that vest on the grant date. |
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Retirement Benefits
We do not have in place any pension or actuarial plan to provide pension, retirement or similar benefits and no funds were set aside or accrued by our company or its subsidiaries during the fiscal year ended April 30, 2007 to provide pension, retirement or similar benefits.
Employment Agreements
We have employment agreements for our Chief Executive, Operating and Financial Officers, the material terms of which are set out below.
We entered into an executive employment agreement made effective as of December 15, 2006 with R. William Thornton, whereby we have agreed to employ Mr. Thornton as our Chief Operating Officer as of January 1, 2007. Pursuant to the agreement, Mr. Thornton will receive an annual salary of $250,000 and bonuses as may be determined by our board. Upon execution of the agreement, we paid Mr. Thornton a signing bonus in the amount of US$250,000. Mr. Thornton will be entitled to coverage under Directors and Officers Liability Insurance and Errors and Omission Insurance (with a minimum cover of at least $2,000,000 per occurrence), all at our company's expense. If Mr. Thornton's employment is terminated for just cause or by Mr. Thornton without constructive dismissal, we will pay to Mr. Thornton the amount of his unpaid annual salary to and including the date of termination, any declared but unpaid bonus and all outstanding vacation pay and expense reimbursements. If Mr. Thornton's employment is terminated by our company without just cause or by Mr. Thornton for constructive dismissal, then in addition to the foregoing amounts, Mr. Thornton will receive a severance payment in the amount of one year's annual salary plus $10,000 less applicable withholdings and deductions, in respect of lost benefits and notwithstanding any provisions of our company's stock plan, all stock options held by Mr. Thornton will automatically vest. Additionally, in the event of a change of control of our company, we and/or Mr. Thornton may terminate Mr. Thornton's employment with our company, on which event, we will pay to Mr. Thornton the termination payments set out above. As part of the agreement Mr. Thornton was granted 1,000,000 common share stock options with an exercise price of US$0.50 per share that expire January 5, 2011 and 500,000 common share stock options with an exercise price of US$0.10 per share that expire December 21, 2011.
Our board of directors approved an executive employment agreement with George T. Stapleton, II, whereby we have agreed to employ Mr. Stapleton as our Chief Executive Officer as of January 1, 2007. Pursuant to the agreement, Mr. Stapleton will receive an annual salary of US$240,000 and performance bonuses as may be determined by our board. As part of the agreement, we paid Mr. Stapleton a signing bonus in the amount of US$300,000. Mr. Stapleton will be entitled to coverage under Directors and Officers Liability Insurance and Errors and Omission Insurance (with a minimum cover of at least $2,000,000 per occurrence), all at our company's expense. If Mr. Stapleton's employment is terminated for just cause or by Mr. Stapleton without constructive dismissal, we will pay to Mr. Stapleton the amount of his unpaid annual salary to and including the date of termination, any declared but unpaid bonus and all outstanding vacation pay and expense reimbursements. If Mr. Stapleton's employment is terminated by our company without just cause or by Mr. Stapleton for constructive dismissal, then in addition to the foregoing amounts, Mr. Stapleton will receive a severance payment in the amount of one year's annual salary plus $10,000 less applicable withholdings and deductions, in respect of lost benefits and notwithstanding any provisions of our company's stock plan, all stock options held by Mr. Stapleton will automatically vest. Additionally, in the event of a change of control of our company, we and/or Mr. Stapleton may terminate Mr. Stapleton's employment with our company, on which event, we will pay to Mr. Stapleton the termination payments set out above. As part of the agreement Mr. Stapleton was granted 1,000,000 common share stock options with an exercise price of US$0.50 per share that expire January 5, 2011 and 500,000 common share stock options with an exercise price of US$0.10 per share which were exercised on March 23, 2007.
Our board of directors approved an executive employment agreement with George Orr, whereby we have agreed to employ Mr. Orr as our Chief Financial Officer as of January 2, 2007. Pursuant to the agreement, Mr. Orr will receive an annual salary of $138,000 and bonuses as may be determined by our board. Mr. Orr will be entitled to coverage under Directors and Officers Liability Insurance and Errors and Omission Insurance (with a minimum cover of at least $2,000,000 per occurrence), all at our company's expense. If Mr. Orr's employment is terminated for just cause or by Mr. Orr without constructive dismissal, we will pay to Mr. Orr the amount of his unpaid annual salary to and including the date of termination, any declared but unpaid bonus and expense reimbursements. If Mr.
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Orr's employment is terminated by our company without just cause or by Mr. Orr for constructive dismissal, then in addition to the foregoing amounts, Mr. Orr will receive a severance payment in the amount of one year's annual salary plus $10,000 less applicable withholdings and deductions, in respect of lost benefits and notwithstanding any provisions of our company's stock plan, all stock options held by Mr. Orr will automatically vest. Additionally, in the event of a change of control of our company, we and/or Mr. Orr may terminate Mr. Orr's employment with our company, on which event, we will pay to Mr. Orr the termination payments set out above. As part of the agreement Mr. Orr was granted 1,000,000 common share stock options with an exercise price of US$0.50 per share that expire January 5, 2011. As part of Mr. Orr's role as a director, our company granted 500,000 common share stock options with an exercise price of US$0.10 per share that expire December 21, 2011.
Board Practices
Our directors are re-elected and our officers are re-appointed at the annual general meeting of our shareholders. Our last annual general meeting was held on October 20, 2006. Messrs. Orr, Stapleton and Thornton were appointed as directors and officers of our company on December 21, 2006 upon the resignations of Terry Amisano and Kevin Hanson. Dr. Gail Bloomer and Brian J. Evans were appointed as directors of our company at our special general meeting held on February 19, 2007. Each of our current directors and officers will continue to hold his respective office until his successor is elected or appointed, unless his office is earlier vacated under any of the relevant provisions of our articles or of the Business Corporations Act (British Columbia).
Other than an executive employment agreements entered into with R. William Thornton, George T. Stapleton, II, and George Orr, there are no service contracts between our company and any of our directors providing for benefits upon termination of employment.
The members of our company's audit committee are Brian Evans, George Orr and Brad Kitchen. George Orr is our Chief Financial Officer and Treasurer and is therefore not considered to be an independent member of the audit committee. Brad Kitchen and Brian Evans are considered to be independent members.
The members of our company's corporate governance and compensation committee are Brian Evans, George Orr, R. William Thornton and George T. Stapleton, II.
We do not have an executive or reserves committee of our board of directors.
Employees
As at August 27, 2007, we employed 31 full-time equivalent people. During the fiscal years ended April 30, 2006 and 2005, we did not have any employees other than our then President/Chief Executive Officer and Chief Financial Officer.
Stock Ownership
Our authorized capital stock consists of an unlimited number of common shares, without par value, and 100,000,000 preferred shares, without par value.
The following table identifies the number of shares of our common stock outstanding as at August 27, 2007 and the number of shares of our common stock that could be issued if all of our dilutive securities were converted into shares.
| August 27, 2007 | |
| Shares of common stock outstanding | 72,561,050 |
| Shares of common stock in escrow | 4,750,000(1) |
| Exchange shares | 9,500,000(2) |
| Stock options | 10,159,000(3) |
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| August 27, 2007 | |
| Private placement share purchase warrants | 18,627,623(4) |
| Incentive warrants | 19,500,000(5) |
| Consulting warrants | 6,000,000(6) |
| Unit rights | 832,500(7) |
| Convertible promissory notes | 6,800,000(8) |
| Total | 148,730,173 |
| Notes: | ||
| (1) | Represents 4,750,000 shares of our common stock issued and held in trust pursuant to an escrow agreement (see "History and Development" above in this prospectus) entered into in connection with the acquisition of Deerfield Missouri. | |
| (2) | Represents 95,000 class B shares of our subsidiary, MegaWest Energy (USA) Corp., as part of the consideration given to acquire Trinity. Each class B exchange share is convertible into 100 shares of our common stock with up to 9,500,000 shares of our common stock to be issued. The holders of these MegaWest Energy (USA) Corp. shares have the right to exchange, or can receive a cash payment of US$950,000 (US$10.00 per exchange share) until July 31, 2008, after which we can implement a forced exchange of the shares. | |
| (3) | Represents stock options to purchase shares of our common stock at prices from US$0.10 to US$2.25 per share, with expiry dates from March 15, 2008 through to March 15, 2012 and with various vesting terms. | |
| (4) | Represents whole common share purchase warrants issued in connection with our private placement offerings. Each whole common share purchase warrant is exercisable into one share of our common stock at prices from US$1.00 to US$1.30 per share, with expiry dates from January 5, 2008 to March 1, 2008. | |
| (5) | Represents warrants granted to three entities (including, Endurance Energy Consulting Ltd., private company controlled by R. William Thornton, a director and the Chief Operating Officer of our company and Gladrock Energy LLC, a private company controlled by Dr. Gail Bloomer, a director of our company) that entitle such persons to purchase shares of our common stock at a price of US$0.10 per share for a period of six months after vesting if the holder thereof brings a project of merit (i.e. a project with a potential economic value in the amount of at least US$1.00 multiplied by the total number of warrants issued to the holder) to the directors of our company by December 21, 2007. Gladrock Energy LLC has been credited with identifying the Kentucky Reserves acquisition and the warrants issued to Gladrock Energy LLC have vested. Endurance Energy Consulting Ltd. has assigned 8,250,000 of its warrants. | |
| (6) | Represents common share purchase warrants granted to various consultants. The warrants are exercisable into one share of our common stock at an exercise price of US$0.50 per share and expire on January 5, 2009. | |
| (7) | Represents rights to buy an additional 180,000 units under the same terms as the January US$0.50 private placement (each unit includes one share of our common stock and one half-common share purchase warrant exercisable at US$1.00 per share) and rights to buy a further 375,000 units under the same terms as the March US$1.00 private placement (each unit includes one share of our common stock and one half-common share purchase warrant exercisable at US$1.30 per share). These rights, including the underlying common share purchase warrants, expire between January 5, 2008 and March 1, 2008. | |
| (8) | Represents shares of our common stock that potentially could be issued from convertible promissory notes in the aggregate amount of US$1,700,000 with an interest rate of six percent per annum, which together maybe converted into shares of our common stock at US$0.25 per share until June 20, 2008. |
Of the above securities, our directors and senior officers owned the following common shares as of August 27, 2007:
Name Office Held | Common Shares | Options and Dilutive Securities Exercisable for Common Shares | |||
Number Beneficially Owned | Percentage of Class | Number Beneficially Owned (Unexercised) | Exercise Price | Expiry Date | |
| George T. Stapleton, II President and Chief Executive Officer Director | 1,772,983(1) | 2.4% | 1,000,000(2) | US$0.50 | January 5, 2011 |
| 4,500,000(1) | - | - | |||
| 753,350(1) | - | - | |||
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Name Office Held | Common Shares | Options and Dilutive Securities Exercisable for Common Shares | |||
Number Beneficially Owned | Percentage of Class | Number Beneficially Owned (Unexercised) | Exercise Price | Expiry Date | |
| George Orr Chief Financial Officer, Treasurer and Director | - | - | 1,000,000(2) | US$0.50 | January 5, 2011 |
| 500,000(2) | US$0.10 | December 21, 2011 | |||
| R. William Thornton Chief Operating Officer and Director | 2,600,000 | 3.4% | 1,000,000(2) | US$0.50 | January 5, 2011 |
| 500,000(2) | US$0.10 | December 21, 2011 | |||
| 1,750,000(3) | US$0.10 | December 21, 2007(3) | |||
| Brad Kitchen Director | 140,465 | *% | 250,000(2) | US$1.00 | March 7, 2012 |
| 250,000(2) | US$0.10 | December 21, 2011 | |||
| Brian J. Evans Director | 10,000 | *% | 500,000(2) | US$1.00 | February 20, 2012 |
| Dr. Gail Bloomer Director | - | - | 500,000(2) | US$0.50 | January 15, 2012 |
| 9,000,000(4) | US$0.10 | October 2, 2007 | |||
| Notes: | ||
| * | Less than one percent. |
| (1) | Includes 39,650 shares of our common stock issued in respect of the Chetopa acquisition. In addition, Mr. Stapleton beneficially owns 45,000 class B exchange shares of our subsidiary, MegaWest Energy (USA) Corp., acquired in connection with the acquisition of Trinity that are exercisable into 4,500,000 shares of our common stock. Further, Mr. Stapleton may receive an additional 753,350 shares of our common stock held in escrow in connection with the acquisition of Deerfield Missouri. (see "Related Party Transactions" below in this prospectus). | |
| (2) | Includes vested and unvested common share stock options under our company's Canadian stock option plan dated | |
August 24, 2004, as amended and restated February 19, 2007 and August 9, 2007, and our company's U.S. stock option plan dated January 5, 2007. | ||
| (3) | Represent the remaining unassigned warrants that entitle Endurance Energy Consulting Ltd., a private company controlled by R. William Thornton, to purchase shares of our common stock at a price of US$0.10 per share for a period of six months after vesting if the Endurance incentive warrant holders collectively bring a project of merit (i.e. a project with a potential economic value in the amount of at least US$1.00 multiplied by the total number of warrants issued to the holder) to the directors of our company by December 21, 2007. | |
| (4) | Represent 9,000,000 warrants (exercisable for shares of our common stock at US$0.10 per share for a period of six months after vesting) issued to Gladrock Energy LLC, a private company controlled by Dr. Gail Bloomer, which vested in April 2007 when the Kentucky Reserves acquisition closed. |
We adopted a formal written stock option plan for Canadian resident directors, senior officers, employees and consultants on August 24, 2004. The purpose of the plan is to provide us with a share-related mechanism to attract, retain and motivate qualified directors, officers, consultants and employees, to reward those persons from time to time for their contributions toward the long-term goals of our company, and to enable and encourage such directors, officers, consultants and employees to acquire our common shares as long-term investments. The plan provides that stock options granted under the plan vest in the manner determined by the administrator appointed under the plan on the date of the grant. The price at which a stock option may be exercised is determined by our board of directors at the time of the grant. The plan also provides that we may not grant stock options to any person or that person's associates that will in aggregate, when exercised, exceed in any 12 month period 5 percent of our issued and outstanding common shares.
As of February 19, 2007 and August 9, 2007, our Canadian stock option plan was amended and restated as follows: (a) to provide that the total number of shares of our common stock that may be issued upon the exercise of stock options issued under the plan plus the total number of shares of our common stock that may be issued upon the
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exercise of stock options issued under a stock option plan, dated January 5, 2007, for United States based employees cannot exceed 20 percent of the total number of shares of our common stock issued and outstanding from time to time; (b) to set out the circumstances under which the number and class of shares issuable upon the exercise of a stock option will be adjusted; (c) to allow for the immediate vesting of all unexpired and unvested stock options in the event of a change of control of our company and for the acceleration of the vesting of stock options at the discretion of the administrator appointed under the plan; (d) to set out how the exercise price of a stock option may be paid and specifically to provide for a (cashless) net exercise option; (e) to provide that our company's obligation to issue shares upon the exercise of a stock option is dependant upon certain factors, including the compliance of the shares with any applicable laws; (f) to provide an option holder is responsible for the payment of any withholding taxes in respect of the exercise of a stock option; (g) to set out the discretion of our board of directors in respect of various matters concerning the interpretation of the plan and the granting and exercise of stock options and, specifically, the discretion to extend the expiry date of the stock options and to determine the price per share at which a stock option may be exercised; and (h) to correct minor typographical and grammatical errors and inconsistencies in the text of the plan.
As of January 5, 2007, our board of directors adopted a stock option plan for U.S. resident directors, senior officers, employees and consultants. The material terms of the plan are: (a) the number of shares of our common stock reserved for issuance under the plan is 20 percent of the issued and outstanding shares of our common stock from time to time less the number of stock options granted under our Canadian stock option plan; (b) the plan is to be administered by our board of directors, except that the board of directors may, in its discretion, establish a committee composed of two or more members of the board or two or more other persons to administer the plan; (c) incentive stock options (stock options which qualify under Section 422 of the Internal Revenue Code of 1986 (United States) may be granted to any individual who, at the time the option is granted, is resident in the U.S. and who is an employee of our company or any related corporation.; (d) non-qualified stock options (stock options that do not qualify under Section 422 of the Internal Revenue Code of 1986) may be granted to employees and to such other persons who are not employees as the plan administrator shall select, subject to any applicable laws; (f) the plan provides that, generally, the number of shares subject to each stock option, the exercise price, the expiry time, the extent to which such stock option is exercisable and other terms and conditions relating to such stock options will be determined by the board of directors of our company or any committee to which such authority is delegated by the board from time to time; (g) the term of the stock options granted under the plan will not exceed ten years from the date of grant, provided that the term of the stock options will be reduced upon the death of an option holder or if an option holder ceases to be employed by or hold office with our company; (h) the vesting of stock options granted under the plan will be in 25 percent increments, beginning one year from the date of the grant, provided that the plan allows for the immediate vesting of all unexpired and unvested stock options in the event of a change of control of our company and for the acceleration of the vesting of stock options at the discretion of the administrator appointed under the plan; (i) the exercise price of the stock options will be determined by the plan administrator in compliance with applicable laws, including the rules of an applicable stock exchange or national market system; and (j) the plan will terminate when all of the stock options, available for grant thereunder, have been granted or when the plan is otherwise terminated by our company (provided that any stock options outstanding when the plan is terminated will remain in effect until they are exercised or expire).
Major Shareholders and Related Party Transactions
Major Shareholders
As of August 27, 2007, there were 72,561,050 shares of our common stock issued and outstanding, excluding 4,750,000 shares held in trust pursuant to an escrow agreement (see "History and Development" above in this prospectus). The following table sets out persons known to us to be the beneficial owners of more than 5 percent of the issued and outstanding shares of our common stock as of August 27, 2007:
| Shareholder | Amount Owned | Percentage of Class(1) |
| FireBird Global Master Fund LTD & FireBird Global Master Fund II LTD | 4,360,000 | 6.0% |
| Gundyco I/T/F Pinetree Resource Partnership | 4,150,000 | 5.7% |
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| Shareholder | Amount Owned | Percentage of Class(1) |
| Cushing MLP Opportunity Fund I LP | 4,000,000 | 5.5% |
| Notes: | ||
| (1) | Based on 72,561,050 shares of our common stock issued and outstanding as of August 27, 2007, excluding 4,750,000 shares issued and held in trust pursuant to an escrow agreement (see "History and Development" above in this prospectus). |
The voting rights of our major shareholders do not differ from the voting rights of shareholders who are not major shareholders.
Other than as disclosed herein, there has been no significant change in the percentage ownership of any of our major shareholders during the fiscal years ended April 30, 2007, 2006 and 2005. During the fiscal year ended April 30, 2007, we issued 70,848,550 shares of our common stock.
Our major shareholders as at April 30, 2006 were Terry Amisano, Kevin Hanson, Alan Crawford and Gregory Burnett, who held 500,000, 500,000, 250,000 and 250,000 of the issued and outstanding shares of our common stock, respectively. As of August 27, 2007, each of these respective individuals beneficially own less than one percent of the issued and outstanding shares of our common stock, respectively,and ceased to be major shareholders.
As of August 27, 2007, Pacific Corporate Trust Company, our registrar and transfer agent, reported that of the 77,311,050 issued and outstanding shares of our common stock (including 4,750,000 held in escrow), 44,556,758 shares were registered to Canadian residents (372 shareholders), 23,013,440 shares were registered to residents of the US (75 shareholders) and 9,740,852 shares were registered to residents of countries other than Canada or the US (20 shareholders).
To the best of our knowledge, we are not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person.
There are no arrangements known to us, the operation of which may at a subsequent date result in a change in the control of our company.
Related Party Transactions
Other than as disclosed herein, to the best of our knowledge, there have been no material transactions or loans from the three preceding financial years to August 27, 2007between our company and: (a) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, our company; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of our company that gives them significant influence over our company, and close members of any such individual's family; (d) key management personnel of our company, including directors and senior management of our company and close members of such individuals' families; and (e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence.
We entered into the following related party transactions during the year ended April 30, 2007. These transactions were measured by the exchange amount, which is the amount agreed upon by the transacting parties.
| 1. | During the nine months ended January 31, 2007, we incurred $87,608 (year ended April 30, 2006 - $26,797; 2005 - $23,926) in general and administrative costs to entities controlled by former directors. |
| 2. | We incurred $5,463 in consulting fees to Dr. Gail Bloomer a director of our company. |
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| 3. | Our Chief Financial Officer, George Orr, is affiliated with a company that assisted us in completing the share issue private placements and that provides us with ongoing investor relations services. For the year ended April 30, 2007 we paid $75,000 for these services. |
| 4. | At April 30, 2006, accounts payable and accrued liabilities includes $34,078 (2005 - $17,340) to a partnership controlled by two directors of the Company. |
| 5. | During the year ended April 30, 2005, former directors and officers were issued 1,250,000 shares at $0.001 per share pursuant to a private placement. |
| 6. | As described in "Compensation" above in this prospectus, 10,000,000 assignable warrants (exercisable for shares of our common stock at US$0.10 per share for a period of six months from vesting date) were granted to Endurance Energy Consulting Ltd., a private company controlled by that R. William Thornton (a director and our Chief Operating Officer), and 9,000,000 assignable warrants (exercisable for shares of our common stock at US$0.10 per share for a period of six months from vesting date) were granted to Gladrock Energy LLC, a private company that is controlled by Dr. Gail Bloomer, which vested when the Kentucky Reserves acquisition closed. |
| 7. | Pursuant a form of debt settlement and subscription agreement dated December 21, 2006, entered into with each of Karkrash Holdings Ltd., Carob Management Ltd. (a private company controlled by Gregory Burnett, a former director of our company), Brian Hanson, Roy Brown and Amisano Hanson, Chartered Accountants, we issued 600,000 shares of our common stock to the said subscribers in settlement of $165,700 of debt. |
| 8. | The acquisitions of the assets of Deerfield Kansas, Deerfield Missouri and Trinity (as described in "History and Development" above in this prospectus) are considered related party transactions, since at the respective acquisition dates, George T. Stapleton, II (a director and the President and Chief Executive Officer of our company) was also the president and unitholder of Trinity (47.37 percent of issued and outstanding units) and Deerfield Missouri (15.86 percent of the issued and outstanding units), the parent company of Deerfield Kansas. |
As a result, George T. Stapleton, II, or a private company controlled by him, received: (i) 39,650 of the shares of our common stock issued for the assets of Deerfield Kansas; (ii) US$204,300 cash from Deerfield Missouri, including a change of control fee, and is entitled to receive, pending escrow release, an additional US$47,580 and 753,350 shares of our common stock; and (iii) 45,000 class B exchange shares of our subsidiary, MegaWest Energy (USA) Corp. convertible into 4,500,000 shares of our common stock and US$94,737 cash of the consideration issued to Trinity. |
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Interests of Experts and Counsel
No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis or had, or is to receive, in connection with the offering, a substantial interest, directly or indirectly, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the registrant or any of its parents, subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer or employee.
Financial Information
Consolidated Statements and Other Financial Information
Financial Statements filed as part of this prospectus:
Consolidated Financial Statements of MegaWest Energy Corp.
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| - | |
| - |
Financial Statements of MegaWest Energy Corp. (formerly Brockton Capital Corp.)
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| - | |
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| - | Notes to the Financial Statements April 30, 2006, 2005 and 2004 |
The financial statements can be found under "Financial Statements" below in this prospectus.
Significant Changes
Other than as disclosed herein, no significant change has occurred in our financial statements since the fiscal year ended April 30, 2007.
Legal Proceedings
There are no pending legal proceedings to which we are a party or of which any of our property is the subject. There are no legal proceedings to which any director, officer or affiliate of our company or any associate of any such director, officer or affiliate of our company is a party or has a material interest adverse to us.
Dividend Distributions
Holders of shares of our capital stock are entitled to receive such dividends as may be declared from time to time by our board, in its discretion, out of funds legally available for that purpose.
We have not paid any cash dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our board of directors.
The Offer and Listing
Offer and Listing Details
This prospectus registers a total of 57,473,673 shares of our common stock and relates to the resale by certain selling shareholders of our company of up to 57,473,673 shares of our common stock in connection with the resale of:
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| - | up to 600,000 shares of our common stock issued pursuant to various debt settlement agreements in December 2006; | |
| - | up to 4,212,500 shares of our common stock underlying warrants to purchase an equal number of shares of our common stock at US$1.00 per share until January 5, 2008 issued in a private placement that was completed in January 2007; | |
| - | up to 27,448,550 shares of our common stock and 14,380,123 shares of our common stock underlying warrants to purchase an equal number of shares of our common stock at $1.30 per share until February 28, 2008, both issued in a private placement that was completed in March 2007; | |
| - | up to 5,000,000 shares of our common stock issued in connection with the acquisition of Kentucky Reserves, LLC in April 2007; | |
| - | up to 250,000 shares of our common stock issued in connection with the acquisition of the assets of Deerfield Energy Kansas Corp. in March 2007; | |
| - | up to 4,750,000 shares of our common stock issued in connection with the acquisition of Deerfield Energy LLC in April 2007, which are being held in escrow pursuant to an escrow agreement (see "History and Development" below in this prospectus); and | |
| - | up to 832,500 shares of our common stock underlying 555,000 unit rights. Of these unit rights, 180,000 entitle the holder to purchase up to 180,000 units at US$0.50 per unit (each unit consists of one share of our common stock and one-half of one common share purchase warrant exercisable at US$1.00 per share). The remaining 375,000 unit rights entitle the holder to purchase up to 375,000 units at US$1.00 per unit (each units consists of one share of our common stock and one-half of one common share purchase warrant exercisable at US$1.30 per share). |
The selling shareholders may offer to sell the shares of common stock being offered in this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices.
Our common stock is quoted on the OTC Bulletin Board under the symbol "MGWSF". On August 27, 2007, the closing bid price for one share of our common stock on the OTC Bulletin Board was US$1.95. Our common stock was listed on the Canadian Venture Exchange (now the TSX Venture Exchange) from August 27, 2001 to June 16, 2004. On March 28, 2005, our common stock was quoted on the OTC Bulletin Board under the symbol "BCKOF". Effective March 6, 2007, our trading symbol was changed to "MGWSF".
The annual high and low market prices of shares of our common stock for the five most recent full fiscal years are as follows:
Year Ended | TSX Venture Exchange | OTC Bulletin Board | ||
| High | Low | High | Low | |
| April 30, 2007 | N/A | N/A | US$2.75 | US$0.50 |
| April 30, 2006 | N/A | N/A | US$1.01 | US$0.30 |
| April 30, 2005 | N/A | N/A | No trades | No trades |
| April 30, 2004 | $0.65 | $0.25 | N/A | N/A |
| April 30, 2003 | $0.50 | $0.25 | N/A | N/A |
The high and low market prices of shares of our common stock for each full financial quarter for the two most recent full fiscal years on the OTC Bulletin Board were as follows:
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Quarter Ended | OTC Bulletin Board | |
| High | Low | |
| April 30, 2007 | US$2.75 | US$1.80 |
| January 31, 2007 | US$0.52 | US$1.90 |
| October 31, 2006 | US$0.61 | US$0.52 |
| July 31, 2006 | US$0.60 | US$0.50 |
| April 30, 2006 | US$0.80 | US$0.40 |
| January 1, 2006 | US$0.51 | US$0.40 |
| October 31, 2005 | US$0.40 | US$0.35 |
| July 31, 2005 | US$1.01 | US$0.30 |
The high and low market prices of shares of our common stock for each of the most recent six months, from February, 2007 through July, 2007, on the OTC Bulletin Board were as follows:
Month Ended | OTC Bulletin Board | |
| High | Low | |
| July 31, 2007 | US$2.75 | US$1.99 |
| June 30, 2007 | US$2.60 | US$1.90 |
| May 31, 2007 | US$2.05 | US$1.80 |
| April 30, 2007 | US$2.40 | US$1.95 |
| March 31, 2007 | US$2.75 | US$2.00 |
| February 28, 2007 | US$1.80 | US$2.20 |
Plan of Distribution
The selling shareholders may, from time to time, sell all or a portion of the shares of our common stock on any market upon which the common stock may be listed or quoted (currently, the OTC Bulletin Board in the United States) in privately negotiated transactions or otherwise. Such sales may be at fixed prices prevailing at the time of sale, at prices related to the market prices or at negotiated prices. The shares of our common stock being offered for resale by this prospectus may be sold by the selling shareholders by one or more of the following methods, without limitation:
| (i) | block trades in which the broker or dealer so engaged will attempt to sell the shares of common stock as agent but may position and resell a portion of the block as principal to facilitate the transaction; | |
| (ii) | purchases by broker or dealer as principal and resale by the broker or dealer for its account pursuant to this prospectus; | |
| (iii) | an exchange distribution in accordance with the rules of the applicable exchange; | |
| (iv) | ordinary brokerage transactions and transactions in which the broker solicits purchasers; | |
| (v) | privately negotiated transactions; | |
| (vi) | market sales (both long and short to the extent permitted under the federal securities laws); |
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| (vii) | at the market to or through market makers or into an existing market for the shares; | |
| (viii) | through transactions in options, swaps or other derivatives (whether exchange listed or otherwise); and | |
| (ix) | a combination of any of the aforementioned methods of sale. |
In the event of the transfer by any of the selling shareholders of its shares or share purchase warrants to any pledgee, donee or other transferee, we will amend this prospectus and the registration statement of which this prospectus forms a part by the filing of a post-effective amendment in order to have the pledgee, donee or other transferee in place of the selling shareholder who has transferred its shares or share purchase warrants, as may be the case.
In effecting sales, brokers and dealers engaged by the selling shareholders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from a selling shareholder or, if any of the broker-dealers act as an agent for the purchaser of such shares, from a purchaser in amounts to be negotiated which are not expected to exceed those customary in the types of transactions involved. Broker-dealers may agree with a selling shareholder to sell a specified number of the shares of common stock at a stipulated price per share. Such an agreement may also require the broker-dealer to purchase as principal any unsold shares of common stock at the price required to fulfill the broker-dealer commitment to the selling shareholder if such broker-dealer is unable to sell the shares on behalf of the selling shareholder. Broker-dealers who acquire shares of common stock as principal may thereafter resell the shares of common stock from time to time in transactions which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above. Such sales by a broker-dealer could be at prices and on terms then prevailing at the time of sale, at prices related to the then-current market price or in negotiated transactions. In connection with such resales, the broker-dealer may pay to or receive from the purchasers of the shares commissions as described above.
The selling shareholders and any broker-dealers or agents that participate with the selling shareholders in the sale of the shares of common stock may be deemed to be "underwriters" within the meaning of the Securities Act of 1933 in connection with these sales. In that event, any commissions received by the broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933.
From time to time, any of the selling shareholders may pledge shares of common stock pursuant to the margin provisions of customer agreements with brokers. Upon a default by a selling shareholder, their broker may offer and sell the pledged shares of common stock from time to time. Upon a sale of the shares of common stock, the selling shareholders intend to comply with the prospectus delivery requirements under the Securities Act of 1933 by delivering a prospectus to each purchaser in the transaction. We intend to file any amendments or other necessary documents in compliance with the Securities Act of 1933 which may be required in the event any of the selling shareholders defaults under any customer agreement with brokers.
To the extent required under the Securities Act of 1933, a post effective amendment to this prospectus and the registration statement of which this prospectus forms a part will be filed disclosing the name of any broker-dealers, the number of shares of common stock involved, the price at which the common stock is to be sold, the commissions paid or discounts or concessions allowed to such broker-dealers, where applicable, that such broker-dealers did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus and other facts material to the transaction.
We and the selling shareholders will be subject to applicable provisions of the Securities Exchange Act of 1934 and the rules and regulations under it, including, without limitation, Rule 10b-5 and, insofar as a selling shareholder is a distribution participant and we, under certain circumstances, may be a distribution participant, under Regulation M. All of the foregoing may affect the marketability of the common stock.
Any shares of common stock covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act of 1933, as amended, may be sold under Rule 144 rather than pursuant to this prospectus.
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Markets
Our common stock is quoted on the OTC Bulletin Board under the symbol "MGWSF".
Selling Shareholders
The selling shareholders may offer and sell, from time to time, any or all of the common stock issued and the common stock issuable to them upon exercise of the share purchase warrants. Because the selling shareholders may offer all or only some portion of the shares of common stock to be registered, no precise estimate can be given as to the amount or percentage of these shares of common stock that will be held by the selling shareholders upon termination of the offering.
The following table sets forth certain information regarding the beneficial ownership of shares of common stock by the selling shareholders as of August 27, 2007, and the number of shares of common stock covered by this prospectus. The number of shares in the table represents an estimate of the number of shares of common stock to be offered by the selling shareholder. Other than as disclosed in Note 6 below, none of the selling shareholders is a broker-dealer, or an affiliate of a broker-dealer to our knowledge.
| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| 0750412 BC Ltd. (4)(7) | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| 0753829 BC Ltd. (4) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| 1004387 Alberta Ltd. (4) | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| 1091096 Ontario Inc. (4) | 450,000 | 25,000 | - | - | - | 475,000 | 25,000 | 450,000 | * |
| 2034511 Ontario Inc. (4) | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| 2034512 Ontario Ltd. (4) | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| 558853 BC Ltd. (4)(7) | 200,000 | - | 100,000 | - | - | 300,000 | 300,000 | - | - |
| 578159 BC Ltd. (4) | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| 624659 Alberta Ltd. (4) | 230,000 | 90,000 | 25,000 | - | - | 345,000 | 165,000 | 180,000 | * |
| 6287 Holdings Inc. (4) | 75,000 | - | 37,500 | - | - | 112,500 | 112,500 | - | - |
| 633430 Alberta Ltd. (4) | 110,000 | 5,000 | 50,000 | - | - | 165,000 | 155,000 | 10,000 | * |
| 9167-1685 Quebec Inc. (4) | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Achilles Setsikas | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Adam Vary | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Aeron T Evans (6) | 40,000 | 15,000 | 5,000 | - | - | 60,000 | 30,000 | 30,000 | * |
| Agostino Velenosi | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Al O’Hare | 30,000 | 10,000 | 5,000 | - | - | 45,000 | 25,000 | 20,000 | * |
| Allen Koffman | 40,000 | - | 20,000 | - | - | 60,000 | 60,000 | - | - |
| Anatoly Langer | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Andrew Thornton | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Anita Datt (6) | 5,000 | 2,500 | - | - | - | 7,500 | 2,500 | 5,000 | * |
| Anne Fairfull | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Anne V. Pruner | 25,000 | 12,500 | - | - | - | 37,500 | 12,500 | 25,000 | * |
| Annie McMath (5) | - | - | 560 | 100,000 | - | 100,560 | 560 | 100,000 | * |
| Antonietta Gatto | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Arnold and Tricia Hughes | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Bank Sal. Oppenheim Jr.& Cie | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Barrie Einarson | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Barry Parsons | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Bateman and Company Ltd. (4) | 200,000 | - | 100,000 | - | - | 300,000 | 300,000 | - | - |
| Bernard Oegema | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
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| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| Bill Brandis (7) | 175,000 | 12,500 | 50,000 | - | - | 237,500 | 162,500 | 75,000 | * |
| Bill Griffis | 35,000 | - | 17,500 | - | - | 52,500 | 52,500 | - | - |
| Blackmont Capital (4)(6) | - | - | 35,000 | - | - | 35,000 | 35,000 | - | - |
| Blackmont Capital ITF Doug | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Casey | |||||||||
| Blackmont Capital ITF Goma | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Foundation (4) | |||||||||
| Blackmont Capital ITF | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Halfmoon Foundation (4) | |||||||||
| Blackmont Capital ITF Maria | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Del Carmen Martin | |||||||||
| Blackmont Capital ITF Paul | 30,000 | - | 15,000 | - | - | 45,000 | 45,000 | - | - |
| Hickey | |||||||||
| Blackmont Capital ITF Tango | 45,000 | - | 22,500 | - | - | 67,500 | 67,500 | - | - |
| Corp Inc. (John Derby) (4) | |||||||||
| Blackmont Capital ITF Todd | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Sharun | |||||||||
| Blackmont Capital ITF Victor | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Dario | |||||||||
| Blackmont ITF Aly Mawji | 75,000 | - | 37,500 | - | - | 112,500 | 112,500 | - | - |
| Blayne Johnson | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Bolder Investments (4) | - | - | 45,500 | - | - | 45,500 | 45,500 | - | - |
| Bolder Opportunites II LP (4) | 600,000 | - | 50,000 | - | - | 650,000 | 150,000 | 500,000 | * |
| Brent Rolufs (7) | 50,000 | 10,000 | 15,000 | - | - | 75,000 | 55,000 | 20,000 | * |
| Brian C. McIntosh | 40,000 | 20,000 | - | - | - | 60,000 | 20,000 | 40,000 | * |
| Brian Chambers | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Brian J. Evans | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Brock Helm | 20,000 | 5,000 | 5,000 | - | - | 30,000 | 20,000 | 10,000 | * |
| Bruce Durnie (7) | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Bruce Hudson | 40,000 | - | 20,000 | - | - | 60,000 | 60,000 | - | - |
| Byron Cook | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Camille Hodge | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Canaccord Capital (4)(6) | - | - | 5,950 | - | - | 5,950 | 5,950 | - | - |
| CapitalOne Asset Management | 250,000 | - | 125,000 | - | - | 375,000 | 375,000 | - | - |
| Limited (4) | |||||||||
| Carley J. Cole | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Carole MacLeod | 40,000 | 20,000 | - | - | - | 60,000 | 20,000 | 40,000 | * |
| Carrie Louise Clark | 40,000 | 20,000 | - | - | - | 60,000 | 20,000 | 40,000 | * |
| Caufield Trust (4) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Chang Wang Woo | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Channing Investments Corp. | 250,000 | 100,000 | 25,000 | - | - | 375,000 | 175,000 | 200,000 | * |
| (4)(6) | |||||||||
| Charles B Simmons Jr. | 125,000 | - | 62,500 | - | - | 187,500 | 187,500 | - | - |
| Chris Gray | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Chris Vorberg | 190,000 | 95,000 | - | - | - | 285,000 | 95,000 | 190,000 | * |
| Christian Yoingco | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Christine Sealock (9) | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Cindy G. White | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Cindy Mallett | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Clinton W. Rebec (7) | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| CMS Capital (4) | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Cnudde Davy | 150,000 | 10,000 | 65,000 | - | - | 225,000 | 205,000 | 20,000 | * |
| Cnudde Martin | 200,000 | - | 100,000 | - | - | 300,000 | 300,000 | - | - |
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| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| Colleen Mulligan | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Cory Pichota | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Craig A. Mills | 50,000 | 12,500 | 37,350 | - | - | 99,850 | 74,850 | 25,000 | * |
| Craig Lytle | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Cullen Kuzio | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Cushing MLP Opportunity Fund I LP (4) | 4,000,000 | - | 2,000,000 | - | - | 6,000,000 | 6,000,000 | - | - |
| Dale Johnson | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Dale Loewen | 90,000 | 15,000 | 30,000 | - | - | 135,000 | 105,000 | 30,000 | * |
| Dan & Sandra Cuerrier | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Danny Dion (7) | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Darren Dzikowski | 60,000 | 30,000 | 2,450 | - | - | 92,450 | 32,450 | 60,000 | * |
| Dave Goodman (5) | 100,000 | - | 9,800 | 50,000 | - | 159,800 | 9,800 | 150,000 | * |
| Dave Van Dyke | 20,000 | 10,000 | 9,450 | - | - | 39,450 | 19,450 | 20,000 | * |
| David Akselson | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| David Batchelor (7) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| David Berg | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| David G. Mills | 12,500 | - | 6,250 | - | - | 18,750 | 18,750 | - | - |
| David Sparks | 260,000 | - | 130,000 | - | - | 390,000 | 390,000 | - | - |
| Dean Claridge | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Dean Duke(6) | 500,000 | 50,000 | - | - | - | 550,000 | 50,000 | 500,000 | * |
| Dean Mockney (7) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Deborah Schaab | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Denis Cook Enterprises Inc | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Denis Wilson | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Deryl Williams | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Diane Michaels | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Diane Winstanley (7) | 40,000 | 20,000 | - | - | - | 60,000 | 20,000 | 40,000 | * |
| Dianna L Bull | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| DKR Saturn Event Driver Holdings Fund Ltd. (4) | 450,000 | - | 225,000 | - | - | 675,000 | 675,000 | - | - |
| Donald Rickard | 40,000 | 10,000 | 10,000 | - | - | 60,000 | 40,000 | 20,000 | * |
| Donna G. Mills | 50,000 | 12,500 | 12,500 | - | - | 75,000 | 50,000 | 25,000 | * |
| Dossche Bart | 190,000 | 20,000 | 75,000 | - | - | 285,000 | 245,000 | 40,000 | * |
| Dossche Bart | - | - | - | - | - | - | - | - | - |
| Doug Casey | 90,000 | 45,000 | - | - | - | 135,000 | 45,000 | 90,000 | * |
| Doug Ramsey | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Doug Simpson | 55,000 | - | 27,500 | - | - | 82,500 | 82,500 | - | - |
| Douglas Kurek (7) | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Douglas Munkley | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Douglas R. Anthony | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Dr. Savvas Nicolaou Inc. (4) | 20,000 | 10,000 | - | - | 30,000 | 30,000 | - | - | |
| Dr. Valerie Kuehne and John Kuehne | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Eat-Me Foods Ltd. (4) (Ross Bailey) | 70,000 | 35,000 | - | - | - | 105,000 | 35,000 | 70,000 | * |
| Edward Lyle Thornton | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Eric Negraeff (6) | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Ethel Holmberg | 30,000 | 10,000 | 5,000 | - | - | 45,000 | 25,000 | 20,000 | * |
| Eymann Investment Corp. (4) | 20,000 | 10,000 | - | - | 30,000 | 30,000 | - | - |
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| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| F.T.S. Worldwide Corporation (4) | 944,000 | 72,000 | - | - | - | 1,016,000 | 72,000 | 944,000 | * |
| Fairview Capital (1978) Ltd. (4) | 40,000 | 20,000 | - | - | - | 60,000 | 20,000 | 40,000 | * |
| Faten Ardakani | 25,000 | 12,500 | - | - | - | 37,500 | 12,500 | 25,000 | * |
| Fatima da Rosa | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Fenyo Sandro | 35,000 | - | 17,500 | - | - | 52,500 | 52,500 | - | - |
| Firebird Global Master Fund II, Ltd. (4) | 3,180,000 | 90,000 | 1,000,000 | - | - | 4,270,000 | 3,090,000 | 1,180,000 | 1.22% |
| Firebird Global Master Fund, Ltd. (4) | 1,180,000 | 90,000 | - | - | - | 1,270,000 | 90,000 | 1,180,000 | 1.22% |
| Franco Tormane | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Frank Quinby | 75,000 | 25,000 | 12,500 | - | - | 112,500 | 62,500 | 50,000 | * |
| Frank Quinby | - | - | - | - | - | - | - | - | - |
| Fraser G. Loney | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Fraser Hindson | 10,000 | 5,000 | - | - | 15,000 | 5,000 | 10,000 | * | |
| Fundarica Investments (4)(6) | 200,000 | 50,000 | 50,000 | - | - | 300,000 | 200,000 | 100,000 | * |
| FX Inc. (4) | 160,000 | - | 80,000 | - | - | 240,000 | 240,000 | - | - |
| Gabriel Eyers | - | - | 10,500 | - | - | 10,500 | 10,500 | - | - |
| Garry Fizzell | 33,000 | 9,000 | 7,500 | - | - | 49,500 | 31,500 | 18,000 | * |
| Gary Danylchuk | 87,000 | 20,000 | 23,500 | - | - | 130,500 | 90,500 | 40,000 | * |
| Gary Elman | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Gary Olsen | 250,000 | - | 125,000 | - | - | 375,000 | 375,000 | - | - |
| GBS Financial (4)(6) | - | - | 82,600 | - | - | 82,600 | 82,600 | - | - |
| George A Brown | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| George Hatch | 100,000 | 50,000 | - | - | - | 150,000 | 50,000 | 100,000 | * |
| George Kokonis | 60,000 | 17,500 | 12,500 | - | - | 90,000 | 55,000 | 35,000 | * |
| Gerald Dasbach | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Gerard P. Gloisten (6) | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Gerry Feldman | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Gianni Sgambaro | 42,000 | 21,000 | - | - | - | 63,000 | 21,000 | 42,000 | * |
| Gill J. Vincent | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Gillian Brandon (7) | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Ginette Maguire | 30,000 | 15,000 | - | - | - | 45,000 | 15,000 | 30,000 | * |
| GKM Holdings Ltd. (4) | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Global Securities (4)(7) | - | - | 700 | - | - | 700 | 700 | - | - |
| GMP Securities L.P. ITF Incorporated International Capital (4) | 45,000 | - | 22,500 | - | - | 67,500 | 67,500 | - | - |
| Gordon MacGregor Elliot | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Graham Dallimore | 20,000 | 10,000 | - | - | 30,000 | 10,000 | 20,000 | * | |
| Granite Associates | - | - | 15,293 | - | - | 15,293 | 15,293 | - | - |
| Greg Burnett | 50,000 | 25,000 | - | - | 75,000 | 25,000 | 50,000 | * | |
| Gregory J. Ledding | 75,000 | - | 37,500 | - | - | 112,500 | 112,500 | - | - |
| Gundyco ITF Aaron Shier | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Gundyco ITF Pinetree | 4,150,000 | 325,000 | 1,125,000 | - | - | 5,600,000 | 3,700,000 | 1.97% | |
| Resource Partnership (4) | 1,900,000 | ||||||||
| Harvey W. Cole | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Haywood Securities Inc ITF Radsport Holdings Inc. (4)(6) | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Haywood Securities Inc. ITF Charles Lyall | 250,000 | - | 125,000 | - | - | 375,000 | - | - | - |
- 49 -
| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| Haywood Securities ITF Steve Bradner | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Haywood Securities ITF Paloduro Investments Inc. | 250,000 | - | 125,000 | - | - | 375,000 | 375,000 | - | - |
| Haywood Securities ITF Robert Lim A/C BMI 1689-C | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Haywood Securities ITF William Gordica A/C BMI- 1687-C | 50,000 | - | 25,000 | - | - | 112,500 | 75,000 | - | - |
| Hazel Reid | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| HBK Resources Ltd. c/o Gerry Hampshire (5) (9) | 75,000 | 37,500 | - | - | - | 112,500 | 37,500 | 75,000 | * |
| Hector Demers | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Hector L. Demers | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Hilde Clovechok | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Hoo-ja Lee | - | 34,300 | - | - | 34,300 | 34,300 | - | - | |
| Howard P. Pruner | 25,000 | 12,500 | - | - | 37,500 | 12,500 | 25,000 | * | |
| HSBC | - | - | 21,350 | - | - | 21,350 | 21,350 | - | - |
| HSBC Securities ITF George Charles Durham A/C 307533F | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| HSBC Securities ITF Gordon MacGregor | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| HSBC Securities ITF Gordon MacGregor Elliott 321H17F | 12,500 | 6,250 | - | - | - | 18,750 | 6,250 | 12,500 | * |
| HSBC Securities ITF Grant Scott and Lesley Jane Scott | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| HSBC Securities ITF Ian Downs A/C 30W834B | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| HSBC Securities ITF James Treliving Holdings Ltd. A/C 089368B (James Trelving) (4) | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| HSBC Securities ITF Timothy William Turyk A/C 30W758F | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Hudson Family Trust (Bruce G. Hudson, Trustee) (4) | 40,000 | - | 20,000 | - | - | 60,000 | 60,000 | - | - |
| Hugo Liberti | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Ian Downs | 37,500 | 18,750 | - | - | - | 56,250 | 18,750 | 37,500 | * |
| Ilja Troitschanski | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| In-sook Leigh | 120,000 | 25,000 | 35,000 | - | - | 180,000 | 130,000 | 50,000 | * |
| Ironshore Trust(4)(6) | 180,000 | 90,000 | - | - | - | 270,000 | 90,000 | 180,000 | * |
| ISGOM Investment & Marketing Company Limited (4) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Jack and Roberta Cross (7) | 40,000 | - | 20,000 | - | - | 60,000 | 60,000 | - | - |
| Jack Bodenstein | - | - | 14,000 | - | - | 14,000 | 14,000 | - | - |
| James Baglot | - | - | 9,053 | 700,000 | - | 709,053 | 9,053 | 700,000 | * |
| James G. Taylor(6) | 100,000 | 50,000 | - | - | - | 150,000 | 50,000 | 100,000 | * |
| James L. and Ann C. Donnelly | 80,000 | 40,000 | - | - | - | 120,000 | 40,000 | 80,000 | * |
| James Lockett Family Trust (4) | 30,000 | - | 15,000 | - | - | 45,000 | 45,000 | - | - |
| James P. Geiskopf | 198,000 | 49,000 | 50,000 | - | - | 297,000 | 199,000 | 98,000 | * |
| James P. Slipp | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| James S. Unterschultz | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| James Wagner (7) | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Jeffery Berliner | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
- 50 -
| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| Jerry Chrzaszcz (7) | 15,000 | 7,500 | - | - | - | 22,500 | 7,500 | 15,000 | * |
| Jimmy S.H. Lee | 400,000 | 200,000 | - | - | - | 600,000 | 200,000 | 400,000 | * |
| Jin-Ho Chang | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Joe Schaab | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| John B. Ross | 64,000 | 32,000 | - | - | - | 96,000 | 32,000 | 64,000 | * |
| John G. Flynn | 5,000 | 2,500 | - | - | 7,500 | 7,500 | - | - | |
| John Herby | 220,000 | 60,000 | 50,000 | - | - | 330,000 | 210,000 | 120,000 | * |
| John Krolick | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| John McGoldrick (7) | 40,000 | - | 20,000 | - | - | 60,000 | 60,000 | - | - |
| John Philip Mappin | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Jonathan Lim Keng Hock | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Joseph Gustafson | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Joseph Paul McDonald | 40,000 | - | 20,000 | - | - | 60,000 | 60,000 | - | - |
| Juan -Pablo Santini | 20,000 | - | 10,000 | - | 30,000 | 30,000 | - | - | |
| Julia Della Maestra | 150,000 | - | 75,000 | - | - | 225,000 | 225,000 | - | - |
| Julie Catling (6) | 110,000 | 5,000 | - | - | - | 115,000 | 5,000 | 110,000 | * |
| Kalayra B. Angelyys | 15,000 | 7,500 | - | - | - | 22,500 | 7,500 | 15,000 | * |
| Karen Gable (7) | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Karkrash Holdings Ltd. (4) | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Kelly Shibata | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Ken Danylchuck (7) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Ken Greenlaw | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Kenneth & Stephanie Alton TTEE Alton Family Trust DTD (4) | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Kenneth Jabs | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Kenneth John Greenlaw | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Kenneth Santa | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Kim Gulevich | 10,000 | 5,000 | - | - | 15,000 | 5,000 | 10,000 | * | |
| KJV Investment Family Limited Partnership (4) | 60,000 | - | 30,000 | - | - | 90,000 | 90,000 | - | - |
| Kosta Tsoutsis (6) | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Kristin Sehn | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Kurt Gainer | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Kurt R. Gainer | 60,000 | 30,000 | - | - | - | 90,000 | 30,000 | 60,000 | * |
| Larry Krawchuk | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Larry Sostad | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Larry Thompson | 1,200,000 | 100,000 | 500,000 | - | - | 1,800,000 | 1,600,000 | 200,000 | * |
| Laurie-Anne Thornton (9) | 100,000 | 50,000 | - | - | 150,000 | 50,000 | 100,000 | * | |
| Lawrence Chernoff | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Lawrence I. Hamm | 35,000 | 5,000 | 12,500 | - | - | 52,500 | 42,500 | 10,000 | * |
| Lee Berstein | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Les Tanzer | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Leslie Friesen, David Friesen (7) | 45,000 | 22,500 | - | - | - | 67,500 | 22,500 | 45,000 | * |
| Little Wing LP | 423,000 | - | 211,500 | - | - | 634,500 | 634,500 | - | - |
| Lloyd Michaels | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Laurie-Anne Jensen (7) | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Manfid SA | 100,000 | 50,000 | - | - | - | 150,000 | 50,000 | 100,000 | * |
| Marcel Brichon (6) | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Marilyn Schiffman | - | 30,450 | - | - | 30,450 | 30,450 | - | - |
- 51 -
| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| Mark and Birgitta Redcliffe (6) | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Mark Spencer | - | - | 73,850 | - | - | 73,850 | 73,850 | - | - |
| Marrandino Holdings Inc. (4) | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Marty Henderson | 40,000 | - | 20,000 | - | - | 60,000 | 60,000 | - | - |
| Mary K. Hill | 15,000 | 7,500 | - | - | - | 22,500 | 7,500 | 15,000 | * |
| Maureen Gustafson | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | * |
| MB Pics Capital Corp. (4) | 1,070,000 | 10,000 | - | - | - | 1,080,000 | 10,000 | 1,070,000 | 1.11% |
| Medallion Capital Corp. (4) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Merlin Lloyd Peterson | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Michael Geleta | 30,000 | 15,000 | - | - | - | 45,000 | 15,000 | 30,000 | * |
| Michael Laidlaw | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Michael McBride | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Michael McMath | 4,000 | 2,000 | - | - | - | 6,000 | 2,000 | 4,000 | * |
| Michael Nininger | 135,000 | - | 67,500 | - | - | 202,500 | 202,500 | - | - |
| Mike McCaffrey | 30,000 | 5,000 | 10,000 | - | - | 45,000 | 35,000 | 10,000 | * |
| Minaz Devji | 5,000 | 2,500 | - | - | - | 7,500 | 2,500 | 5,000 | * |
| Miranda Bradley | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Monarch Capital Fund Ltd. (4) | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Monica McGrandle | 35,000 | 17,500 | - | - | - | 52,500 | 17,500 | 35,000 | * |
| Monika Campbell | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Morton Elman | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Murray Vernon | 220,000 | 35,000 | 75,000 | - | - | 330,000 | 260,000 | 70,000 | * |
| Myron Braun | 31,000 | 3,000 | 12,500 | - | - | 46,500 | 40,500 | 6,000 | * |
| Nassrin Kabiri | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Nathan Isbister | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| NBCN Clearing INC ITF | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Brenda Howard A/C 10E120F | |||||||||
| NBCN Clearing Inc ITF John | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Frome A/C 11-B84E-F (6) | |||||||||
| NBCN Clearing Inc ITF Kevin Gould A/C 10E025F (6) | 30,000 | - | 15,000 | - | - | 45,000 | 45,000 | - | - |
| Nesbit Burns ITF K.R. Lockett A/C 214-40085-27 | 26,000 | - | 13,000 | - | - | 39,000 | 39,000 | - | - |
| Nicholas Reeves | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Overdirve Enterprises Ltd. (4) | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Pacific West Ventures Inc. (4) | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Patrick Whibley(6) | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Paul Yezzi | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Pauline Wong | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Penson Financial ITF Alex Rothwell | 135,000 | - | 67,500 | - | - | 202,500 | 202,500 | - | - |
| Penson Financial ITF Harry Pokrandt | 230,000 | - | 115,000 | - | - | 345,000 | 345,000 | - | - |
| Penson Financial ITFTimothy Sorensen | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Penson Financial Services Canada ITF Steven Mantel | 500,000 | - | 250,000 | - | - | 750,000 | 750,000 | - | - |
| Penson Financial Services of Canada Inc. ITF Barry Reed | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Penson Financial Services of Canada Inc. ITF Marcel Brichon | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Pentor Capital Corp. (4) | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
- 52 -
| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| Peter Cozzi | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Peter J.R. Holt | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Peter M. Halloran (7) | 250,000 | - | 125,000 | - | - | 375,000 | 375,000 | - | - |
| Philip Brenner | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Ping Ping Toth and Zoltan Toth | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Ping Ping Toth | 30,000 | 15,000 | - | - | - | 45,000 | 15,000 | 30,000 | * |
| PowerOne Capital Markets Limited (5)(4) | 3,150,000 | 325,000 | 625,000 | 832,500 | - | 4,932,500 | 3,032,500 | 1,900,000 | 1.97% |
| Quarry Capital Corporation (4) | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Radcliffe Foundation (4) | 500,000 | - | 250,000 | - | - | 750,000 | 750,000 | - | - |
| Ramona Vorberg | 220,000 | 110,000 | - | - | - | 330,000 | 110,000 | 220,000 | * |
| Randall Pow | 60,000 | 30,000 | - | - | - | 90,000 | 30,000 | 60,000 | * |
| Randy Chan | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Randy Johnson | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Randy L. Oswald | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Rayna Lynnette Elsdon | 4,000 | 2,000 | - | - | - | 6,000 | 2,000 | 4,000 | * |
| RBC Dexia Investor Services ITF Vertex One Asset Mgmt Inc. 116506006 (4) | 1,480,000 | - | 740,000 | - | - | 2,220,000 | 2,220,000 | - | - |
| RBC Dominion Securities Inc ITF Craig Bessie | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Renita Narayan (6) | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Richard A. Brook | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Richard J. Sorensen | 40,000 | 20,000 | - | - | - | 60,000 | 20,000 | 40,000 | * |
| Rick Zeibots | 290,050 | - | 145,025 | - | - | 435,075 | 435,075 | - | - |
| Robert Steinborn | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Robert Douglas Gerbrandt | 70,000 | 10,000 | 25,000 | - | - | 105,000 | 85,000 | 20,000 | * |
| Robert Holtzclaw & Darlene M Holtzclaw | 320,000 | - | 160,000 | - | - | 480,000 | 480,000 | - | - |
| Robert Rushing | 25,000 | - | 12,500 | - | - | 37,500 | 37,500 | - | - |
| Robert Steinborn | 100,000 | 50,000 | - | - | - | 150,000 | 50,000 | 100,000 | * |
| Roberto Sgambaro | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Roland M. Labuan | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Rolf Tevely (7) | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Ron & Val McDougall | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Ron and Carole MacLeod | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Ron Child | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Ron James Rubuliak | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Ron Johnston | 12,500 | - | 6,250 | - | - | 18,750 | 18,750 | - | - |
| Ron Perry | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Ron Voogel (7) | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Ronald Lee Eisenberg | 200,000 | - | 100,000 | - | - | 300,000 | 300,000 | - | - |
| Rosenbloom Medicine Professional Corporation (4) | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Roy Holdings, LLC (4) | 80,000 | - | 40,000 | - | - | 120,000 | 120,000 | - | - |
| RSJN Holdings Ltd. (4) | 150,000 | 50,000 | 25,000 | - | - | 225,000 | 125,000 | 100,000 | * |
| Rupprecht Family Trust (4) | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Ryan Larsh | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Sam Magid | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Sandra E. Fopma | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Sandra Rupprecht | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
- 53 -
| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| Sanjay Chand Maharaj | 40,000 | 12,500 | 7,500 | - | - | 60,000 | 35,000 | 25,000 | * |
| Scott Calderwood | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Scott & Heather Kyllo | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Scott L. McNitt | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Scott Wilson | 90,000 | - | 45,000 | - | - | 135,000 | 135,000 | - | - |
| Shane Koh | 30,000 | 15,000 | - | - | - | 45,000 | 15,000 | 30,000 | * |
| Shane Meyers (6) | 150,000 | 50,000 | 25,000 | - | - | 225,000 | 125,000 | 100,000 | * |
| Shaun Kelbert | 40,000 | 10,000 | 10,000 | - | - | 60,000 | 40,000 | 20,000 | * |
| Shelley M. Sorensen | 20,000 | - | 10,000 | - | - | 30,000 | 30,000 | - | - |
| Shelly Shaw | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Shirley Lee | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Stacy Broadoway | 11,000 | 5,500 | - | - | 16,500 | 5,500 | 11,000 | * | |
| Stefaniya Danylchuk | 17,500 | - | 8,750 | - | - | 26,250 | 26,250 | - | - |
| Stephen Krystofiak | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Steven Palmer | 500,000 | 250,000 | - | - | - | 750,000 | 250,000 | 500,000 | * |
| Sturgeon Holdings Corp. | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Sukhbir Mann | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Sunita Prasad | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | - |
| Susan Hamilton | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | - |
| Suzanne Liptak | 30,000 | 10,000 | 5,000 | - | - | 45,000 | 25,000 | 20,000 | * |
| Swank MLP Convergence Fund (4) | 1,000,000 | 500,000 | - | - | 1,500,000 | 1,500,000 | - | * | |
| Sweetwater Capital Corp. (4) | - | - | 18,192 | - | - | 18,192 | 18,192 | - | * |
| Tamara Ross | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Taras Pysyk | 20,000 | 10,000 | - | - | - | 30,000 | 10,000 | 20,000 | * |
| Tarbo Resources Ltd. | 100,000 | - | - | - | - | 100,000 | - | 100,000 | * |
| TD Waterhouse ITF Tom | 90,000 | - | 45,000 | - | - | 135,000 | 135,000 | - | - |
| James A/C 571344F (6) | |||||||||
| Teak-ky Min | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Ted & Kim Williams TTEES Williams Family Trust (4) | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Terence Schorn | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Terrance Sigmund | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Terrence G. Dingwell | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Terrence J Hankerson (6) | 30,000 | - | 15,000 | - | - | 45,000 | 45,000 | - | - |
| Terry Amisano | 50,000 | 25,000 | - | - | - | 75,000 | 25,000 | 50,000 | * |
| Terry T. Jarton | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Thomas D. Willis II | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | - |
| Thomas Della Maestra | 250,000 | - | 125,000 | - | - | 375,000 | - | - | - |
| Thomas Martin Christopher | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Tiger Capital Corp. (4) | 100,000 | 50,000 | - | - | - | 150,000 | 50,000 | 100,000 | * |
| Tom Matthes (7) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Tom Rupprecht | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Tony Baldassarre (7) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Tradewinds Fund Ltd. (4) | 77,000 | - | 38,500 | - | - | 115,500 | 115,500 | - | - |
| Treshnish Investment, Inc. (4) | 944,000 | 72,000 | - | - | - | 1,016,000 | 72,000 | 944,000 | * |
| Trevor Perepolkin (6) | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | - |
| Trout Exploration & Mining Ltd. (4)(7) | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | - |
| Tyler Romanchuk | 10,000 | 5,000 | - | - | - | 15,000 | 5,000 | 10,000 | * |
| Vanderstraeten Luc | 15,000 | - | 7,500 | - | - | 22,500 | 22,500 | - | * |
- 54 -
| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| Verdmont Capital SA (4) | - | - | 49,000 | - | - | 49,000 | 49,000 | - | * |
| Veron F. Ross | 180,000 | - | 90,000 | - | - | 270,000 | 270,000 | - | * |
| Vicki Koh | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | * |
| Victor Dario | - | - | 35,000 | - | - | 35,000 | 35,000 | - | * |
| Vital Beliveau | 10,000 | - | 5,000 | - | - | 15,000 | 15,000 | - | * |
| Vivien Roe-Perry | 30,000 | - | 15,000 | - | - | 45,000 | 45,000 | - | * |
| Waltraud Wilson | 5,000 | - | 2,500 | - | - | 7,500 | 7,500 | - | * |
| Warren Manis | 121,000 | - | 188,500 | - | - | 309,500 | 309,500 | - | * |
| Wei-Tek Tsai / Enyan Deng | 240,000 | - | 120,000 | - | - | 360,000 | 360,000 | - | * |
| Will Harris | 50,000 | - | 25,000 | - | - | 75,000 | 75,000 | - | * |
| William Lee Buse | 12,000 | - | 6,000 | - | - | 18,000 | 18,000 | - | * |
| Yeomans 1991 Living trust Dated 08-06-96 | 100,000 | - | 50,000 | - | - | 150,000 | 150,000 | - | * |
| Yong-Jong Kim | 30,000 | - | 15,000 | - | - | 45,000 | 45,000 | - | * |
| Bass Energy Inc | 250,000 | - | - | - | - | 250,000 | 250,000 | - | * |
| Nils P. Johnson, Hr. Trustee of the Kristen A. Johnson IRV Trust #1 U/A/D 12/16/05 | 250,000 | - | - | - | - | 250,000 | 250,000 | - | * |
| Kathleen G. Johnson & Nils P. Johnson, Jr. Trustees of the Kathleen G. Johnson Family Trust | 2,000,000 | - | - | - | - | 2,000,000 | 2,000,000 | - | * |
| John B. Byrnes | 250,000 | - | - | - | - | 250,000 | 250,000 | - | * |
| Nils P. Johnson, Hr. Trustee of the Thomas Craig Johnson IRV Trust U/A/D 1/1/06 | 250,000 | - | - | - | - | 250,000 | 250,000 | - | * |
| Nils P. Johnson, Jr. Trustee of the Erin Kathleen Johnson IRV Trust U/A/D | 250,000 | - | - | - | - | 250,000 | 250,000 | - | * |
| Nils P. Johnson, Jr. Trustee Nils Peter Johnson IRV Trust#1 U/A/D 12/16/05 | 250,000 | - | - | - | - | 250,000 | 250,000 | - | * |
| Eric Johnson | 500,000 | - | - | - | - | 500,000 | 500,000 | - | * |
| Nils P. Johnson, Jr. Trustee of the Molly K. Johnson IRV Trust #1 U/A/D 12/16/05 | 250,000 | - | - | - | - | 250,000 | 250,000 | - | * |
| Robert E. Dickey, Trustee of the Robert E. Dickey | 250,000 | - | - | - | - | 250,000 | 250,000 | - | * |
| James S. Fleischer and Sarah P. Fleishcer, Co-Trustees of the James S. Fleisher Family Trust No.1 | 500,000 | - | - | - | - | 500,000 | 500,000 | - | * |
| Karkrash Holdings Ltd. | 93,333 | - | - | - | - | 93,333 | 93,333 | - | * |
| Beverly Amisano | 93,333 | - | - | - | - | 93,333 | 93,333 | - | * |
| Scharfe Holdings | 200,000 | - | - | - | - | 200,000 | 200,000 | - | * |
| Calneva Financial | 100,000 | - | - | - | - | 100,000 | 100,000 | - | * |
| Carob Management | 93,334 | - | - | - | - | 93,334 | 93,334 | - | * |
| Brian Hanson | 10,000 | - | - | - | - | 10,000 | 10,000 | - | * |
| Roy Brown | 10,000 | - | - | - | - | 10,000 | 10,000 | - | * |
| Ake Almgren | 20,968 | - | - | - | 398,387 | 419,355 | 419,355 | - | * |
| DK True Energy Development Ltd. (4)(5) | 57,527 | - | - | 4,437,500 | 1,093,011 | 5,588,538 | 1,150,538 | 4,437,500 | 4.59% |
| Larry Hancock | 2,150 | - | - | - | 40,860 | 43,010 | 43,010 | - | * |
| James Haymour | 6,183 | - | - | - | 117,473 | 123,656 | 123,656 | - | * |
| Health Solutions Holdings Inc. (4) | 8,602 | - | - | - | 163,441 | 172,043 | 172,043 | - | * |
- 55 -
| Name | Outstanding Shares of Common StockOwned by the Selling Shareholders | Shares of Common Stock Underlying Warrants from January 2007(1) | Shares of Common Stock Underlying Warrants from February 2007(2) | Shares of Common Stock Underlying Other Warrants, Options and other Exchange Shares(5) | Shares of Common Stock Held in Escrow (pursuant to Deerfield Energy LLC Acquisition)(9) | Total Shares (aggregate of Columns A to D Beneficially Owned Prior to Offering Hereunder)(3) | Shares of Common Stock Offered Hereunder | Shares of Common Stock Owned by Selling Shareholder after Offering Hereunder(8) | Percent- age of Class |
| John Ladd | 12,366 | - | - | - | 234,946 | 247,312 | 247,312 | - | * |
| LPL Investments Inc. | 4,839 | - | - | - | 91,935 | 96,774 | 96,774 | - | * |
| Jonathan Lim Hock | 12,500 | - | - | - | 237,500 | 250,000 | 250,000 | - | * |
| MK Tech Solutions (4) | 2,151 | - | - | - | 40,860 | 43,011 | 43,011 | - | * |
| Anthony Pirraglia | 1,344 | - | - | - | 25,538 | 26,882 | 26,882 | - | * |
| Raymond T. Pirraglia (5) | 53,225 | - | - | 450,000 | 1,011,291 | 1,514,516 | 1,064,516 | 450,000 | * |
| Robert A. Pirraglia (5) | 9,409 | - | - | 112,500 | 178,763 | 300,672 | 188,172 | 112,500 | * |
| Robert A. Pirraglia as custodian for Caitlin Pirraglia under the Nyutma | 1,344 | - | - | - | 25,538 | 26,882 | 26,882 | - | * |
| Robert A. Pirraglia as custodian for Nicole Pirraglia under the Nyutma | 1,344 | - | - | - | 25,538 | 26,882 | 26,882 | - | * |
| Red Rock Interests Ltd. (4) | 10,215 | - | - | - | 194,086 | 204,301 | 204,301 | - | * |
| Janet Young | 6,183 | - | - | - | 117,473 | 123,656 | 123,656 | - | * |
| Stapleton Investments Inc. (4)(9) | 37,500 | - | - | 4,500,000 | 712,500 | 5,250,000 | 750,000 | 4,500,000 | 4.67% |
| George T. Stapleton, II (9)(5) | 1,735,483 | - | - | 1,000,000 | 40,860 | 2,776,343 | 43,010 | 2,733,333 | 2.83% |
| TOTAL: | 52,256,883 | 4,212,500 | 14,380,123 | 12,182,500 | 4,750,000 | 87,782,006 | 57,473,673 | 30,308,333 | - |
Notes:
(1) Includes the shares of our common stock issuable upon the exercise of common share purchase warrants issued in respect of a private placement of 8,425,000 units which closed on January 5, 2007. The units were sold at a purchase price of US$0.50 per unit. Each unit consists of one share of our common stock and one-half of one common share purchase warrant (each whole warrant entitles the holder to purchase an additional share of our common stock on or before 5:00 p.m. (Vancouver time) on January 5, 2008, at a price of US$1.00 per share. There are 4,212,500 warrants being registered.
(2) Includes the shares of our common stock issuable upon the exercise of common share purchase warrants issued in respect of a private placement of 27,448,550 units which closed on February 28, 2007. The units were sold at a purchase price of US$1.00 per unit. Each unit consists of one share of our common stock and one-half of one common share purchase warrant (each whole warrant entitles the holder to purchase an additional share of our common stock on or before 5:00 p.m. (Vancouver time) on February 28, 2008, at a price of US$1.30 per share. There are 14,380,123 warrants being registered, including 655,848 advisor finders warrants issued in respect both private placements.
(3) The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes such additional number of shares of common stock as may be issued or issuable upon exercise of the warrants by reason of any stock spilt, stock dividend or similar transaction involving the common stock, in accordance with Rule 416 under the Securitas Act of 1933, the beneficial ownership of the common stock by the seeking stockholder set forth in the table is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934.
(4) Voting and dispositive power for these entities is controlled by the following individuals:
| Company Name | Controlled By: |
| Yeomans 1991 Living Trust Dated 08-06-96 | Barbara Yeomans |
| 0750412 B.C. Ltd. | John S. Brock |
| 0753829 BC Ltd. | Angela Nault |
| 1004387 Alberta Ltd. | Bob Baker |
| 1091096 Ontario Inc. | Don Padgett |
| 2034511 Ontario Inc. | Eugene Kandjian |
| 2034512 Ontario Ltd. | Howard Hanick |
| 558853 BC Ltd. | Dennis Burdett |
| 578159 BC Ltd. | Lakhbir Singh |
| 624659 Alberta Ltd. | Michael Geleta |
| 6287 Holdings Inc. | Brian Roberts |
| 633430 Alberta Ltd. | Gordon Funnell |
| 9167-1685 Quebec Inc. | France Couture |
| Bank Sal. Oppenheim Jr.& Cie | U. Fricker |
- 56 -
| Company Name | Controlled By: |
| (Switzerland) Ltd. | |
| Bateman and Company Ltd. | Ryan Bateman |
| Ironshore Trust | Ryan Bateman |
| Blackmont Capital | Renee Claveau |
| Bolder Investments | Channing Buckland |
| Bolder Investments II LP. | Channing Buckland |
| Capital One Asset Management Ltd. | Pat DiCapo |
| Caufield Trust | Robert Gayton |
| Channing Investments Corp. | Channing Buckland |
| CMS Capital | Menachern Lipsker |
| Cushing MLP Opportunity Fund I LP | Jerry V. Swank |
| Swank MLP Convergence Fund | Jerry V. Swank |
| Denis Cook Enterprises Inc. | Denis Cooke |
| DKR Saturn Event Driver Holdings Fund Ltd. | Barbara Burger, Director |
| Eat-Me Foods Ltd. | Ross Bailey |
| F.T.S. Worldwide Corporation | Michael Marechal |
| Fairview Capital (1978) Ltd. | Michael Jensen, President |
| Firebird Global Master Fund, Ltd. | James Passin |
| Firebird Global Master Fund II, Ltd. | James Passin |
| Fundarica Investments | Shane Meyers |
| FX Inc. | Warren Manis |
| GBS Financial | Gerald Gloistein |
| GKM Holdings Ltd. | Graham Harris |
| Incorporated International Capital | David Franklin |
| Granite Associates | Tom James |
| Pinetree Resource Partnership | Larry Goldberg |
| RSJN Holdings Ltd. | Harvey Harriott |
| Radsport Holdings Inc. | Thomas Reilling |
| HBK Resources Ltd. | Gerry Hampshire |
| Hudson Family Trust | Brian G. Hudson |
| ISGOM Investment and Marketing Company | David Pinkus |
| James Lockett Family Trust | James Lockett |
| Karkrash Holdings Ltd. | Terry Amisano |
| Kenneth & Stephanie Alton TTEE Alton Family Trust DTD | Stephanie and Kenneth Alton |
| KJV Investment Family Limited Partnership | Wei-Tek Tsai / Enyan Deng |
| Little Wing LP | Parker L. Quillen |
| Tradewinds Fund Ltd. | Parker L. Quillen |
| MB Pics Capital Corp. | Mike Marrandino |
| Pacific West Ventures Inc. | Mike Marrandino |
| Medallion Capital Corp. | Stafford Kelley |
| Monarch Capital Fund Ltd. | Thomas Van Poucke |
| Overdrive Enterprisers Ltd. | Patrick Trask |
| Paloduro Investments Inc. | Robert Cross |
| PowerOne Capital Markets Ltd. | Pat DiCapo |
| Quarry Capital Corporation | Doug Forster |
| Radcliffe Foundation | John Proust |
| Vertex One Asset Management Inc. | John Thiessen |
| Rosenbloom Medicine Professional Corporation | Andrea Rosenbloom |
| Roy Holdings, LLC | Craig D. Roy |
| Rupprecht Family Trust | Sandra Rupprecht |
| Sturgeon Holdings Corp. | Vaughn Sturgeon |
| Tango Corp. Inc. | John Derby |
| Tarbo Resources Ltd. | Terence Schorn |
| Ted & Kim Williams TTEES Williams Family Trust | Theodore and Kim Williams |
| Tiger Capital Corp. | Ian Goodall |
| Treshnish Investment Inc. | B. Korolnik |
| Trout Exploration & Mining Ltd. | Paul Davey |
| Health Solutions Holdings Inc | Raymond Pirraglia |
| MK Tech Solutions Inc. | Myron Coleman |
- 57 -
| Company Name | Controlled By: |
| Red Rock Interests Ltd. | Steven Erikson |
| True Energy Development | David Kahn |
| LPL Investments Inc | Larry Hancock |
| Stapleton Investments Inc. | George T. Stapleton, II |
(5) Other shares, options and warrants include:
| - | PowerOne Capital Markets Limited was issued 180,000 unit rights whereby they can purchase 180,000 units at US$0.50 per unit (each unit consists of one share of our common stock and one-half of one common share purchase warrant exercisable at US$1.00 per share). There are 270,000 fully diluted shares of our common stock offered in respect of these warrants. PowerOne Capital Markets Limited was also Issued 375,000 Brokers warrants whereby they can purchase 375,000 units at US$1.00 per unit (each units consists of one share of our common stock and one-half of one common share purchase warrant exercisable at US$1.30 per share). There are 562,500 fully diluted shares of our common stock offered in respect of these warrants. | |
| - | Annie McMath holds 100,000 common share purchase warrants exercisable at US$0.50 per share until January 5, 2009. | |
| - | Dave Goodman holds 50,000 common share purchase warrants exercisable at US$0.50 per share until January 5, 2009. | |
| - | Gerry Hampshire is the control person for HBK Resources Ltd. and he is an officer of our company. Mr. Hampshire holds 600,000 common share stock options granted effective January 8, 2007 at an exercise price of US$0.50 per share exercisable for a period for four years, 150,000 of which vest six months from grant and the remainder in three equal tranches of 150,000 options each vesting on the first, second and third anniversary of the grant date. Mr. Hampshire also holds 1,200,000 incentive warrants (exercisable for common shares at US$0.10 per share for a period of six months after vesting) vest if the Endurance incentive warrant holders collectively bring a project of merit (i.e. a project with a potential economic value of at least US$10,000,000) to the directors of our company by December 20, 2007. | |
| - | James Baglot holds 700,000 common share purchase warrants exercisable at US$0.50 until January 5, 2009. | |
| - | DK True Energy Development Ltd., Raymond T. Pirraglia and Robert A. Pirraglia beneficially own 44,375, 4,500 and 1,125 class B exchange shares, respectively, of our subsidiary, MegaWest Energy (USA) Corp. that are exercisable into 4,437,500, 450,000 and 112,500 shares, respectively, of our common stock. | |
| - | George T. Stapleton, II, a director and senior officer of our company, holds 1,000,000 common share stock options granted effective January 5, 2007 at an exercise price of US$0.50 per share exercisable for a period of four years that vested on grant date. Through Stapleton Investments Inc., Mr. Stapleton and family members beneficially own 45,000 class B exchange shares of our subsidiary, MegaWest Energy (USA) Corp. that are exercisable into 4,500,000 shares of our common stock. In addition, family members of Mr. Stapleton own 500,000 shares of our common stock. |
(6) The following names are registered broker dealers or are affiliates of registered broker-dealers. All other shareholders (except as provided in Note 7 below) have represented that they are not registered broker-dealers or an affiliate of a registered broker-dealer.
| Name of Control Person | Broker Status/Affiliation |
| Renée Claveau | Canaccord Capital - Registered Broker |
| Gerard Gloisten | GBS Financial - Registered Broker |
| Thomas Relling | Haywood Securities - Registered Broker |
| John Frome | National Bank Financial – Registered Broker |
| Kevin Gould | National Bank Financial – Registered Representative |
| Shane Meyers of Fundarica Investments | Bolder Investments - Registered Broker |
| Shane Meyers | Bolder Investments - Registered Broker |
| Craig Bessie | RBC Dominion Securities - Investment Advisor |
| Channing Buckland | Channing Investments – Registered Broker |
| Renita Narayan | Bolder Investments - Registered Broker |
| Trevor Perepolkin | Canaccord Capital - Investment Advisor |
| Eric Negraeff | PI Financial - Investment Advisor |
| Terrence J. Hankerson | UBS Financial Services, Inc. – Affiliate |
| Patrick Whibley | PI Financial - Investment Advisor |
| Aeron T. Evans | Canaccord Capital - Registered Broker |
| Marcel Brichon | Northern Securities – Registered Investment Advisor |
| Ryan Bateman of Bateman and | Registered Broker in the Cayman Islands |
- 58 -
| Name of Control Person | Broker Status/Affiliation |
| Company | |
| Ryan Bateman of Ironshore Trust | Registered Broker in the Cayman Islands |
| Tom James | Granite Associates, Ltd. – Limited Market Dealer |
| James G. Taylor | Blackmont Capital - Investment Advisor |
| Mark Redcliffe | Blackmont Capital – Registered Investment Advisor |
| Anita Datt | Blackmont Capital – Affiliate |
| Kosta Tsoutsis | Investment Advisor |
| Dean Duke | Blackmont Capital - Registered Broker |
| Julie Catling | Blackmont Capital - Registered Broker |
(7) Based on reasonable inquiry, we have never received disclosure on these selling stockholders
| Ken Danylchuck | Tony Baldassarre |
| David Batchelor | 558853 BC Ltd. |
| Anita Datt | Brent Rolufs |
| Rolf Tevely | 578159 BC Ltd. |
| Bruce Durnie | Pauline Wong |
| Jack and Roberta Cross | Dean Mockney |
| Douglas Kurek | John McGoldrick |
| Laurie-Anne Jensen | Gillian Brandon |
| James Wagner | Global Securities |
| NBCN Clearing INC ITF Brenda Howard A/C 10E120F | Karen Gable |
| Trout Exploration & Mining Ltd. | Jin-Ho Chang |
| Bill Brandis | Danny Dion |
| Ron Voogel | 0750412 B.C. Ltd. |
| Clinton W. Rebec | Leslie Friesen and David Friesen |
(8) Represents 4,750,000 shares of our common stock issued and held in trust pursuant to an escrow agreement entered into in connection with the acquisition of Deerfield Energy LLC.
(9) The following are affiliates of our company:
| - | Gerry Hampshire is the control person for HBK Resources Ltd. and he is an officer of our company. Mr. Hampshire holds 600,000 common share stock options granted effective January 8, 2007 at an exercise price of US$0.50 per share exercisable for a period for four years, 150,000 of which vest six months from grant and the remainder in three equal tranches of 150,000 options each vesting on the first, second and third anniversary of the grant date. | |
| - | George T. Stapleton, II, a director and senior office of our company, holds 1,000,000 common share stock options granted effective January 5, 2007 at an exercise price of US$0.50 per share exercisable for a period of four years that vested on grant date. See "Share Ownership" in this prospectus for details on additional shares of our common stock and cash received from various acquisitions. | |
| - | Laurie-Anne Thornton is R. William Thornton's wife. | |
| - | Christine Sealock is David Sealock’s wife. |
Dilution
The common stock to be sold by the selling shareholders is common stock that are currently issued and outstanding. Accordingly, there will be no dilution to our existing shareholders.
Expenses of the Issue
All expenses of the this prospectus and the registration statement of which this prospectus forms a part, including, but not limited to, legal, accounting, printing and mailing fees are and will be borne by us. Any commissions, discounts or other fees payable to brokers or dealers in connection with any sale of the shares of common stock will be borne by the selling shareholders, the purchasers participating in such transaction, or both.
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Additional Information
Share Capital
Our authorized capital consists of an unlimited number of shares of common stock, without par value, and 100,000,000 shares of preferred stock, without par value.
Clark Wilson LLP, of 800-885 W Georgia Street, Vancouver, British Columbia, Canada, our independent legal counsel, has provided an opinion on the validity of the shares of our common stock that are the subject of this prospectus.
The following table identifies the number of issued and outstanding shares in capital as at August 27, 2007 and the number of shares of our common stock that could be issued if all of our dilutive securities were converted into shares.
| August 27, 2007 | |
| Shares of common stock outstanding | 72,561,050 |
| Shares of common stock in escrow | 4,750,000(1) |
| Exchange shares | 9,500,000(2) |
| Stock options | 10,159,000(3) |
| Private placement share purchase warrants | 18,627,623(4) |
| Incentive warrants | 19,500,000(5) |
| Consulting warrants | 6,000,000(6) |
| Unit rights | 832,500(7) |
| Convertible promissory notes | 6,800,000(8) |
| Total | 148,730,173 |
| Notes: | ||
| (1) | Represents 4,750,000 shares of our common stock issued and held in trust pursuant to an escrow agreement (see "History and Development" above in this prospectus) entered into in connection with the acquisition of Deerfield Missouri. | |
| (2) | Represents 95,000 class B shares of our subsidiary, MegaWest Energy (USA) Corp., as part of the consideration given to acquire Trinity. Each class B exchange share is convertible into 100 shares of our common stock with up to 9,500,000 shares of our common stock to be issued. The holders of these MegaWest Energy (USA) Corp. shares have the right to exchange, or can receive a cash payment of US$950,000 (US$10.00 per exchange share) until July 31, 2008, after which we can implement a forced exchange of the shares. | |
| (3) | Represents stock options to purchase shares of our common stock at prices from US$0.10 to US$2.25 per share, with expiry dates from March 15, 2008 through to March 15, 2012 and with various vesting terms. | |
| (4) | Represents whole common share purchase warrants issued in connection with our private placement offerings. Each whole common share purchase warrant is exercisable into one share of our common stock at prices from US$1.00 to US$1.30 per share, with expiry dates from January 5, 2008 to March 1, 2008. | |
| (5) | Represents warrants granted to three entities (including, Endurance Energy Consulting Ltd., private company controlled by R. William Thornton, a director and the Chief Operating Officer of our company and Gladrock Energy LLC, a private company controlled by Dr. Gail Bloomer, a director of our company) that entitle such persons to purchase shares of our common stock at a price of US$0.10 per share for a period of six months after vesting if the holder thereof brings a project of merit (i.e. a project with a potential economic value in the amount of at least US$1.00 multiplied by the total number of warrants issued to the holder) to the directors of our company by December 21, 2007. Gladrock Energy LLC has been credited with identifying the Kentucky Reserves acquisition and the warrants issued to Gladrock Energy LLC have vested. Endurance Energy Consulting Ltd. has assigned 8,250,000 of its warrants. | |
| (6) | Represents warrants granted to various investor relations and other contractors. The consulting warrants are exercisable into one share of our common stock at an exercise price of US$0.50 per share and expire on January 5, 2009. | |
| (7) | Represents rights to buy an additional 180,000 units under the same terms as the January US$0.50 private placement (each unit includes one share of our common stock and one half-common share purchase warrant exercisable at US$1.00 per share) and rights to buy a further 375,000 units under the same terms as the March US$1.00 private placement (each unit includes one share of our common stock and one half-common share purchase warrant exercisable at US$1.30 per share). These rights, including the underlying common share purchase warrants, expire between January 5, 2008 and March 1, 2008. |
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| (8) | Represents shares of our common stock that potentially could be issued from convertible promissory notes in the aggregate amount of US$1,700,000 with an interest rate of six percent per annum, which together maybe converted into shares of our common stock at US$0.25 per share until June 20, 2008. |
Memorandum and Articles of Association
We are incorporated under the laws of the Province of British Columbia, Canada and have been assigned incorporation number BC0600967.
Our articles do not contain a description of our objects and purposes.
Our articles do not restrict a director's power to vote on a proposal, arrangement or contract in which the director is materially interested, vote compensation to themselves or any other members of their body in the absence of an independent quorum or exercise borrowing powers. Our articles do not restrict the directors' power, in the absence of an independent quorum, to vote compensation to themselves or any members of their body. Our articles do not provide for borrowing powers exercisable by directors. Our articles do not set out a mandatory retirement age for our directors and our directors are not required to own securities of our company in order to serve as directors.
Our authorized capital consists of an unlimited number of shares of common stock, without par value, and 100,000,000 shares of common stock, without par value. Our preference stock may be issued in one or more series and our directors may fix the number of shares which is to comprise each series and the designation, rights, privileges, restrictions and conditions attaching to each series.
Holders of our common stock are entitled to vote at all meetings of shareholders, except meetings at which only holders of a specified class of shares are entitled to vote, receive any dividend declared by our company's board of directors and, subject to the rights, privileges, restrictions and conditions attaching to any other class of shares, receive the remaining property of our company upon dissolution.
At each annual general meeting of our company, all of our directors retire and the shareholders elect a new board of directors. Each director holds office until our next annual general meeting, or until his office is earlier vacated in accordance with our articles or with the provisions of the Business Corporations Act. A director appointed or elected to fill a vacancy on our board also holds office until our next annual general meeting.
Our articles provide that our annual meetings of shareholders must be held at such time in each calendar year and not more than 15 months after the last annual general meeting and at such place as our board of directors may from time to time determine.
Under our articles, and subject to the special rights and restrictions attached to the shares of any class or series of shares, the quorum for the transaction of business at a meeting of our shareholders is two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5 percent of the issued shares entitled to be voted at the meeting.
Our articles state that our directors, the president, the secretary, and any lawyer or auditor of our company are entitled to attend any meeting of our shareholders.
Except as provided in the Investment Canada Act, there are no limitations specific to the rights of non-Canadians to hold or vote our common stock under the laws of Canada or British Columbia, or in our charter documents.
There are no provisions in our articles that would have the effect of delaying, deferring or preventing a change in control of our company, and that would operate only with respect to a merger, acquisition or corporate restructuring involving our company.
Our articles do not contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed. Securities legislation in Canada, however, requires that we disclose in our annual general meeting proxy statement, holders who beneficially own more than 10 percent of our issued and outstanding shares,
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and United States Federal securities laws require the disclosure in our annual report on Form 20-F of holders who own more than five percent of our issued and outstanding shares.
Material Contracts
The following summary of certain material provisions of the agreements referenced below is not complete and these provisions are qualified in their entirety by reference to the full text of such agreements.
In July 2007, we entered into an executive employment agreement with George T. Stapleton, II, whereby we have agreed to employ Mr. Stapleton as our Chief Executive Officer effective January 1, 2007. Pursuant to the agreement, Mr. Stapleton will receive an annual salary of US$240,000. As part of the agreement we paid Mr. Stapleton a signing bonus in the amount of US$300,000, issued to Mr. Stapleton 1,000,000 fully vested common share stock options with an exercise price of US$0.50 per share exercisable until January 5, 2011 and issued to Mr. Stapleton 500,000 fully vested common share stock options with an exercise price of US$0.10 per share which were exercised on March 23, 2007.
In July 2007, we entered into an executive employment agreement with George Orr, whereby we have agreed to employ Mr. Orr as our Chief Financial Officer effective January 2, 2007. Pursuant to the agreement, Mr. Orr will receive an annual salary of $138,000. As part of the agreement we issued to Mr. Orr 1,000,000 fully vested common share stock options with an exercise price of US$0.50 per share exercisable until January 5, 2011.
In April 2007,we entered into a membership unit purchase agreement whereby we purchased (though our subsidiary, MegaWest Energy (USA) Corp). all of the issued and outstanding membership units of Trinity Sands Energy LLC in consideration for US$200,000 in cash and 95,000 exchange shares of MegaWest Energy (USA) Corp. and our release of Trinity of its obligations to us in respect of a promissory note (previously assumed by us) in the amount of US$1,200,000 granted by Trinity to Agosto Corporation Limited. Each exchange share may be exchanged for US$10 in cash or 100 shares of our common stock during the period January 1, 2008 to July 31, 2008.
In April 2007, we entered into a membership unit purchase agreement whereby we purchased (though MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Kentucky Reserves, LLC in consideration for US$3,000,000 in cash and 5,000,000 shares of our common stock.
In April 2007, we entered into a membership unit purchase agreement whereby we purchased (though MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Deerfield Energy LLC in consideration for US$800,000 in cash and 4,750,000 shares of our common stock. In connection with the purchase agreement, we entered into an escrow agreement whereby part of the consideration of the Deerfield Energy LLC acquisition was placed into escrow, to be released under certain conditions.
In March 2007, we entered into an asset purchase agreement whereby we purchased (though MegaWest Energy (USA) Corp.) all of the assets of Deerfield Energy Kansas Corp. in consideration for 250,000 shares of our common stock and our release of Deerfield Energy LLC (the parent of Deerfield Energy Kansas Corp.) of its obligations to us in respect of a promissory note (previously assumed by us) in the amount of US$500,000 granted by Deerfield Energy LLC to Agosto Corporation Limited in the amount of US$500,000.
In February 2007, we entered into an agreement with a consultant, Mercury Capital Inc., to provide advisory services to our company whereby we have agreed to issue to the consultant up to 750,000 shares of our common stock. At August 27, 2007, 500,000 of the shares were issued and the remainder are issuable in 125,000 share tranches on August 15, 2007 (which to date have not been issued) and November 15, 2007. In respect of a private placement that was completed on March 1, 2007, we entered into a form of private placement subscription agreement with various accredited investors whereby we issued 27,448,550 units, at a price of US$1.00 per unit, for aggregate proceeds of $32,115,870, each of which units consists of one share of our common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase an additional share of our common stock at an exercise price of US$1.30 per share for a period of one year.
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In respect of a private placement that was completed on March 1, 2007, we entered into a form of private placement subscription agreement with various accredited investors whereby we issued 27,448,550 units, at a price of US$1.00 per unit, for aggregate proceeds of $32,115,870, each of which units consists of one share of our common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase an additional share of our common stock at an exercise price of US$1.30 per share for a period of one year.
In respect of a private placement that was completed on January 5, 2007, we entered into a form of private placement subscription agreement with various accredited investors whereby we issued 8,425,000 units, at a price of US$0.50 per unit, for aggregate proceeds of $4,992,234, each of which units consists of one share of our common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase an additional share of our common stock at an exercise price of US$1.00 per share for a period of one year.
In respect of a private placement that was completed on January 5, 2007, we entered into a form of private placement subscription agreement with various accredited investors whereby we issued 8,425,000 units, at a price of US$0.50 per unit, for aggregate proceeds of $4,992,234, each of which units consists of one share of our common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase an additional share of our common stock at an exercise price of US$1.00 per share for a period of one year.
Pursuant to a form of debt settlement and subscription agreement dated December 21, 2006, entered into with each of Karkrash Holdings Ltd., Carob Management Ltd., Brian Hanson, Roy Brown and Amisano Hanson, Chartered Accountants, we issued 600,000 shares of our common stock to the said subscribers in settlement of $165,700 of debt.
Pursuant to a form of warrant issuance agreement dated December 20, 2006, we granted 19,500,000 warrants to three persons that entitle such persons to purchase shares of our common stock at a price of US$0.10 per share upon the occurrence of certain conditions. The conditions include that the warrants are exercisable if the holder thereof brings a project of merit (i.e. a project with a potential economic value in the amount of at least US$1.00 multiplied by the total number of warrants issued to the holder) to the directors of our company by December 21, 2007.
Pursuant to a letter of intent dated December 20, 2006, entered into with Trinity Sands Energy LLC and its unitholders in respect of our purchase of all of the issued and membership units of Trinity Sands Energy LLC, we entered into an assumption and loan conversion agreement with a private company, Agosto Corporation Limited dated December 20, 2006, as amended, whereby we assumed the repayment of a US$1,200,000 loan made by Agosto to Trinity Sands Energy LLC. In exchange for the assumption of Agosto loan, we issued a convertible promissory note to Agosto in the amount of US$1,200,000 with simple interest accruing at a rate of six percent per annum.
Pursuant to a letter of intent dated December 20, 2006, entered into with Deerfield Energy LLC in respect of our acquisition of all of the assets of Deerfield Energy LLC, we entered into an assumption and loan conversion agreement with Agosto Corporation Limited dated December 20, 2006, as amended, whereby we assumed the repayment of a US$500,000 loan made by Agosto to Deerfield Energy LLC. In exchange for the assumption of Agosto loan, we issued a convertible promissory note to Agosto in the amount of US$500,000 with simple interest accruing at a rate of six percent per annum.
In respect of a private placement that was completed December 18, 2006, we entered into a form of private placement subscription agreement with various accredited investors whereby we issued 23,500,000 shares of our common stock at US$0.10 per share for aggregate proceeds of $2,707,168.
Effective December 15, 2006, we entered into an executive employment agreement with R. William Thornton, whereby we have agreed to employ Mr. Thornton as our Chief Operating Officer as January 1, 2007. Pursuant to the agreement, Mr. Thornton will receive an annual salary of $250,000. Upon execution of the agreement we paid Mr. Thornton a signing bonus in the amount of US$250,000, issued to Mr. Thornton 1,000,000 common share stock options with an exercise price of US$0.50 per share exercisable until January 5, 2011 and issued to Mr. Thornton 500,000 common shares stock options with an exercise price of US$0.10 per share exercisable until December 21, 2011.
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Exchange Controls
There are no government laws, decrees or regulations in Canada which restrict the export or import of capital or which affect the remittance of dividends, interest or other payments to non-resident holders of our common stock. Any remittances of dividends to United States residents and to other non-residents are, however, subject to withholding tax (see "Taxation" below in this prospectus).
Taxation
Certain Canadian Federal Income Tax Consequences
We consider that the following general summary fairly describes the principal Canadian federal income tax consequences applicable to a holder of our common stock who is a resident of the United States, who is not, will not be and will not be deemed to be a resident of Canada for purposes of the Income Tax Act (Canada) and any applicable tax treaty and who does not use or hold, and is not deemed to use or hold, his shares of our common stock in connection with carrying on a business in Canada (a "non-resident holder").
This summary is based upon the current provisions of the Income Tax Act (Canada), the regulations thereunder (the "Regulations"), the current publicly announced administrative and assessing policies of the Canada Customs and Revenue Agency and the Treaty. This summary also takes into account the amendments to the Income Tax Act (Canada) and the Regulations publicly announced by the Minister of Finance (Canada) prior to the date hereof (the "Tax Proposals") and assumes that all such Tax Proposals will be enacted in their present form. However, no assurances can be given that the Tax Proposals will be enacted in the form proposed, or at all. This summary is not exhaustive of all possible Canadian federal income tax consequences applicable to a holder of our common stock and, except for the foregoing, this summary does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ from the Canadian federal income tax consequences described herein.
This summary is of a general nature only and is not intended to be, and should not be construed to be, legal, business or tax advice to any particular holder or prospective holder of our common stock, and no opinion or representation with respect to the tax consequences to any holder or prospective holder of our common stock is made. Accordingly, holders and prospective holders of our common stock should consult their own tax advisors with respect to the income tax consequences of purchasing, owning and disposing of our common stock in their particular circumstances.
Dividends
We have not declared any dividends on shares of our common stock for the last five years and do not anticipate that we will do so in the foreseeable future. The present policy of our company is to retain future earnings for use in our operations and the expansion of our business.
Notwithstanding the aforementioned, we are unaware of any dividend restrictions; have no specific procedure for the setting of the date of dividend entitlement; but might expect to set a record date for share ownership to determine entitlement; have no specific procedures for non-resident holders to claim dividends, but might expect to mail their dividends in the same manner as resident holders. We have not nominated any financial institutions to be the potential paying agents for dividends in the United States.
Capital Gains
A non-resident holder is not subject to tax under the Income Tax Act (Canada) in respect of a capital gain realized upon the disposition of a share of our common stock unless such share represents "taxable Canadian property", as defined in the Income Tax Act (Canada), to the holder thereof. Shares of our common stock will generally be considered taxable Canadian property to a non-resident holder if:
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| - | the non-resident holder; | |
| - | persons with whom the non-resident holder did not deal at arm's length; or | |
| - | the non-resident holder and persons with whom such non-resident holder did not deal at arm's length, |
owned, or had an interest in an option in respect of, not less than 25 percent of the issued shares of any class of our capital shares at any time during the 60 month period immediately preceding the disposition of such shares. In the case of a non-resident holder to whom shares of our company represent taxable Canadian property and who is resident in the United States, no Canadian taxes will generally be payable on a capital gain realized on such shares by reason of the Treaty unless the value of such shares is derived principally from real property situated in Canada.
Certain United States Federal Income Tax Consequences
The following is a general discussion of certain possible United States Federal foreign income tax matters under current law, generally applicable to a U.S. Holder (as defined below) of our common stock who holds such shares as capital assets. This discussion does not address all aspects of United States Federal income tax matters and does not address consequences peculiar to persons subject to special provisions of Federal income tax law, such as those described below as excluded from the definition of a U.S. Holder. In addition, this discussion does not cover any state, local or foreign tax consequences. See "Certain Canadian Federal Income Tax Consequences" above.
The following discussion is based upon the Internal Revenue Code of 1986, as amended, Treasury Regulations, published Internal Revenue Service (IRS) rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. In addition, this discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time. No assurance can be given that the IRS will agree with such statements and conclusions, or will not take, or a court will not adopt, a position contrary to any position taken herein.
The following discussion is for general information only and is not intended to be, nor should it be construed to be, legal, business or tax advice to any holder or prospective holder of our common stock, and no opinion or representation with respect to the United States Federal income tax consequences to any such holder or prospective holder is made. Accordingly, holders and prospective holders of shares of our common stock should consult their own tax advisors with respect to Federal, state, local, and foreign tax consequences of purchasing, owning and disposing of our common stock.
U.S. Holders
As used herein, a "U.S. Holder" includes a holder of less than 10 percent of the outstanding shares of our common stock who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, any entity which is taxable as a corporation for U.S. tax purposes and any other person or entity whose ownership of our common stock is effectively connected with the conduct of a trade or business in the United States. A U.S. Holder does not include persons subject to special provisions of Federal income tax law, such as tax-exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign corporations whose ownership of shares of our common stock is not effectively connected with the conduct of a trade or business in the United States and shareholders who acquired their shares through the exercise of employee stock options or otherwise as compensation.
Distributions
The gross amount of a distribution paid to a U.S. Holder will generally be taxable as dividend income to the U.S. Holder for U.S. federal income tax purpose to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions which are taxable dividends and which meet certain requirements will be "unqualified dividend income" and taxed to U.S. Holders at a maximum U.S. federal
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rate of 15 percent. Distributions in excess of our current and accumulated earnings and profits will be treated first as a tax-free return of capital to the extent the U.S. Holder's tax basis in the shares of our common stock and, to the extent in excess of such tax basis, will be treated as a gain from a sale or exchange of such shares.
Capital Gains
In general, upon a sale, exchange or other disposition of shares of our common stock, a U.S. Holder will generally recognize a capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other distribution and the U.S. Holder's adjusted tax basis in such shares. Such gain or loss will be U.S. source gain or loss and will be treated as a long-term capital gain or loss if the U.S. Holder's holding period of the shares exceeds one year. If the U.S. Holder is an individual, any capital gain will generally be subject to U.S. federal income tax at preferential rates if specified minimum holding periods are met. The deductibility of capital losses is subject to significant limitations.
Foreign Tax Credit
A U.S. Holder who pays (or has had withheld from distributions) Canadian income tax with respect to the ownership of shares of our common stock may be entitled, at the option of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States Federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and generally applies to all foreign income taxes paid by (or withheld from) the U.S. Holder during that year. There are significant and complex limitations which apply to the tax credit, among which is an ownership period requirement and the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder's United States income tax liability that the U.S. Holder's foreign source income bears to his or its worldwide taxable income. In determining the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. There are further limitations on the foreign tax credit for certain types of income such as "passive income", "high withholding tax interest", "financial services income", "shipping income", and certain other classifications of income.The availability of the foreign tax credit and the application of these complex limitations on the tax credit are fact specific and holders and prospective holders of shares of our common stock should consult their own tax advisors regarding their individual circumstances.
Dividends and Paying Agents
There is no dividend restriction or any special procedure for non-resident holders to claim dividends. However, we have not declared dividends to our shareholders since our inception.
Statement by Experts
The financial statements of our company included in this prospectus have been audited by our current auditors KPMG LLP, whose business address is Suite 2700, Bow Valley Square II, 205 - 5th Avenue SW, Calgary, Alberta, T2P 4B9, Canada, and our prior auditors, Morgan & Company, Chartered Accountants, whose business address is Suite 1488, 700 West Georgia Street, Vancouver, British Columbia,V7Y 1A1, Canada, as stated in their reports appearing in this prospectus and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
Documents on Display
Documents and agreements concerning our company referred to in this prospectus may be viewed by appointment during normal business hours at our registered and records office at Suite 800 – 885 West Georgia Street, Vancouver, British Columbia, Canada, V6C 3H1.
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Subsidiary Information
As of the date of this prospectus, we have the following direct and indirectly owned subsidiaries incorporated in the United States:
Subsidiary | Acquisition Date | Ownership Percentage |
| MegaWest Energy (USA) Corp. | -(1) | 99%(2) |
| MegaWest Energy Texas Corp. (formerly Trinity Sands Energy LLC) | April 25, 2007 | 100% |
| MegaWest Energy Kentucky Corp. (formerly Kentucky Reserves, LLC) | April 2, 2007 | 100% |
| MegaWest Energy Missouri Corp. (formerly Deerfield Energy LLC) | April 5, 2007 | 100% |
| MegaWest Energy Kansas Corp. (formerly Deerfield Energy Kansas Corp.) | April 5, 2007 | 100% |
| Notes: | ||
| (1) | Incorporated on January 9, 2007. | |
| (2) | The remaining one percent ownership is held by the former unitholders of Trinity Sands Energy LLC through the exchange shares discussed in "History and Development" above in this prospectus. |
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
All of our company’s debt is fixed as to interest rates and we have sufficient working capital to meet and or extinguish our debt obligations.
Foreign Currency Exchange Rate Risk
Our company is exposed to foreign currency fluctuations as its has cash and cash equivalents, accounts payable and convertible notes denominated in U.S. dollars at April 30, 2007 as follows:
| US $ | CDN $ | |
| Cash and cash equivalents | $26,081,690 | $341,096 |
| Accounts payable | $563,756 | $692,622 |
| Convertible notes | $1,736,329 | - |
Financing Risk
As our projects are in the exploration stage and we do not have profitable oil and gas operations, existing working capital will be used to fund operations and our capital program. The ultimate development of our oil and gas projects, if proven commercial, will require additional funding. Additional capital will be required in the form of equity, debt and or joint venture farmouts. In addition to cash on hand, we have 18,627,623 common share purchase warrants outstanding that could generate up to $24.9 million (US$23.7 million) in cash during the 2008 fiscal year.
Commodity Price Risk
Our company is not currently not party to any commodity future contracts, and as a result current oil production is sold at spot prices.
Stock Market Risk
Our common stock is currently quoted on the OTC Bulletin Board and is thinly traded. In the past, our trading price has fluctuated widely, depending on many factors that may have little to do with our operations or business prospects. There is currently a limited market for our common stock and we can provide no assurance to investors
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that a liquid market will develop. If a market for our common stock does not develop, our shareholders may not be able to resell the shares of our common shares that they have purchased and they may lose all of their investment. Public announcements regarding our company, changes in government regulations, conditions in our market segment and changes in earnings estimates by analysts may cause the price of our common stock to fluctuate substantially. In addition, the OTC Bulletin Board is not an exchange and, because trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a national exchange, our shareholders may have difficulty reselling their shares.
Securities class-action litigation has often been instituted following periods of volatility in the market price of a company's securities. Such litigation, if instituted against our company, could result in substantial costs for our company and a diversion of management's attention and resources.
The SEC has adopted regulations which generally define "penny stock" to be any equity security that has a market price (as defined) less than US$5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of US$5,000,000 or individuals with a net worth in excess of US$1,000,000 or annual income exceeding US$200,000 or US$300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the share that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common shares.
In addition to the "penny stock" rules described above, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability to buy and sell our shares and have an adverse effect on the market for our shares.
Description Of Securities Other than Equity Securities
Debt Securities
Not Applicable.
Warrants and Rights
| August 27, 2007 | |
| Shares of common stock in escrow | 4,750,000(1) |
| Exchange shares | 9,500,000(2) |
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| August 27, 2007 | |
| Stock options | 10,159,000(3) |
| Private placement share purchase warrants | 18,627,623(4) |
| Incentive warrants | 19,500,000(5) |
| Consulting warrants | 6,000,000(6) |
| Unit rights | 832,500(7) |
| Convertible promissory notes | 6,800,000(8) |
| Notes: | ||
| (1) | Represents 4,750,000 shares of our common stock issued and held in trust pursuant to an escrow agreement (see "History and Development" above in this prospectus) entered into in connection with the acquisition of Deerfield Missouri. | |
| (2) | Represents 95,000 class B shares of our subsidiary, MegaWest Energy (USA) Corp., as part of the consideration given to acquire Trinity. Each class B exchange share is convertible into 100 shares of our common stock with up to 9,500,000 shares of our common stock to be issued. The holders of these MegaWest Energy (USA) Corp. shares have the right to exchange, or can receive a cash payment of US$950,000 (US$10.00 per exchange share) until July 31, 2008, after which we can implement a forced exchange of the shares. | |
| (3) | Represents stock options to purchase shares of our common stock at prices from US$0.10 to US$2.25 per share, with expiry dates from March 15, 2008 through to March 15, 2012 and with various vesting terms. | |
| (4) | Represents whole common share purchase warrants issued in connection with our private placement offerings. Each whole common share purchase warrant is exercisable into one share of our common stock at prices from US$1.00 to US$1.30 per share, with expiry dates from January 5, 2008 to March 1, 2008. | |
| (5) | Represents warrants granted to three entities (including, Endurance Energy Consulting Ltd., private company controlled by R. William Thornton, a director and the Chief Operating Officer of our company and Gladrock Energy LLC, a private company controlled by Dr. Gail Bloomer, a director of our company) that entitle such persons to purchase shares of our common stock at a price of US$0.10 per share for a period of six months after vesting if the holder thereof brings a project of merit (i.e. a project with a potential economic value in the amount of at least US$1.00 multiplied by the total number of warrants issued to the holder) to the directors of our company by December 21, 2007. Gladrock Energy LLC has been credited with identifying the Kentucky Reserves acquisition and the warrants issued to Gladrock Energy LLC have vested. Endurance Energy Consulting Ltd. has assigned 8,200,000 of its warrants. | |
| (6) | Represents warrants granted to various investor relations and other contractors. The consulting warrants are exercisable into one share of our common stock at an exercise price of US$0.50 per share and expire on January 5, 2009. | |
| (7) | Represents rights to buy an additional 180,000 units under the same terms as the January US$0.50 private placement (each unit includes one share of our common stock and one half-common share purchase warrant exercisable at US$1.00 per share) and rights to buy a further 375,000 units under the same terms as the March US$1.00 private placement (each unit includes one share of our common stock and one half-common share purchase warrant exercisable at US$1.30 per share). These rights, including the underlying common share purchase warrants, expire between January 5, 2008 and March 1, 2008. | |
| (8) | Represents shares of our common stock that potentially could be issued from convertible promissory notes in the aggregate amount of US$1,700,000 with an interest rate of six percent per annum, which together maybe converted into shares of our common stock at US$0.25 per share until June 20, 2008. |
Other Securities
Not Applicable.
American Depositary Shares
Not Applicable.
Financial Statements
Financial Statements filed as part of this prospectus:
Consolidated Financial Statements of MegaWest Energy Corp.
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Financial Statements of MegaWest Energy Corp. (formerly Brockton Capital Corp.)
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(formerly Brockton Capital Corp.)
a Development Stage Company
Consolidated Financial Statements
April 30, 2007 and 2006
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REPORT OF MANAGEMENT
To the Shareholders of
MegaWest Energy Corp. (formerly Brockton Capital Corp)
We have audited the accompanying consolidated balance sheet of MegaWest Energy Corp. as of April 30, 2007 and the consolidated statements of operations and deficit, shareholders' equity and cash flows for the year ended April 30, 2007. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
Management maintains a system of internal controls to ensure, on a reasonable and cost effective basis, that the Company's assets are safeguarded and to facilitate the preparation of relevant, reliable and timely financial information. Management has the responsibility for preparation and fair presentation of the accompanying financial statements, including the financial process that give rise to such consolidated financial statements. This responsibility includes selecting appropriate accounting principles and making objective judgments and estimates in accordance with Canadian generally accepted accounting principle and providing a reconciliation to generally accepted accounting principles in the United States.
It is the responsibility of the audit committee and the board of directors to review the financial statements with management prior to their approval of the financial statements for publication. In addition, the audit committee meets regularly with management and the external auditor to review accounting policies, financial reporting and internal controls. The audit committee is comprised of three financially literate directors, of which two are independent. The audit committee is responsible for the compensation of the external auditor and pre-approves their retention for the appointment and any such fees related to non-audit services.
External auditors have examined the financial statements. Their report is attached to the consolidated financial statements that follow. The audit committee has reviewed these statements with management and the auditors and has reported to the board of directors, who have approved these financial statements.
July 25, 2007
| /s/ George T. Stapleton, II | /s/ George Orr | |
| George T. Stapleton, II | George Orr | |
| Chief Executive Officer, | Chief Financial Officer and | |
| President | Director | |
| and Director | ||
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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Shareholders of
MegaWest Energy Corp. (formerly Brockton Capital Corp)
We have audited the accompanying consolidated balance sheet of MegaWest Energy Corp. as of April 30, 2007 and the consolidated statements of operations and deficit, shareholders' equity and cash flows for the year ended April 30, 2007. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards and 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 whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as of April 30, 2007 and the result of its operations and cash flows for the year ended April 30, 2007 in accordance with Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles vary in certain significant respects from United States generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in note 19 to the consolidated financial statements.
The financial statements as at April 30, 2006 and for the years ended April 30, 2006 and 2005 were audited by another auditor who expressed an opinion without reservation on those statements in their report dated August 25, 2006.
/s/ KPMG LLP
KPMG LLP
Calgary, Canada
July 25, 2007
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COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA –
UNITED STATES OF AMERICA REPORTING DIFFERENCES
The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph when the financial statements are affected by conditions and events that cast substantial doubt on the company's ability to continue as a going concern, such as those described in note 1 to the consolidated financial statements. Although we conducted our audits in accordance with both Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), our reports to the board of directors and shareholders dated July 25, 2007 is expressed in accordance with Canadian reporting standards which do not permit a reference to such conditions and events in the auditors' report when these are adequately disclosed in the financial statements.
/s/ KPMG LLP
KPMG LLP
Calgary, Canada
July 25, 2007
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MegaWest Energy Corp
Consolidated Balance Sheets
April 30
| (in Canadian dollars) | 2007 | 2006 | ||||
| Assets | ||||||
| Current assets | ||||||
| Cash and cash equivalents | $ | 29,328,951 | $ | 14,141 | ||
| Accounts receivable and prepaid expenses | 125,590 | 7,298 | ||||
| Inventory (note 3) | - | 1 | ||||
| 29,454,541 | 21,440 | |||||
| Marketable securities (note 4) | 1,851,960 | - | ||||
| Restricted cash (note 5) | 341,250 | - | ||||
| Property, plant and equipment (note 6) | 20,885,096 | - | ||||
| Rights (note 3) | - | 10,000 | ||||
| $ | 52,532,847 | $ | 31,440 | |||
| Liabilities and Shareholders' Equity (Deficiency in Assets) | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities | $ | 1,301,640 | $ | 120,862 | ||
| Notes payable (note 7) | - | 40,000 | ||||
| 1,301,640 | 160,862 | |||||
| Exchange shares (note 8) | 1,061,055 | - | ||||
| Convertible promissory notes (note 7) | 1,867,387 | - | ||||
| Asset retirement obligations (note 9) | 154,244 | - | ||||
| Shareholders' Equity (Deficiency in Assets) | ||||||
| Share capital | 41,168,088 | 207,342 | ||||
| Warrants | 3,729,000 | - | ||||
| Equity portion of exchange shares (note 8) | 8,599,442 | - | ||||
| Contributed surplus | 13,338,629 | 168,750 | ||||
| Equity portion of convertible promissory notes (note 7) | 120,566 | - | ||||
| Deficit | (18,807,204 | ) | (505,514 | ) | ||
| 48,148,521 | (129,422 | ) | ||||
| Future operations (note 1) | ||||||
| Commitments (notes 2 and 8) and contractual obligations (note 16) | ||||||
| $ | 52,532,847 | $ | 31,440 |
See accompanying notes to consolidated financial statements.
Approved by the Board:
| /s/ George T. Stapleton, II | /s/ Brad Kitchen | |
| George T. Stapleton II, Director | Brad Kitchen, Director | |
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MEGAWEST ENERGY CORP
Consolidated Statements of Operations and Deficit
Years ended April 30
| (in Canadian dollars) | 2007 | 2006 | 2005 | ||||||
| Interest income | $ | 263,125 | $ | - | $ | 2,261 | |||
| Expenses | |||||||||
| General and administrative (note 18) | 5,523,694 | 104,601 | 57,292 | ||||||
| Foreign exchange loss | 1,548,840 | - | - | ||||||
| Accretion on promissory notes | 71,270 | - | - | ||||||
| Depreciation and write-downs (note 3) | 12,373 | 118,344 | 6,000 | ||||||
| 7,156,177 | 222,945 | 63,292 | |||||||
| Net loss for the year | (6,893,052 | ) | (222,945 | ) | (61,031 | ) | |||
| Deficit, beginning of year | (505,514 | ) | (282,569 | ) | (221,538 | ) | |||
| Deficit adjustment on related party | - | - | |||||||
| acquisitions (note 2) | (11,408,638 | ) | |||||||
| Deficit, end of year | $ | (18,807,204 | ) | $ | (505,514 | ) | $ | (282,569 | ) |
| Net Loss per share (note 12) | |||||||||
| Basic and diluted | $ | (0.31 | ) | $ | (0.04 | ) | $ | (0.01 | ) |
See accompanying notes to consolidated financial statements.
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MegaWestEnergy Corp
Consolidated Statements of Shareholders' Equity (Deficiency in Assets)
Years ended April 30
| Share Capital | |||||||||||||||||||||||
| Shareholder's | |||||||||||||||||||||||
| Exchange | Contributed | Equity Portion of | Equity (Deficiency | ||||||||||||||||||||
| (in Canadian dollars) | Shares | Amount | Warrants | Shares | Surplus | Convertible Debt | Deficit | in Assets) | |||||||||||||||
| Balance, April 30, 2004 | 4,087,500 | $ | 371,592 | $ | - | $ | - | $ | - | $ | - | $ | (221,538 | ) | $ | 150,054 | |||||||
| Cancel escrow shares | (2,250,000 | ) | (168,750 | ) | - | 168,750 | - | - | - | ||||||||||||||
| Private placement | 4,500,000 | 4,500 | - | - | - | - | - | 4,500 | |||||||||||||||
| Net loss for the year | - | - | - | - | - | - | (61,031 | ) | (61,031 | ) | |||||||||||||
| Balance, April 30, 2005 | 6,337,500 | 207,342 | - | - | 168,750 | - | (282,569 | ) | 93,523 | ||||||||||||||
| Net loss for the year | - | - | - | - | - | - | (222,945 | ) | (222,945 | ) | |||||||||||||
| Balance, April 30, 2006 | 6,337,500 | 207,342 | - | - | 168,750 | - | (505,514 | ) | (129,422 | ) | |||||||||||||
| Shares issued on: | |||||||||||||||||||||||
| Private placements (note 10(a) and (d)) | 59,373,550 | 34,203,821 | 3,729,000 | - | 368,400 | - | - | 38,301,221 | |||||||||||||||
| Acquisitions (notes 2 and 8) | 5,250,000 | 6,062,825 | - | 8,599,442 | - | - | (11,408,638 | ) | 3,253,629 | ||||||||||||||
| Services (note 10(b)) | 375,000 | 434,900 | - | - | - | - | - | 434,900 | |||||||||||||||
| Debt settlement (note 10(c)) | 600,000 | 165,700 | - | - | - | - | - | 165,700 | |||||||||||||||
| Exercise of stock options (note 11) | 500,000 | 93,500 | - | - | (35,000 | ) | - | - | 58,500 | ||||||||||||||
| Stock based compensation (note 11) | - | - | - | - | 1,863,448 | - | - | 1,863,448 | |||||||||||||||
| Consulting warrants (note 10(d)) | - | - | - | - | 1,600,800 | - | - | 1,600,800 | |||||||||||||||
| Incentive warrants (note 10(d)) | - | - | - | - | 9,372,231 | - | - | 9,372,231 | |||||||||||||||
| Issue convertible promissory notes (note 7) | - | - | - | - | - | 120,566 | - | 120,566 | |||||||||||||||
| Net loss for the year | - | - | - | - | - | - | (6,893,052 | ) | (6,893,052 | ) | |||||||||||||
| Balance, April 30, 2007 | 72,436,050 | $ | 41,168,088 | $ | 3,729,000 | $ | 8,599,442 | $ | 13,338,629 | $ | 120,566 | $ | (18,807,204 | ) | $ | 48,148,521 | |||||||
See accompanying notes to consolidated financial statements.
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MegaWest Energy Corp
Consolidated Statements of Cash Flows
Years ended April 30
| (in Canadian dollars) | 2007 | 2006 | 2005 | ||||||
| Operating activities | |||||||||
| Net loss for the year | $ | (6,893,052 | ) | $ | (222,945 | ) | $ | (61,031 | ) |
| Items not involving cash | |||||||||
| Stock-based compensation (note 18) | 3,899,148 | - | - | ||||||
| Unrealized foreign exchange loss | 1,606,317 | - | - | ||||||
| Accretion on promissory notes | 71,270 | - | - | ||||||
| Depreciation and write-downs (note 3) | 12,373 | 118,344 | 6,000 | ||||||
| Change in non-cash working capital | 879,786 | 72,877 | 5,838 | ||||||
| (424,158 | ) | (31,724 | ) | (49,193 | ) | ||||
| Financing activities | |||||||||
| Proceeds from private placements (note 10) | 38,301,221 | - | 4,500 | ||||||
| Proceeds from stock option exercises | 58,500 | - | - | ||||||
| Notes payable (note 7) | (40,000 | ) | 40,000 | - | |||||
| 38,319,721 | 40,000 | 4,500 | |||||||
| Investing activities | |||||||||
| Expenditures on capital assets | (836,875 | ) | - | - | |||||
| Acquisitions net of cash acquired (note 2): | |||||||||
| Deerfield Kansas | (6,438 | ) | - | - | |||||
| Kentucky Reserves | (3,488,794 | ) | - | - | |||||
| Deerfield Missouri | (666,359 | ) | - | - | |||||
| Trinity Sands Energy | (82,769 | ) | - | - | |||||
| Marketable securities (note 3) | (1,851,960 | ) | - | - | |||||
| Restricted cash (note 5) | (341,250 | ) | - | - | |||||
| Change in non-cash working capital | 341,792 | - | - | ||||||
| (6,932,653 | ) | - | - | ||||||
| Change in cash and cash equivalents | 30,962,910 | 8,276 | (44,693 | ) | |||||
| Exchange rate fluctuations on change in cash and | |||||||||
| cash equivalents | (1,648,100 | ) | - | - | |||||
| Cash and cash equivalents, beginning of year | 14,141 | 5,865 | 50,558 | ||||||
| Cash and cash equivalents, end of year | $ | 29,328,951 | $ | 14,141 | $ | 5,865 |
See accompanying notes to consolidated financial statements.
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| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
MegaWest Energy Corp ("MegaWest") was incorporated on February 8, 2000 in the name of Brockton Capital Corp. under the Company Act in the province of British Columbia, Canada. On February 27, 2007 the Company changed its name to MegaWest Energy Corp. The primary business activity of MegaWest and its subsidiaries (collectively the "Company") is the acquisition, exploration and development of oil and gas properties in North America. | |
Prior to December 2006, MegaWest was a technology company whose business plan was to acquire the rights to market, sell and distribute a product line of consumer electronic technology products in Canada. | |
| 1. | Significant Accounting Policies: |
| (a) | Future Operations and Basis of Presentation: | |
These financial statements have been prepared on a going concern basis. The Company incurred a net loss of $6.9 million for the year ended April 30, 2007, as at April 30, 2007 had an accumulated deficit of $18.8 million and positive working capital of $28.2 million. The Company has a U.S. $15 million work commitment on its Kentucky property, which if not met by October 2009, will require the Company to pay a penalty of 37.5 percent on the unspent balance, which was U.S. $14.9 million at April 30, 2007. The Company currently anticipates spending its existing funds in the upcoming fiscal year to acquire, explore and appraise new and existing oil and gas projects. | ||
The ultimate development of the Company's oil and gas projects, if proven commercial, will require additional funding. The Company's future operations are dependent upon its ability to obtain additional financing and ultimately achieve profitable operations. The outcome of these matters cannot be predicted with certainty at this time. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to secure additional funding or obtain profitable operations. | ||
These consolidated financial statements have been prepared using generally accepted accounting principles ("GAAP") in Canada. The impact of material differences between Canadian and U.S. GAAP on the consolidated financial statements is disclosed in note 19. | ||
| (b) | Principles of Consolidation: | |
These financial statements include the accounts of MegaWest and its subsidiaries from their respective acquisition dates (note 2). All intercompany balances and transactions have been eliminated. |
| Ownership | |||
| Subsidiary | Acquisition Date | Percentage | |
| MegaWest Energy Corp USA | (i) | 99 %(i) | |
| MegaWest Energy Texas Corp (formerly Trinity Sands Energy LLC) | April 25, 2007 | 100 % | |
| MegaWest Energy Kentucky Corp (formerly Kentucky Reserves LLC) | April 2, 2007 | 100 % | |
| MegaWest Energy Missouri Corp (formerly Deerfield Energy LLC) | April 5, 2007 | 100 % | |
| MegaWest Energy Kansas Corp (formerly Deerfield Energy Kansas Corp.) | April 5, 2007 | 100 % |
(i) incorporated January 9, 2007 (note 8)
| (c) | Use of Estimates and Measurement Uncertainty: | |
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and other disclosures in these consolidated financial statements. Actual results may differ from those estimates. |
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| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
In particular, the amounts recorded for the value of oil and gas assets are subject to a ceiling test. By their nature, these ceiling test estimates are subject to measurement uncertainty and the impact on the financial statements of future periods could be material. | ||
| (d) | Cash and Cash Equivalents: | |
Cash and cash equivalents consist of highly liquid investments with terms to maturity, at the date of issue, not exceeding 90 days. | ||
| (e) | Marketable Securities: | |
Marketable securities are recorded at the lower of cost or market value. | ||
| (f) | Oil and Gas Operations: | |
The Company follows the full cost method of accounting for oil and gas operations whereby all costs related to exploration and development of oil and gas reserves are capitalized. Such costs are capitalized on a country-by-country basis, which to date there is one cost centre, being the United States. | ||
These capitalized costs will be depleted using the unit-of-production method based on estimated gross proved oil and gas reserves as determined by independent reservoir engineers. Oil and gas reserves and production will be converted into equivalent units based upon relative energy content. | ||
Costs of acquiring and evaluating unproved properties are initially excluded from the depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of impairment is added to the costs subject to depletion calculations. | ||
In applying the full cost method, the Company calculates a ceiling test whereby the carrying value of oil and gas assets is compared quarterly to the sum of undiscounted future cash flows expected to result from proved reserves and the lower of cost and market of unproved properties. Cash flows are based on third party quoted forward prices, adjusted for transportation and quality differentials. Should the ceiling test result in an excess of carrying value, the Company would then measure the amount of impairment by comparing the carrying amounts of oil and gas assets to an amount equal to the estimated net present value of future cash flows from proved plus probable reserves and the market value of unproved properties. A risk free interest rate would be used to arrive at the net present value of future cash flows. The carrying value of oil and gas assets in excess of the discounted future cash flows would be recorded as a permanent impairment. | ||
Proceeds from the sale of oil and gas assets are applied against capitalized costs, with no gain or loss recognized, unless a sale would alter the rate of depletion and depreciation by more than 20 per cent. | ||
Office furniture and equipment are stated at cost. Depreciation is provided on a declining balance method over the estimated useful lives of the respective assets, at rates ranging from 20 – 30 percent per year. | ||
| (g) | Asset Retirement Obligations: | |
The Company recognizes a liability for the estimated fair value of site restoration and abandonment costs when the obligations are legally incurred and the fair value can be reasonably estimated. The fair value of the obligations is based on the estimated cash flow required to settle the obligations discounted using the Company's credit adjusted risk-free interest rate. The obligation is recorded as a liability with a corresponding increase in the carrying amount of the oil and gas assets. The capitalized amount will be depleted on a unit-of-production method. The liability is increased each period, or accretes, due to the passage of time and a corresponding amount is recorded in the statement of operations as an operating expense. Revisions to the estimated fair value would result in an adjustment to the liability and the capitalized amount in oil and gas assets. |
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| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| (h) | Convertible Promissory Notes: | |
Convertible promissory notes were recorded at the amount of proceeds received less the amount attributed to the conversion feature which is included as part of shareholders' equity. The liability component is accreted to the face value of the promissory note at maturity on an effective yield basis. The accretion is charged to the statement of operations as interest expense. | ||
| (i) | Foreign Currency Translation: | |
The Company's subsidiaries are considered financially and operationally integrated. The Canadian dollar is the parent company's functional currency and the U.S. dollar is the functional currency of all subsidiaries. As a result, monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities at the exchange rates in effect at the time of the transactions. Revenues and expenses are translated to Canadian dollars at rates approximating exchange rates in effect at the time of the transactions. Exchange gains and losses resulting from the period-end translation of monetary assets and liabilities denominated in foreign currencies are recorded in the statement of operations. | ||
| (j) | Oil and Gas Revenue: | |
After an oil and gas project becomes commercial, sales of crude oil and natural gas will be recognized in the period in which the product is delivered to the customer. Oil and gas revenue represents the Company's share and is recorded net of royalty payments to governments and other mineral interest owners. | ||
| (k) | Stock-Based Compensation: | |
The Company accounts for all stock options, consulting and incentive warrants granted using the fair value method. Under this method, compensation expense is measured at fair value on the grant date using the Black-Scholes option pricing model and recognized over the vesting period with a corresponding credit to contributed surplus. Compensation expense is adjusted for the estimated amount of forfeitures, awards forfeited due to a failure to satisfy the service requirement for vesting, in the period in which the stock options expire. | ||
Consideration received upon the exercise of stock options and warrants together with the amount of non-cash compensation expense recognized in contributed surplus is recorded as share capital. | ||
| (l) | Income Taxes: | |
The Company uses the asset and liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year and future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying value and tax basis of assets and liabilities. | ||
Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which these differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. A valuation allowance is recorded against any future income tax asset if it is more likely than not that the asset will not be realized. |
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| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| (m) | Per Share Amounts: | |
Basic per share amounts are computed by dividing the earnings or loss by the weighted average shares outstanding during the reporting period. Diluted amounts for options and warrants are computed using the treasury stock method. The treasury stock method assumes that proceeds received from the exercise of in-the-money stock and purchase warrants are used to repurchase shares at the average market price for the period. The difference between the number of shares that could have been purchased at market prices in the period and the number of in-the-money options and warrants is added to the weighted average shares outstanding. Dilutive amounts for convertible promissory notes are determined by adding the maximum number of shares that could be converted on the balance sheet date to the weighted average shares outstanding. | ||
| (n) | Comparative Figures: | |
Certain comparative figures have been reclassified to conform to the current year's presentation. | ||
| (o) | Impact of New Canadian GAAP Accounting Standards: | |
In December 2006, the Canadian institute of Chartered Accountants ("CICA") approved Section 1535 "Capital Disclosure" ("S.1535"), Section 3862 "Financial Instruments – Disclosures" ("S.3862") and Section 3863 "Financial Instruments – Presentation" ("S.3863"). S.1535 established standards for disclosing information about capital and how it is managed. The objective of S.3862 is to require entities to provide disclosures that enable users to evaluate both the significance of financial instruments for the entity's financial position and performance; and the nature and extent of risk arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. The purpose of S.3863 is to enhance financial statement users' understanding of the significance of financial instruments to an entity's financial position, performance and cash flows. These sections apply to interim and annual financial statements relation to fiscal years beginning on or after October 1, 2007. Management is in the process of reviewing the requirements of these recent sections. | ||
In July 2006, the CICA approved Section 1506 "Accounting Changes". The objective of this section is to prescribe the criteria for changing accounting policies, together with the accounting treatment and disclosure of change in accounting policies, changes in accounting estimates and correction of errors. This section is intended to enhance the relevance and reliability of an entity's financial statements and the comparability of those financial statements over time and with financial statements of other entities. This section applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2007. | ||
In January 2005, the CICA approved Section 1530 "Comprehensive Income" ("S.1530"), Section 3855 "Financial Instruments – Recognition and Measurements" ("S.3855") and Section 3865 "Hedges" ("S.3865") to harmonize financial instruments and hedge accounting with International Financial Reporting Standards and introduce the concept of comprehensive income. S.1530 requires presentation of certain gains and losses outside of net income, such as unrealized gains or losses related to hedges or other derivative instruments. S.3855 establishes standards for recognizing and measuring financial assets and financial liabilities and non-financial derivatives as required to be disclosed under Section 3861 "Financial Instruments Disclosure and Presentation". S.3865 establishes standards for how and when hedge accounting may be applied. These sections apply to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. Management is in the process of reviewing the requirements of these recent sections. |
- 82 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| 2. | Acquisitions: | |
The Company completed the following acquisitions. The operations of each entity are included in the consolidated financial statements from the closing date. | ||
| (a) | Assets of Deerfield Energy Kansas LLC ("Deerfield Kansas"): | |
On March 26, 2007 MegaWest acquired the net assets of Deerfield Kansas in exchange for 250,000 common shares of MegaWest and the prior assumption of a $591,250 (U.S. $500,000) note payable to a third party. The value of the common shares issued was based on the cash consideration received for recent private placements of shares around the closing date. Deerfield Kansas is a development stage oil and gas company that owned certain oil and gas equipment and held 100 percent working interest in 392 undeveloped acres of oil and gas leases in Kansas. | ||
| (b) | Kentucky Reserves LLC ("Kentucky Reserves"): | |
On April 2, 2007 MegaWest acquired 100 percent of the membership units of Kentucky Reserves in exchange for $3,412,500 (U.S. $3,000,000) cash and 5,000,000 common shares of the Company. The value of the common shares issued was based on the cash consideration received for recent private placements of shares around the closing date. Kentucky Reserves is a development stage oil and gas company that owned a 62.5 percent working interest in the shallow tar sands rights plus an additional 37.5 percent interest in the deep rights of 27,009 undeveloped acres of oil and gas leases in Kentucky. | ||
Included in the cost of acquisition is $9,372,231 million for 9,000,000 incentive warrants which vested on the acquisition of Kentucky Reserves (see note 10(d)). The fair value of the warrants was estimated to be $1.04 (U.S. $0.90) per warrant and was determined using the Black-Scholes pricing model with the following assumptions: expected volatility 80 percent, risk-free interest rate of 5.10 percent and expected term of 0.5 years. | ||
| (c) | Deerfield Energy LLC ("Deerfield Missouri"): | |
On April 5, 2007 MegaWest acquired 100 percent of the membership units of Deerfield Missouri in exchange for $926,480 (U.S. $800,000) cash, plus a $144,700 (U.S. $125,000) change in control fee recorded as acquisition expenses, and 4,750,000 common shares of the Company. Of the total consideration, $575,050 (U.S. $500,000) cash and the change in control fee was paid on the closing date, the remaining consideration is contingent upon meeting the terms of an escrow agreement. Pursuant to this agreement, the shares and cash can be released on a pro-rata basis based on either the modification of certain development agreements into oil and gas leases or until 4,000 acres of replacement acreage have been leased. | ||
The value of the common shares issued was based on the cash consideration received for recent private placements of shares around the closing date. Deerfield Missouri is a development stage oil and gas company party to oil development agreements on 7,620 undeveloped acres and also holds all of the issued and outstanding units of Deerfield Kansas. | ||
| (d) | Trinity Sands Energy LLC ("Trinity"): | |
On April 25, 2007 MegaWest acquired 100 percent of the membership units of Trinity in exchange for $227,500 (U.S. $200,000) cash, the prior assumption of a $1,361,085 (U.S. $1,200,000) note payable to a third party and 95,000 shares of a MegaWest subsidiary exchangeable into 9,500,000 common shares of the Company. The value of the common shares issued was based on the cash consideration received for recent private placements of shares around the closing date. Trinity is a development stage oil and gas company that had a 50 percent working interest in 14,948 undeveloped acres of oil and gas leases in Texas, and is party to an earn-in agreement whereby its working interest may be increased to 66.67 and can earn a 66.67 percent working interest in an additional 13,385 undeveloped acres of oil and gas leases. | ||
- 83 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
The following table summarizes the estimated net assets acquired and liabilities assumed and the consideration given as of the date of each respective acquisition date.
| Deerfield | Kentucky | Deerfield | ||||||||||||||
| Kansas | Reserves | Missouri | Trinity | Totals | ||||||||||||
| April 25, | ||||||||||||||||
| Closing Date | March 26, 2007 | April 2, 2007 | April 5, 2007 | 2007 | ||||||||||||
| Net Assets Acquired: | ||||||||||||||||
| Cash | $ | - | $ | 3,521 | $ | 75,330 | $ | 166,750 | $ | 245,601 | ||||||
| Oil and gas assets | 440,042 | 18,633,054 | 47,012 | 930,014 | 20,050,122 | |||||||||||
| Working capital | (13,667 | ) | - | 7,058 | - | (6,609 | ) | |||||||||
| Asset retirement obligations | (160,376 | ) | - | - | - | (160,376 | ) | |||||||||
| $ | 265,999 | $ | 18,636,575 | $ | 129,400 | $ | 1,096,764 | $ | 20,128,738 | |||||||
| Consideration Given: | ||||||||||||||||
| Shares | ||||||||||||||||
| Common shares | 250,000 | 5,000,000 | - | - | 5,250,000 | |||||||||||
| Exchange shares | - | - | - | 95,000 | 95,000 | |||||||||||
| Incentive warrants | - | 9,000,000 | - | - | 9,000,000 | |||||||||||
| Value of common shares | $ | 290,325 | $ | 5,772,500 | $ | - | $ | - | $ | 6,062,825 | ||||||
| Value of exchange shares | - | - | - | 9,660,497 | 9,660,497 | |||||||||||
| Value of incentive warrants | - | 9,372,231 | - | - | 9,372,231 | |||||||||||
| Cash | - | 3,412,500 | 579,050 | 227,500 | 4,219,050 | |||||||||||
| Note payable assumed | 591,250 | - | - | 1,361,085 | 1,952,335 | |||||||||||
| Expenses | 6,438 | 79,344 | 162,638 | 22,018 | 270,438 | |||||||||||
| 888,013 | 18,636,575 | 741,688 | 11,271,100 | 31,537,376 | ||||||||||||
| Deficit adjustment on related party | ||||||||||||||||
| acquisitions (i) | (622,014 | ) | - | (612,288 | ) | (10,174,336 | ) | (11,408,638 | ) | |||||||
| $ | 265,999 | $ | 18,636,575 | $ | 129,400 | $ | 1,096,764 | $ | 20,128,738 | |||||||
| Contingent Consideration: | ||||||||||||||||
| Shares | ||||||||||||||||
| Number | - | - | 4,750,000 | - | 4,750,000 | |||||||||||
| Value | $ | - | $ | - | $ | 5,500,975 | $ | - | $ | 5,500,975 | ||||||
| Cash | - | - | 347,430 | - | 347,430 | |||||||||||
| $ | - | $ | - | $ | 5,848,405 | $ | - | $ | 5,848,405 |
| (i) | The acquisitions of the assets of Deerfield Energy Kansas Corp., Deerfield Missouri and Trinity are considered related party transactions, since at the respective acquisition dates the president and chief executive officer of the Company, was also the president and a unitholder of Trinity (47.37% of issued and outstanding units) and the president and unitholder of Deerfield Missouri (15.86% of the issued and outstanding units), which is also the parent company of Deerfield Kansas. | |
As a result, the president and chief executive officer of the Company, or a private company controlled by him, received i) 39,650 of the common shares issued for the assets of Deerfield Kansas, ii) U.S.$204,300 cash from Deerfield Missouri, including a change in control fee, and is entitled to receive, pending escrow release, an additional U.S.$47,580 and 753,350 common shares and iii) 45,000 class B exchange shares of our subsidiary, MegaWest USA convertible into 4,500,000 common shares and US$94,737 cash of the consideration issued to Trinity. |
| 3. | Inventory and Rights: |
While operating as a technology products distribution company, the Company wrote-off its inventory and costs associated with its rights under a distributor agreement during the years ended April 30, 2007, 2006 and 2005. |
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| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| 4. | Marketable Securities: |
The Company acquired 7,500,000 common shares of Energy Finders Inc. ("Energy Finders") for $1,851,960 (U.S. $1,650,000) representing approximately nine percent of its issued and outstanding share capital. The Company does not have any representation on the Energy Finders board of directors. As a result, the Company does not believe it exerts influence over Energy Finders. The quoted market price of Energy Finder's shares on April 30, 2007 was U.S. $0.25 per share, converting to an approximate market value of $2,094,000. | |
| 5. | Restricted Cash: |
The Company deposited $341,250 (U.S. $300,000) in trust pursuant to an escrow agreement entered into as part of the Deerfield Missouri acquisition (see Note 2(c)). | |
| 6. | Property, Plant and Equipment: |
| Accumulated | ||||||||||
| April 30, 2007 | Cost | Depreciation | Net Book Value | |||||||
| Oil and gas assets – unproven | $ | 20,756,355 | $ | - | $ | 20,756,355 | ||||
| Office furniture and equipment | 131,113 | 2,372 | 128,741 | |||||||
| $ | 20,887,468 | $ | 2,372 | $ | 20,885,096 |
At April 30, 2007, all of the costs associated with oil and gas assets are excluded from depletion calculations. | |
During the quarter the Company capitalized $176,600 of general and administrative expenses. | |
| 7. | Convertible Promissory Notes and Note Payable: |
In December 2006, MegaWest assumed two convertible promissory notes totaling $1,952,335 (U.S. $1,700,000) in conjunction with proposed acquisitions (see note 2). As part of the assumption, the Company agreed to the following terms: interest accrues at six percent and the outstanding interest and principal are convertible into MegaWest common shares at U.S. $0.25 per share until June 20, 2008. The fair value of the conversion feature at the date of assumption was estimated to be $120,566 and has been classified as equity. The fair value was estimated at $0.02 (U.S. $0.02) per share using the Black-Scholes option pricing model assuming a volatility of 80 percent, risk free interest rate of 4.90 percent and expected term of eighteen months. | |
In 2006 the Company issued $40,000 of notes payable to shareholders, including $14,000 to former directors and $2,500 to a current director. The notes payable were repaid in cash during the year ended April 30, 2007. | |
| 8. | Exchange Shares: |
As part of the consideration given to acquire Trinity (see note 2(d)), MegaWest issued 95,000 class B shares of its subsidiary, MegaWest USA. Each class B exchange share is convertible into 100 MegaWest shares with up to 9,500,000 common shares of MegaWest to be issued. The holders of these MegaWest USA shares have the right to exchange, or can receive a cash payment of U.S. $950,000 (U.S. $10.00 per exchange share) until July 31, 2008, after which the Company can implement a forced exchange of the shares. The cash redemption value of the exchange shares of $1,061,055 (U.S. $950,000) has been recorded as a liability. The estimated fair value of the conversion feature of $8,599,442 has been classified as equity. The fair value was estimated at $1.02 (U.S. $0.91) per exchange share using the Black-Scholes option pricing model assuming a volatility of 80 percent, risk free interest rate of 5.09 percent and expected term of fifteen months. |
- 85 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| 9. | Asset Retirement Obligations: | |
As at April 30, 2007 the Company had an asset retirement obligation for the equipment and wells acquired as part of the Deerfield Kansas asset purchase (note 2). The present value of this obligation has been projected using estimates of the future costs and the timing of abandonment. At April 30, 2007 the Company estimated the present value of its asset retirement obligations to be $154,244 based on a future undiscounted liability of $260,000. These costs are expected to be incurred within two to ten years. A credit-adjusted risk-free discount rate of ten per cent and an inflation rate of two per cent were used to calculate the present value. | ||
| 10. | Share Capital and Warrants: | |
The authorized capital of the Company consists of unlimited common shares without par value and 100,000,000 preferred shares without par value. | ||
| (a) | Shares Issued on Private Placements: | |
During the year ended April 30, 2007 the Company closed three private placements, summarized as follows: | ||
| Units / Shares | ||||||||||
| Closing Date | Offering Price | Issued | Proceeds | |||||||
| December, 2006 (i) | U.S. $0.10 | 23,500,000 | $ | 2,707,168 | ||||||
| January and February 2007 (ii) | U.S. $0.50 | 8,425,000 | 4,992,234 | |||||||
| March, 2007 (iii) | U.S. $1.00 | 27,448,550 | 32,115,870 | |||||||
| Issue costs (iv) | - | (1,882,451 | ) | |||||||
| 59,373,550 | 37,932,821 | |||||||||
| Value ascribed to U.S. $1.30 private placement warrants (iii) | 3,446,000 | |||||||||
| Value ascribed to U.S. $1.00 private placement warrants (ii) | 283,000 | |||||||||
| Net amount recorded to share capital from private placements | $ | 34,203,821 |
| (i) | The December U.S. $0.10 private placement consisted of common shares only. | |
(ii) | Units of the U.S. $0.50 private placement included one common share and one half share purchase warrant. One whole share purchase warrant entitles the holder to acquire one share for U.S. $1.00. The amount classified to warrants was based on the fair value of the share purchase warrants which was estimated at $0.07 (U.S. $0.06) per warrant, using the Black-Scholes option pricing model assuming a volatility of 80 percent, risk free interest rate of 5.10 percent and expected term of one year. | |
In connection with placement, the Company granted a consultant rights to purchase 180,000 units under the same terms as the private placement for a period of one year from the date of the placement. The value of these units, recorded as issue costs, was estimated to be $0.22 (U.S. $0.19) per unit, being the sum of the estimated fair value of one share plus one half share purchase warrant. The fair value was estimated using the Black-Scholes option pricing model. | ||
(iii) | Units of the U.S. $1.00 private placement included one common share and one half share purchase warrant. One whole share purchase warrant entitles the holder to acquire one share for U.S. $1.30. The amount classified as warrants was based on the fair value of the share purchase warrants, which was estimated at $0.28 (U.S. $0.24) per warrant using the Black-Scholes option pricing model assuming a volatility of 80 percent, risk free interest rate of 4.95 percent and expected term of one year. |
- 86 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
In connection with the placement, the Company granted a consultant rights to purchase 375,000 units under the same terms as the private placement for a period of one year from the date of the placement. The value of these units, recorded as issue costs, was estimated to be $0.53 (U.S. $0.45) per unit, being the sum of the estimated fair value of one share plus one half share purchase warrant. The fair value was estimated using the Black-Scholes option pricing model. | ||
| (iv) | Included in issue costs of the private placements is $1,514,051 of fees paid in cash, $190,000 representing the fair value of 690,848 share purchase warrants issued and $178,400 representing the fair value of 555,000 units issued in connection with the financing. |
| (b) | Shares Issued for Services: | |
In March 2007, the Company entered into an agreement with a consultant to provide advisory services. The consideration for the advisory services is 750,000 common shares of the Company, of which 375,000 were issued as at April 30, 2007. The value of the common shares issued of U.S. $1.00 was based on the cash consideration received for recent private placements of shares around the closing date. The remainder is issuable in 125,000 share tranches on May 15, 2007, August 15, 2007 and November 15, 2007, respectively. | ||
| (c) | Shares Issued to Settle Debt: | |
In December 2006, the Company agreed to issue 600,000 common shares to settle accounts payable of $165,700, which included amounts payable to former directors and officers of the Company. | ||
| (d) | Warrants: | |
Warrants were granted during the year and remain outstanding as of April 30, 2007: |
| Warrants Outstanding | Warrants Vested | |||||
| Weighted Ave. | Weighted Ave. | Weighted Ave. | ||||
| Warrant Type | Number | Remaining Life | Exercise Price | Number | Exercise Price | |
| Incentive (i) | 19,500,000 | 0.6 years | U.S. $ 0.10 | 9,000,000 | U.S. $ 0.10 | |
| Consulting (ii) | 6,000,000 | 1.7 years | U.S. $ 0.50 | 6,000,000 | U.S. $ 0.50 | |
| Private Placement (iii) | 18,627,623 | 0.8 years | U.S. $ 1.23 | 18,627,623 | U.S. $ 1.23 | |
| 44,127,623 | 0.9 years | U.S. $0.63 | 33,627,623 | U.S. $0.80 | ||
| (i) | The Incentive warrants were issued in an effort to secure additional non-conventional oil and gas prospects. The warrants allow the holders to purchase common shares from the Company at an exercise price of U.S. $0.10 per share, subject to the holder of the warrants bringing to the Company a project that has, at the reasonable opinion of the board of directors, a minimum specified potential value to the Company of at least U.S. $1.00 per warrant. Upon acceptance by the board of directors of a project, the warrant holder will have six months to exercise the warrants. If the holders of the warrants have not delivered a project that is acceptable to the board of directors within one year from the date of issuance then the warrants will expire. The recipients of 19,000,000 incentive warrants are two private companies, one is controlled by a current director and the other is controlled by a current senior officer and director of the Company. | |
In April 2007, 9,000,000 incentive warrants vested on the closing of the Kentucky Reserves acquisition and $9.4 million was recorded as part of the cost of acquisition. | ||
Compensation costs will be recorded for the remaining 10,500,000 incentive warrants if and when the holders introduce a project to the Company of sufficient value. |
- 87 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| (ii) | The consulting warrants were issued to various investor relations and other contractors. The consulting warrants vest on grant date, have a term of two years and an exercise price of U.S. $0.50 per share. For the year ended April 30, 2007, the Company recorded $1,600,800 million of stock based compensation expense with a corresponding increase in contributed surplus for these warrants. The fair value of the warrants granted was estimated to be $0.27 (U.S. $0.23) per warrant and was determined using the Black-Scholes pricing model with the following assumptions: expected volatility 80 percent, risk-free interest rate of 4.75 percent and expected term of two years. | |
| (iii) | The private placement warrants were issued in conjunction with the US$0.50 and U.S. $1.00 private placements. The Company calculated the fair value of these warrants using the Black-Scholes pricing model on the date of grant. The fair value of the warrants issued has been accounted for as reduction to share capital with a corresponding increase in the amount of warrants. |
| 11. | Stock Options: |
The 2004 stock option plan (the "2004 Plan") allows for an amount of options equaling 10 percent of the outstanding common shares to be reserved for grant. During 2005 and 2006 years no options were issued. During the year ended April 30, 2007, 302,500 previously granted stock options under the 2004 Plan expired unexercised.
On February 19, 2007, the 2007 Stock Option Plan ("2007 plan") was approved at a special general meeting of shareholders. The 2007 Plan specifies that the number of common shares reserved for issuance under the plan is 20 percent of the issued and outstanding common shares less the number of options granted under the 2004 Plan. The term and vesting schedule of the stock options granted is set by the board of directors at the time of grant.
The following table summarizes the changes in stock options outstanding during the years ended April 30, 2007 and 2006:
| Number of | Weighted Avg. | ||||||
| Options | Exercise Price | ||||||
| Outstanding, April 30, 2005 and 2006 | 302,500 | U.S. $0.15 | |||||
| Granted | 10,169,000 | 0.59 | |||||
| Exercised | (500,000 | ) | 0.10 | ||||
| Expired | (302,500 | ) | 0.15 | ||||
| Outstanding, April 30, 2007 | 9,669,000 | U.S. $0.62 |
The following table summarizes information about the options outstanding and exercisable at April 30, 2007:
| Options Outstanding | Options Vested | |||
| Weighted Ave. | Weighted Ave. | Weighted Ave. | ||
| Options | Remaining Life | Exercise Price | Options | Exercise Price |
| 1,250,000 | 4.7 years | U.S. $ 0.10 | 1,250,000 | U.S. $ 0.10 |
| 5,705,000 | 3.8 years | $0.50 | 3,500,000 | $0.50 |
| 2,464,000 | 3.9 years | $1.00 | 750,000 | $1.00 |
| 250,000 | 4.9 years | $2.00 | 41,665 | $2.00 |
| 9,669,000 | 4.0 years | U.S. $0.62 | 5,541,665 | U.S. $0.49 |
- 88 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
For the year ended April 30, 2007, the Company recorded $1,863,448 million of stock-based compensation expense related to stock options with a corresponding increase in contributed surplus. The fair value of the options granted for the year ended April 30, 2007 was estimated to be $0.41 (U.S. $0.35) per option and was determined using the Black-Scholes option pricing model with the following assumptions: expected volatility of 80 percent, risk-free interest rate of 5.04 percent and expected lives of four years. | |
| 12. | Per Share Amounts: |
The loss per share is based on the weighted average shares outstanding for the year. The weighted average shares outstanding for the year ended April 30, 2007 was 22,102,129 (2006 – 6,337,500). There is no change between the basic and diluted per share amounts since the effect of stock options, warrants and convertible promissory notes would be anti-dilutive. | |
| 13. | Income taxes: |
Income tax expense differs from the amount that would be computed by applying the Canadian federal and provincial statutory income tax rates to the loss for the year as follows: |
| 2007 | 2006 | 2005 | ||||||||
| Loss for the year | $ | (6,893,052 | ) | $ | (222,945 | ) | $ | (61,031 | ) | |
| Statutory tax rate | 34.5 % | 37.6 % | 37.6 % | |||||||
| Expected income tax recovery | (2,378,103 | ) | (83,827 | ) | (22,948 | ) | ||||
| Increase (decrease) resulting from: | ||||||||||
| Non-deductible stock-based compensation | 1,345,200 | - | - | |||||||
| Change in valuation allowance and other | 1,032,903 | 83,827 | 22,948 | |||||||
| $ | - | $ | - | $ | - |
The components of the April 30 net future income tax asset and liability, after applying corporate income tax rates, are as follows:
| 2007 | 2006 | ||||||
| Net future income tax asset: | |||||||
| Capital assets | $ | 3,994,000 | $ | - | |||
| Operating losses | 636,000 | 164,452 | |||||
| Share issue costs | 436,700 | - | |||||
| Unrealized foreign exchange loss | 464,000 | - | |||||
| Marketing rights | - | (11,007 | ) | ||||
| 5,530,700 | 153,445 | ||||||
| Less: valuation allowance | (5,530,700 | ) | (153,445 | ) | |||
| $ | - | $ | - |
- 89 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
The Company has accumulated operating losses totaling $2,193,166 which expire over the following years:
| 2008 | $ | 2,748 | ||
| 2009 | 48,867 | |||
| 2010 | 60,060 | |||
| 2011 | 157,207 | |||
| 2012 | 74,847 | |||
| Thereafter | 1,849,437 | |||
| Totals | $ | 2,193,166 |
| 14. | Related Party Transactions: | |
The Company incurred the following related party transactions in the year ended April 30, 2007. These transactions were measured by the exchange amount, which is the amount agreed upon by the transacting parties. | ||
| (a) | During the nine months ended January 31, 2007, the Company incurred $87,608 (2006 - $26,797; 2005 - $23,926) in general and administrative costs to entities controlled by former directors. | |
| (b) | During the year, the Company incurred $5,463 in consulting fees to a current director of the Company. | |
| (c) | The Chief Financial Officer ("CFO") is affiliated with a company that assisted MegaWest in completing the share issue private placements and that provides the Company with ongoing investor relations services. For the year ended April 30, 2007 the Company paid $75,000 for these services. | |
| (d) | At April 30, 2006, accounts payable and accrued liabilities includes $34,078 (2005 - $17,340) to a partnership controlled by two directors of the Company. | |
| (e) | During the year ended April 30, 2005, former directors and officers were issued 1,250,000 shares at $0.001 per share pursuant to a private placement. | |
Refer to acquisitions (note 2) and share capital (note 10(b) and (d)) for additional related party transactions. | ||
| 15. | Financial Instruments: | |
The Company is exposed to foreign currency fluctuations as it has cash, short-term deposits and accounts payable denominated in U.S. dollars. In addition, a significant portion of the Company's operating activities are conducted in U.S. dollars. There are no exchange rate contracts in place. | ||
The fair value of the Company's financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate their carrying values due to their short terms to maturity. | ||
At April 30, 2007, the fair values of the convertible promissory notes and exchange shares were estimated to be $5,924,000 and $9,660,000, respectively. The fair value was determined using the Black-Scholes option pricing model at April 30, 2007. | ||
| 16. | Commitments and Contractual Obligations: | |
| (a) | Contractual Obligations: | |
As part of the acquisition of Kentucky Reserves (see note 2), the Company is obligated to spend U.S. $15,000,000 on the project by October 2009. In the event the Company does not complete this work program, the Company is obligated to pay 37.5 percent of the unspent balance to its joint venture partner. | ||
As part of the Deerfield Kansas acquisition, MegaWest is obligated to pay Central Production Company Inc. ("CPC") a net revenue interest up to a maximum of U.S. $750,000 on net revenues generated from the Chetopa project. The net revenue interest becomes payable after the Company recovers 100 percent of its capital and operating costs, and will be paid quarterly from 25 percent of the project's net revenues. | ||
- 90 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| (b) | Office and Equipment Leases: | |
The Company is committed to office and equipment leases over the next five fiscal years as follows: |
| 2008 | $ | 239,438 | |||||
| 2009 | 241,620 | ||||||
| 2010 | 241,620 | ||||||
| 2011 | 241,620 | ||||||
| 2012 | 237,836 | ||||||
| Thereafter | 420,836 | ||||||
| Total | 1,622,970 |
Included in the above commitments are costs associated with an office lease entered into subsequent to April 30, 2007. | |
| (c) | Severance Obligations: |
Pursuant to employment agreements with three senior officers, the Company is obligated to pay $688,000 under certain events around employment termination. | |
| (d) | The Company pledged a $30,000 guaranteed investment certificate as collateral against a letter of credit issued by the Company for the start up of its oil and gas operations in Kansas. Subsequent to April 30, 2007 the restrictions were removed and the letter of credit was cancelled. |
| 17. | Supplemental Cash Flow Information: | ||
The following non-cash transactions were excluded from the statement of cash flows: | |||
| (a) | Year ended April 30, 2007: | ||
| (i) | The Company issued 600,000 shares to settle outstanding debts ($165,700) and 375,000 shares for consulting services ($434,900). | ||
| (ii) | The shares and debt assumed as part of the consideration given for the acquisitions (note 2) is non-cash. | ||
| (b) | Year ended April 30, 2005: | ||
| (i) | The Company cancelled and returned to treasury 2,250,000 common shares previously issued at $0.075 per share ($168,750). The amount paid for these shares has been recorded as contributed surplus. | ||
| (ii) | The Company acquired rights in exchange for notes and accrued interest receivable of $123,610. | ||
- 91 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| 18. | General and Administrative Expenses: |
General and administrative expenses for the years ended April 30 consisted of: |
| 2007 | 2006 | 2005 | ||||||||
| Stock-based compensation: | ||||||||||
| Stock options | $ | 1,863,448 | $ | - | $ | - | ||||
| Consulting warrants | 1,600,800 | - | - | |||||||
| Shares issued for services | 434,900 | - | - | |||||||
| 3,899,148 | - | - | ||||||||
| Salaries and benefits | 1,171,885 | - | - | |||||||
| Professional fees | 332,218 | 83,720 | 36,874 | |||||||
| Office and operations | 297,043 | 20,881 | 20,418 | |||||||
| Capitalized portion | (176,600 | ) | - | - | ||||||
| $ | 5,523,694 | $ | 104,601 | $ | 57,292 |
| 19. | Additional Disclosures Required under U.S. Generally Accepted Accounting Principles: | |
The consolidated financial statements have been prepared in accordance with GAAP as applied in Canada. For the years ended April 30, 2007, Canadian GAAP conforms in all material respects with U.S. GAAP except for certain matters, detailed in the following. For the years ended April 30, 3006 and 2005, Canadian GAAP conforms in all material respects with U.S. GAAP. | ||
| (a) | Consolidated Balance Sheets: | |
The application of U.S. GAAP has the effects on the following consolidated balance sheet items as at April 30, 2007: | ||
| Property, Plant | ||||||
| Marketable | and | |||||
| Assets | Securities | Equipment | ||||
| Canadian GAAP: | $ | 1,851,960 | $ | 20,885,096 | ||
| Adjustments for: | ||||||
| Oil and gas assets on acquisition of Kentucky | ||||||
| (ii) | - | 21,820,050 | ||||
| Marketable securities to fair value (iii) | 242,040 | - | ||||
| U.S. GAAP | $ | 2,094,000 | $ | 42,705,146 |
| (i) | There are certain differences between the full cost method of accounting for oil and gas assets as applied in Canada and in the U.S. The principal difference is in the method of performing ceiling test evaluations under the full cost method. Canadian GAAP requires the ceiling test evaluation to use estimates of future oil and gas prices and costs plus the value of unproved properties on an undiscounted basis. To calculate the amount of impairment, the future net cash flows of a cost center's proved and probable reserves are discounted using a risk- free interest rate. | |
In the ceiling test evaluation for U.S. GAAP purposes, under Regulation S-X, future net cash flows from proved reserves using period-end, non-escalated prices and costs, are discounted to present value at 10 percent per annum plus the value of unproved properties is compared to the carrying value of oil and gas assets. | ||
There is no GAAP difference for the year end April 30, 2007 related to oil and gas assets. |
- 92 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| (ii) | There is a difference in determining the fair value of shares issued for certain stock-based transactions under Canadian GAAP compared to U.S. GAAP if the market for the Company's shares is not active and liquid. Under Canadian GAAP, if the market for the Company's shares is not active and liquid, fair value is established using valuation techniques that include recent arm's length market transactions. Under U.S. GAAP, regulatory interpretation requires the use of quoted market prices as fair value. As a result, the amount recorded for the Kentucky oil and gas assets is higher under U.S. GAAP. | |
| (iii) | There is a difference in the carrying amounts of marketable securities under Canadian GAAP compared to U.S. GAAP. Currently under Canadian GAAP, marketable securities are recorded at the lower of cost or market value, and are not re-measured unless an impairment of carrying amount has occurred. Under U.S. GAAP, marketable securities available for sale are recorded and re-measured at each balance sheet date at their fair value. At April 30, 2007 under U.S. GAAP the Company recorded a $242,040 unrealized gain on marketable securities as a component of other comprehensive income. |
| Convertible | Equity portion of | ||||||||||||||||||||
| promissory | convertible | Contributed | Exchange | ||||||||||||||||||
| Liabilities and Equity | notes | promissory notes | surplus | shares | Share capital | Warrants | Deficit | ||||||||||||||
| Canadian GAAP: | $ | 1,867,387 | $ | 120,566 | $ | 13,338,629 | $ | 8,599,442 | $ | 41,168,088 | $ | 3,729,000 | $ | (18,807,204 | ) | ||||||
| Adjustments for: | |||||||||||||||||||||
| Re-class convertible note (iv) | 120,566 | (120,566 | ) | - | - | - | - | - | |||||||||||||
| Interest expense on | |||||||||||||||||||||
| convertible note (iv) | (28,695 | ) | - | - | - | - | - | - | |||||||||||||
| Stock-compensation | |||||||||||||||||||||
| transactions (v) | - | - | 10,651,013 | - | 597,392 | - | - | ||||||||||||||
| Value of warrants on private | |||||||||||||||||||||
| placements (vi) | - | - | 1,604,600 | - | (10,657,600 | ) | 9,053,000 | - | |||||||||||||
| Kentucky acquisition (ii) | - | - | 14,027,175 | - | 7,792,875 | - | - | ||||||||||||||
| Related party acquisitions | |||||||||||||||||||||
| (vii) | - | - | - | 11,515,824 | 383,229 | - | (11,899,053 | ) | |||||||||||||
| Transfer on stock option | |||||||||||||||||||||
| exercise (viii) | - | - | (430,000 | ) | - | 430,000 | - | - | |||||||||||||
| Net loss | - | - | - | - | - | - | (11,219,710 | ) | |||||||||||||
| U.S. GAAP | $ | 1,959,258 | $ | - | $ | 39,191,417 | $ | 20,115,266 | $ | 39,713,984 | $ | 12,782,000 | $ | (41,925,967 | ) |
| (iv) | There is a difference in the treatment of convertible promissory notes under Canadian GAAP compared to U.S. GAAP. Under Canadian GAAP, the equity component of the note is valued using an option pricing model and classified as shareholders' equity. The residual amount is classified as a liability and interest is recorded, to bring the liability to its future value at maturity using the effective interest rate method. | |
Under U.S. GAAP, the convertible promissory notes are classified as liability, and interest is accrued at the contractual rate. This results in the re-classification of the equity portion to liability, and a reduction in interest expense. |
- 93 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| (v) | The fair value of the Company's stock compensation transactions was estimated using the Black-Scholes options pricing model. One of the assumptions used in the Black-Scholes model is the market price of the underlying share on the grant date. As a result of the GAAP difference on the fair value of the Company's shares described in (ii), the stock compensation transactions have a different fair value input under Canadian GAAP compared to U.S. GAAP. Under Canadian GAAP, the fair value of the Company's shares was based on recent arm's length transactions, including recent private placements. Under U.S. GAAP, the quoted OTC exchange price is used. | |
This results in the GAAP differences for the following stock-based transactions for the year ended April 30, 2007: |
| Canadian | GAAP | |||||||||
| GAAP | U.S. GAAP | Adjustment | ||||||||
| Compensation cost on stock options | $ | 1,863,448 | $ | 7,712,061 | $ | 5,848,613 | ||||
| Compensation cost on consulting warrants | 1,600,800 | 6,403,200 | 4,802,400 | |||||||
| Adjustment to contributed surplus | 3,464,248 | 14,115,261 | 10,651,013 | |||||||
| Shares issued to settle debt | - | 597,392 | 597,392 | |||||||
| Adjustment to net loss | $ | 3,464,248 | $ | 14,712,653 | $ | 11,248,405 |
| (vi) | The value ascribed to the share purchase warrants issued in connection with the unit private placements is adjusted under U.S. GAAP, as the OTC exchange quoted price is used for the market price input in the option pricing model. This results in an adjustment of $9.1 million from share capital to warrants and $1.6 million from share capital to contributed surplus for the stock-based issue costs. | |
| (vii) | The deficit adjustment on related party acquisitions is different under Canadian GAAP compared to U.S. GAAP because of different fair values assigned to the Company's shares. Under U.S. GAAP, the average OTC exchange closing price around the acquisition date was used to value the share consideration given. This results in an adjustment of $11.9 million to deficit. | |
| (viii) | As a result of the higher stock compensation cost as described in (v), when stock options and warrants are exercised, there will be an adjustment under U.S. GAAP related to the transfer from contributed surplus to share capital. During the year, 500,000 options were exercised resulting in an additional $430,000 transferred to share capital from contributed surplus. | |
| (ix) | At April 30, 2007, accounts payable and accrued liabilities consisted of trade payables of $246,978 (2006 - $120,862), salary and bonus accrual of $401,029 (2006 - $-), operational accruals of $615,185 (2006 - $-) and sales tax accruals of $38,448 (2006 - $-). |
- 94 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
| (b) | Consolidated Statement of Operations: | |
The application of U.S. GAAP has the effects on the following consolidated statement of operations for the year ended April 30, 2007: |
| Net Loss | Net Loss per Share | ||||||
| Canadian GAAP Loss: | $ | (6,893,052 | ) | $ | (0.31 | ) | |
| Adjustments for: | |||||||
| Reduced interest expense on convertible promissory | |||||||
| notes (iv) | 28,695 | 0.01 | |||||
| Stock-based compensation expense (v) | (11,248,405 | ) | (0.51 | ) | |||
| U.S. GAAP Loss | $ | (18,112,762 | ) | $ | (0.81 | ) | |
| Unrealized gain on marketable securities (iii) | 242,040 | ||||||
| U.S. GAAP Comprehensive Loss | $ | (17,870,722 | ) |
| (c) | Recent Developments in US GAAP: | |
In June 2006, the FASB issued FASB Interpretation No.48, "Accounting of Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109" ("FIN 48"). The interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. The evaluation of a tax position in accordance with this interpretation is a two-step process. Under the recognition step an enterprise determines whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. Under the measurement step a tax position that meets the more more-likely- than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial, in the period this interpretation is adopted. Management does not believe the requirements of this interpretation will have a material impact on its financial statements. | ||
In February 2006, the FASB issued SFAS No. 155 "Accounting for certain Hybrid Financial Instruments – an amendment of FASB statements No. 133 and 140" (SFAS no.155"). SFAS No. 155 resolves issues surrounding the application of the bifurcation requirements to beneficial interest in securitized financial assets. In general, this statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No.155 is effective for all financial instruments acquired or issued after the beginning of entity's first fiscal year that begins after September 15, 2006 and is not expected to have a material impact on the Company's financial statements. | ||
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS No. 157"). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; however, for some entities the application of this statement will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, although early adoption is permitted. Management is in the process of reviewing the requirements of this recent statement. |
- 95 -
| MegaWest Energy Corp |
| Notes to the Consolidated Financial Statements |
| For the years ended April 30, 2007, 2006 and 2005 |
| (in Canadian dollars unless otherwise indicated) |
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). Under SFAS 159, entities are provided with an option to report selected financial assets and liabilities at fair value. The standard permits an entity to elect the fair value option on an instrument-by-instrument basis; and once the election is made, it is irrevocable. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. In addition, SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The effective date of SFAS 159 is for fiscal years beginning after November 15, 2007. Management is in the process of reviewing the requirements of this recent statement.
- 96 -
BROCKTON CAPITAL CORP.
(A Development Stage Company)
REPORT AND FINANCIAL STATEMENTS
April 30, 2006 and 2005
(Stated in Canadian Dollars)
- 97 -
AUDITORS’ REPORT
To the Shareholders,
Brockton Capital Corp.
(A Development Stage Company)
We have audited the balance sheets of Brockton Capital Corp. (A Development Stage Company) as at April 30, 2006 and 2005 and the statements of operations and cash flows for each of the years in the three year period ended April 30, 2006 and for the period February 8, 2000 (Date of Incorporation) to April 30, 2006 and the statement of shareholders’ equity (deficiency) for the period February 8, 2000 (Date of Incorporation) to April 30, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at April 30, 2006 and 2005 and the results of its operations and its cash flows for each of the years in the three year period ended April 30, 2006 and for the period February 8, 2000 (Date of Incorporation) to April 30, 2006, in accordance with Canadian generally accepted accounting principles.
| Vancouver, Canada | /s/ Morgan & Company |
| August 25, 2006 | Chartered Accountants |
COMMENTS BY AUDITOR FOR US. READERS
ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in Note 1 to the financial statements. Our report to the shareholders, dated August 25, 2006, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditor’s report when these are adequately disclosed in the financial statements or a reference to such a change in accounting principles in the auditor’s report when the change is property accounted for and adequately disclosed in the financial statements.
| Vancouver, Canada | /s/ Morgan & Company |
| August 25, 2006 | Chartered Accountants |
- 98 -
BROCKTON CAPITAL CORP.
(A Development Stage Company)
BALANCE SHEETS
April 30, 2006 and 2005
(Stated in Canadian Dollars)
| 2006 | 2005 | |||||
| ASSETS | ||||||
| Current | ||||||
| Cash and cash equivalents | $ | 14,141 | $ | 5,865 | ||
| GST receivable | 7,298 | 2,903 | ||||
| Inventory – Notes 2 and 3 | 1 | 4,735 | ||||
| 21,440 | 13,503 | |||||
| Rights – Notes 3 and 8 | 10,000 | 123,610 | ||||
| $ | 31,440 | $ | 137,113 | |||
| LIABILITIES | ||||||
| Current | ||||||
| Accounts payable and accrued liabilities – Note 6 | $ | 120,862 | $ | 43,590 | ||
| Notes payable – Note 4 | 40,000 | - | ||||
| 160,862 | 43,590 | |||||
| SHAREHOLDERS’ EQUITY (DEFICIENCY) | ||||||
| Share Capital – Notes 5 and 6 | 207,342 | 207,342 | ||||
| Contributed surplus – Note 8 | 168,750 | 168,750 | ||||
| Deficit accumulated during the development stage | (505,514 | ) | (282,569 | ) | ||
| (129,422 | ) | 93,523 | ||||
| $ | 31,440 | $ | 137,113 | |||
| Nature and Continuance of Operations – Note 1 | ||||||
| Commitments – Notes 3, 4 and 5 | ||||||
| Subsequent Event – Note 3 | ||||||
APPROVED BY THE DIRECTORS:
| /s/ Terry Amisano | Director | /s/ Kevin Hanson | Director |
| Terry Amisano | Kevin Hanson |
SEE ACCOMPANYING NOTES
- 99 -
BROCKTON CAPITAL CORP.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
for the years ended April 30, 2006, 2005 and 2004
and for the period from February 8, 2000 (Date of Incorporation) to April 30, 2006
(Stated in Canadian Dollars)
| February 8, 2000 | ||||||||||||
| (Date of | ||||||||||||
| Incorporation) to | ||||||||||||
| Years ended April 30, | April 30, | |||||||||||
| 2006 | 2005 | 2004 | 2006 | |||||||||
| Administrative Expenses | ||||||||||||
| Accounting, audit and legal – Note 6 | $ | 14,599 | $ | 24,406 | $ | 37,820 | $ | 120,953 | ||||
| Consulting fees | 61,200 | 2,383 | 1,826 | 74,069 | ||||||||
| Equipment rental – Note 6 | 6,000 | 6,000 | 6,000 | 28,000 | ||||||||
| Filing fees | 7,525 | 5,357 | 3,188 | 19,911 | ||||||||
| General and administrative | - | 169 | 2,974 | 3,899 | ||||||||
| Interest and bank charges | 2,056 | 768 | 422 | 4,110 | ||||||||
| Investor relations | - | 625 | 6,339 | 6,964 | ||||||||
| Marketing | - | - | - | 1,170 | ||||||||
| Office rent – Note 6 | 9,000 | 9,000 | 9,000 | 42,000 | ||||||||
| Office supplies – Note 6 | 3,284 | 3,000 | 3,000 | 14,462 | ||||||||
| Promotion | 541 | 1,481 | 1,677 | 4,708 | ||||||||
| Transfer agent fees | 396 | 4,103 | 9,861 | 23,228 | ||||||||
| Travel | - | - | 1,729 | 8,171 | ||||||||
| Loss before other items | (104,601 | ) | (57,292 | ) | (83,836 | ) | (351,645 | ) | ||||
| Other items: | ||||||||||||
| Other income | - | - | 961 | 961 | ||||||||
| Interest income | - | 2,261 | 11,513 | 41,641 | ||||||||
| Write-off of deferred investment expenses | - | - | (72,127 | ) | (72,127 | ) | ||||||
| Write-down of inventory to net realizable value | (4,734 | ) | (6,000 | ) | - | (10,734 | ) | |||||
| Write-down of rights – Note 3 | (113,610 | ) | - | - | (113,610 | ) | ||||||
| Net loss for the year | $ | (222,945 | ) | $ | (61,031 | ) | $ | (143,489 | ) | $ | (505,514 | ) |
| Basic and diluted loss per share | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.08 | ) | |||
| Weighted average number of shares outstanding | 6,337,500 | 5,018,322 | 1,837,500 | |||||||||
SEE ACCOMPANYING NOTES
- 100 -
BROCKTON CAPITAL CORP.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
for the years ended April 30, 2006, 2005 and 2004
and for the period from February 8, 2000 (Date of Incorporation) to April 30, 2006
(Stated in Canadian Dollars)
| February 8, | ||||||||||||
| 2000 (Date of | ||||||||||||
| Incorporation) | ||||||||||||
| to | ||||||||||||
| Years ended April 30, | April 30, | |||||||||||
| 2006 | 2005 | 2004 | 2006 | |||||||||
| Operating Activities | ||||||||||||
| Net loss for the period | $ | (222,945 | ) | $ | (61,031 | ) | $ | (143,489 | ) | $ | (505,514 | ) |
| Add (deduct) items not involving cash: | ||||||||||||
| Interest accrual on notes receivable | - | (1,946 | ) | - | (1,946 | ) | ||||||
| Write-off of deferred investment expenses | - | - | 72,127 | 72,127 | ||||||||
| Write-down of inventory to net realizable value | 4,734 | 6,000 | - | 10,734 | ||||||||
| Write-down of rights | 113,610 | - | - | 113,610 | ||||||||
| Changes in non-cash working capital items related to | ||||||||||||
| operations: | ||||||||||||
| GST and interest receivable | (4,395 | ) | 1,424 | 3,050 | (7,298 | ) | ||||||
| Inventory | - | (10,735 | ) | - | (10,735 | ) | ||||||
| Prepaid expenses | - | - | 9,700 | - | ||||||||
| Accounts payable and accrued liabilities | 77,272 | 17,095 | 6,114 | 120,862 | ||||||||
| Cash used in operating activities | (31,724 | ) | (49,193 | ) | (52,498 | ) | (208,160 | ) | ||||
| Investing Activities | ||||||||||||
| Notes and accrued interest receivable | - | - | (49,414 | ) | (121,664 | ) | ||||||
| Deferred investment expenses | - | - | (34,679 | ) | (72,127 | ) | ||||||
| Cash used in investing activities | - | - | (84,093 | ) | (193,791 | ) | ||||||
| Financing Activities | ||||||||||||
| Proceeds from shares issued | - | 4,500 | - | 448,875 | ||||||||
| Share issue costs | - | - | - | (72,783 | ) | |||||||
| Notes payable | 40,000 | - | - | 40,000 | ||||||||
| Cash provided by financing activities | 40,000 | 4,500 | - | 416,092 | ||||||||
| Increase in cash and cash equivalents during the | 8,276 | (44,693 | ) | (136,591 | ) | 14,141 | ||||||
| period | ||||||||||||
| Cash and cash equivalents at the beginning of the | 5,865 | 50,558 | 187,149 | - | ||||||||
| period | ||||||||||||
| Cash and cash equivalents at the end of the period | $ | 14,141 | $ | 5,865 | $ | 50,558 | $ | 14,141 | ||||
…/cont’d
SEE ACCOMPANYING NOTES
- 101 -
| BROCKTON CAPITAL CORP. | Continued | |
| (A Development Stage Company) | ||
| STATEMENTS OF CASH FLOWS | ||
| for the years ended Apr.il 30, 2006, 2005 and 2004 | ||
| and for the period from February 8, 2000 (Date of Incorporation) to April 30, 2006 | ||
| (Stated in Canadian Dollars) |
| February 8, 2000 | ||||||||||||
| (Date of | ||||||||||||
| Incorporation) to | ||||||||||||
| Years ended April 30, | April 30, | |||||||||||
| 2006 | 2005 | 2004 | 2006 | |||||||||
| Cash and cash equivalents consist of: | ||||||||||||
| Cash | $ | 14,141 | $ | 5,865 | $ | 10,558 | $ | 14,141 | ||||
| Term deposits | - | - | 40,000 | - | ||||||||
| $ | 14,141 | $ | 5,865 | $ | 50,558 | $ | 14,141 | |||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for: | ||||||||||||
| Interest | $ | - | $ | - | $ | - | $ | - | ||||
| Income taxes | $ | - | $ | - | $ | - | $ | - | ||||
| Non-cash Transactions – Note 8 | ||||||||||||
SEE ACCOMPANYING NOTES
- 102 -
BROCKTON CAPITAL CORP.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIENCY)
for the period from February 8, 2000 (Date of Incorporation) to April 30, 2005
(Stated in Canadian Dollars)
| Retained | |||||||||||||||
| Earnings | |||||||||||||||
| (Deficit) | |||||||||||||||
| Accumulated | |||||||||||||||
| Common Stock | During the | ||||||||||||||
| Number of | Contributed | Development | |||||||||||||
| Shares | Amount | Surplus | Stage | Total | |||||||||||
| Balance, February 8, 2000 | - | $ | - | $ | - | $ | - | $ | - | ||||||
| (Date of Incorporation) | |||||||||||||||
| Net income for the period | - | - | - | 737 | 737 | ||||||||||
| Balance, April 30, 2000 | - | - | - | 737 | 737 | ||||||||||
| Cash received from escrow share | 2,250,000 | 168,750 | - | - | 168,750 | ||||||||||
| issuances at $0.075 per share | |||||||||||||||
| Net income for the year | - | - | - | 1,297 | 1,297 | ||||||||||
| Balance, April 30, 2001 | 2,250,000 | 168,750 | - | 2,034 | 170,784 | ||||||||||
| Cash received from share | |||||||||||||||
| issuances at $0.15 per share | 1,837,500 | 275,625 | - | - | 275,625 | ||||||||||
| Less share issue costs | - | (72,783 | ) | - | - | (72,783 | ) | ||||||||
| Net loss for the year | - | - | - | (34,310 | ) | (34,310 | ) | ||||||||
| Balance, April 30, 2002 | 4,087,500 | 371,592 | - | (32,276 | ) | 339,316 | |||||||||
| Net loss for the year | - | - | - | (45,773 | ) | (45,773 | ) | ||||||||
| Balance, April 30, 2003 | 4,087,500 | 371,592 | - | (78,049 | ) | 293,543 | |||||||||
| Net loss for the year | - | - | - | (143,489 | ) | (143,489 | ) | ||||||||
| Balance, April 30, 2004 | 4,087,500 | 371,592 | - | (221,538 | ) | 150,054 | |||||||||
| Cancel escrow shares | (2,250,000 | ) | (168,750 | ) | 168,750 | - | - | ||||||||
| Cash received from share | 4,500,000 | 4,500 | - | - | 4,500 | ||||||||||
| issuance at $0.001 per share | |||||||||||||||
| Net loss for the year | - | - | - | (61,031 | ) | (61,031 | ) | ||||||||
| Balance, April 30, 2005 | 6,337,500 | 207,342 | 168,750 | (282,569 | ) | 93,523 | |||||||||
| Net loss for the year | - | - | - | (222,945 | ) | (222,945 | ) | ||||||||
| Balance, April 30, 2006 | 6,337,500 | $ | 207,342 | $ | 168,750 | $ | (505,514 | ) | $ | (129,422 | ) | ||||
SEE ACCOMPANYING NOTES
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BROCKTON CAPITAL CORP.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
April 30, 2006, 2005 and 2004
(Stated in Canadian Dollars)
| Note 1 | Nature and Continuance of Operations |
The Company is in the development stage and during the year ended April 30, 2005, entered into a distributor agreement with Cyberhand Technologies Inc. (“Cyberhand”) to acquire the right to market, sell and distribute in Canada the full product line of Cyberhand.
These financial statements have been prepared on a going concern basis. The Company has a working capital deficiency of $139,422, has yet to achieve profitable operations and has accumulated a deficit of $505,514 since inception. Its ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that the Company will be able to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. The Company anticipates that additional funding will be in the form of equity financing from the sale of common shares. The Company may also seek to obtain short-term loans from the directors of the Company. There are no current arrangements in place for equity funding or short-term loans.
At April 30, 2004, the Company’s shares were listed on the TSX Venture Exchange (“TSX”) and the Company was classified as a Capital Pool Company as defined in the TSX policy 2.4. Effective June 16, 2004, the Company was delisted from trading on the TSX-V at the request of the Company and effective March 28, 2005, the Company’s common shares commenced trading on the Over-The-Counter Bulletin Board in the United States of America.
The Company was incorporated under the Company Act of the Province of British Columbia on February 8, 2000.
| Note 2 | Significant Accounting Policies |
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in Canada and are stated in Canadian dollars. These financial statements conform in all respects with GAAP in the United States of America. Because a precise determination of many assets and liabilities is depended on the future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgement. Actual results could differ from these estimates.
These financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of significant accounting policies summarized below:
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Brockton Capital Corp.
(A Development Stage Company)
Notes to the Financial Statement
April 30, 2006, 2005 and 2004
(Stated in Canadian Dollars) – Page 2
| Note 2 | Significant Accounting Policies– (cont’d) |
| a) | Cash and Cash Equivalents | |
Cash and cash equivalents consist of all highly liquid investments that are readily convertible to cash and have maturities of three months or less when purchased. | ||
| b) | Inventory | |
Inventory is recorded at the lower of cost and net realizable value. Cost is determined using the first in first out method. Inventory consists of finished goods. | ||
| c) | Loss Per Share | |
Basic loss per share is computed by dividing the loss for the year by the weighted average number of shares outstanding during the year. Diluted loss per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock. The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the “if converted” method. Fully diluted amounts are not presented when the effect of the computations are anti-dilutive due to the losses incurred. Accordingly, there is no difference in the amounts presented for basic and diluted loss per share. | ||
| d) | Financial Instruments | |
The carrying value of the Company’s financial instruments, consisting of cash and cash equivalents and accounts payable and accrued liabilities approximate their fair value due to the short-term maturity of such instruments. Notes payable also approximate fair value. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. | ||
| e) | Income Taxes | |
The Company follows the liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year. Future income tax assets and liabilities are determined based on differences between tax and accounting basis of assets and liabilities. The future tax assets or liabilities are calculated using the tax rates for the periods in which the differences are expected to be settled. Future tax assets are recognized to the extent that they are considered more likely than not to be realized. | ||
| f) | Rights | |
Intangible assets with indefinite lives are not amortized but are subject to an annual impairment test. Other intangible assets are amortized over their estimated useful lives and are also tested for impairment annually. Impairment write-downs will be charged to operations. |
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Brockton Capital Corp.
(A Development Stage Company)
Notes to the Financial Statement
April 30, 2006, 2005 and 2004
(Stated in Canadian Dollars) – Page 3
| Note 2 | Significant Accounting Policies– (cont’d) |
| g) | Stock-based Compensation | |
The fair value of all share purchase options granted is expensed over their vesting period with a corresponding increase to contributed surplus. Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital. | ||
The Company uses the Black-Scholes option valuation model to calculate the fair value of share purchase options at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the fair value estimate and, therefore, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s share purchase options. |
| Note 3 | Rights– Note 8 |
By a distributor agreement dated July 5, 2004, the Company acquired the non-exclusive right to market, sell and distribute in Canada the full product line of Cyberhand Technologies Inc. (“Cyberhand”). Consideration paid was the assignment of the principal and accrued interest of $123,610 due from Cyberhand on promissory notes receivable. Under the terms of the agreement and amendment dated July 5, 2006, the Company agreed to purchase a minimum of 15,000 units on or before July 5, 2007, and upon completion of this minimum order, to purchase 50,000 units per month or forfeit its rights acquired under the July 5, 2004 agreement. As required by the agreement, the Company purchased an initial stocking order of 200 units at a cost of $10,735, which was written down to its net realizable value of $4,735 during the year ended April 30, 2005 and to $1 during the year ended April 30, 2006. During the year ended April 30, 2006, the Company wrote down the rights to $10,000 to recognize the possible impairment of the asset primarily due to the lack of sales of the product.
| Note 4 | Notes Payable |
The notes payable are due on demand, bear interest at 10% per annum and are unsecured. Included in notes payable are notes due to directors of the Company ($9,500) and a Company controlled by a director of the Company ($7,000).
| Note 5 | Share Capital |
| a) | Authorized: | |
100,000,000 common shares without par value |
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Brockton Capital Corp.
(A Development Stage Company)
Notes to the Financial Statement
April 30, 2006, 2005 and 2004
(Stated in Canadian Dollars) – Page 4
| Note 5 | Share Capital– (cont’d) |
| b) | Commitments: | |
Stock-based Compensation Plan | ||
The Company has granted directors and officers common share purchase options. Options are granted with an exercise price equal to the market price of the Company’s stock on the date of the grant, however, the Company was not publicly listed at the date of the grant and the options were priced equal to the offering price on the Company’s Initial Public Offering. Unless otherwise stated, share purchase options vest when granted. Details of share purchase options for the year ended April 30, 2006 and 2005 are as follows: |
| April 30, 2006 | April 30, 2005 | ||||||||||||
| Weighted | Weighted | ||||||||||||
| Average | Average | ||||||||||||
| Number of | Exercise | Number of | Exercise | ||||||||||
| Shares | Price | Shares | Price | ||||||||||
| Options outstanding and exercisable | 302,500 | $ | 0.15 | 302,500 | $ | 0.15 | |||||||
| at beginning and end of year | |||||||||||||
At April 30, 2006, directors and officers of the Company held 302,500 common share purchase options. Each option entitles the holder to purchase one share for each option held at $0.15 per share. These options expire on August 28, 2006.
| Note 6 | Related Party Transactions– Notes 4 and 5 |
The Company incurred the following expenses charged by a partnership controlled by two directors of the Company:
| Years ended April 30, | ||||||||||
| 2006 | 2005 | 2004 | ||||||||
| Accounting fees | $ | 8,797 | $ | 5,926 | $ | 16,109 | ||||
| Equipment rental | 6,000 | 6,000 | 6,000 | |||||||
| Office rent | 9,000 | 9,000 | 9,000 | |||||||
| Office supplies | 3,000 | 3,000 | 3,000 | |||||||
| $ | 26,797 | $ | 23,926 | $ | 34,109 | |||||
These charges were measured by the exchange amount, which is the amount agreed upon by the transacting parties.
At April 30, 2006, accounts payable and accrued liabilities includes $34,078 (2005: $17,340) to a partnership controlled by two directors of the Company.
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Brockton Capital Corp.
(A Development Stage Company)
Notes to the Financial Statement
April 30, 2006, 2005 and 2004
(Stated in Canadian Dollars) – Page 5
| Note 6 | Related Party Transactions– Notes 4 and 5 – (cont’d) |
During the year ended April 30, 2005, directors and officers were issued 1,250,000 shares at $0.001 per share pursuant to a private placement.
| Note 7 | Corporation Income Tax Losses |
At April 30, 2006, the Company has accumulated eligible capital costs of $92,708 and non-capital losses totaling $462,695, which are available to reduce taxable income in future taxation years. The non-capital losses expire as follows:
| 2007 | $ | 420 | |
| 2008 | 2,748 | ||
| 2009 | 48,867 | ||
| 2010 | 60,060 | ||
| 2014 | 157,207 | ||
| 2015 | 74,847 | ||
| 2016 | 118,546 | ||
| $ | 462,695 |
Significant components of the Company’s future tax assets and liabilities, after applying enacted corporate income tax rates are as follows:
| 2006 | 2005 | ||||||
| Future income tax assets | |||||||
| Net tax losses carried forward | $ | 164,812 | $ | 120,452 | |||
| Marketing rights | (11,007 | ) | (10,816 | ) | |||
| 153,805 | 109,636 | ||||||
| Less: valuation allowance | (153,805 | ) | (109,636 | ) | |||
| $ | - | $ | - |
The Company recorded a valuation allowance against its future income tax assets based on the extent to which it is more-likely-than-not that sufficient taxable income will not be realized during the carry forward periods to utilize all the future tax assets.
| Note 8 | Non-cash Transactions |
Investing and financing activities that do not have an impact on current cash flows are excluded from the statement of cash flows. The following transactions have been excluded:
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Brockton Capital Corp.
(A Development Stage Company)
Notes to the Financial Statement
April 30, 2006, 2005 and 2004
(Stated in Canadian Dollars) – Page 6
| Note 8 | Non-cash Transactions– (cont’d) |
During the year ended April 30, 2005;
| a) | the Company cancelled and returned to treasury 2,250,000 common shares previously issued at $0.075 per share ($168,750). The amount paid for these shares has been recorded as contributed surplus. | |
| b) | the Company acquired Rights (Note 3) in exchange for notes and accrued interest receivable of $123,610. |
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MATERIAL CHANGES
There have been no material changes in our company's affairs since the end of our fiscal year ended April 30, 2007 that have not otherwise been described and filed in a report on Form 6-K and incorporated by reference into the reoffer prospectus.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Not Applicable.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Articles
Under our articles our directors must cause our company to indemnify its directors and former directors, and their respective heirs and personal or other legal representatives, to the greatest extent permitted by Division 5 of Part 5 of the Business Corporations Act(British Columbia).
Business Corporations Act (British Columbia)
Division 5 of Part 5 of the Business Corporations Act (British Columbia) consists of Sections 159 through 165. Section 160 provides that a corporation may: (i) indemnify an eligible party (these consist of the corporation's directors, officers, former directors and former officers and their respective heirs and personal or other legal representatives) against judgments, penalties or fines awarded as the result of an eligible proceeding (consisting of any proceeding in which any eligible party is or may be joined as a party by reason of being or having been a director or officer, or the equivalent of a director or officer, of the corporation) and/or (ii) pay the expenses of an eligible party reasonably incurred by that party in respect of such an eligible proceeding after final disposition. Section 161 provides that a British Columbia corporation must pay the expenses incurred by an eligible party in respect of an eligible proceeding if the eligible party is ultimately successful in defending any such proceeding on the merits. Notwithstanding the foregoing, Section 163 prohibits a British Columbia corporation from granting such an indemnity to an eligible party if:
| (a) | at the time the agreement to give indemnity was made the corporation was prohibited from agreeing to grant it by its memorandum or articles; | |
| (b) | at the time the indemnity is made or paid the corporation is prohibited from giving the indemnity or paying the expenses by its memorandum or articles; | |
| (c) | if, in relation to the subject matter of the proceeding, the eligible party did not act honestly and in good faith with a view to the best interests of the corporation; or | |
| (d) | in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the eligible party did not have reasonable grounds for believing his or her conduct was lawful. |
Section 164 of the Business Corporations Act (British Columbia) provides that, regardless of whether the payment of expenses or an indemnity is otherwise authorized under the corporation's Articles or whether it is authorized or declined under Division 5 of Part 5 of the Business Corporations Act, a court may:
| (a) | order a corporation to indemnify an eligible party against any liability incurred in respect of an eligible proceeding; |
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| (b) | order a corporation to pay some or all of the expenses incurred by an eligible party in respect of an eligible proceeding; | |
| (c) | order the enforcement of, or a payment under, an agreement of indemnity; | |
| (d) | order payment of some or all expenses incurred by any eligible person in obtaining a court order under Section 164 of the Business Corporations Act; or | |
| (e) | make any other order that the court deems appropriate. |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 might be permitted to directors, officers or persons controlling our company under the provisions described above, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.
PART II – INFORMATION NOT REQUIRED IN PROSPECTUS
Item 6. Indemnification of Directors and Officers
Articles
Under our articles our directors must cause our company to indemnify its directors and former directors, and their respective heirs and personal or other legal representatives, to the greatest extent permitted by Division 5 of Part 5 of the Business Corporations Act(British Columbia).
Business Corporations Act (British Columbia)
Division 5 of Part 5 of the Business Corporations Act (British Columbia) consists of Sections 159 through 165. Section 160 provides that a corporation may: (i) indemnify an eligible party (these consist of the corporation's directors, officers, former directors and former officers and their respective heirs and personal or other legal representatives) against judgments, penalties or fines awarded as the result of an eligible proceeding (consisting of any proceeding in which any eligible party is or may be joined as a party by reason of being or having been a director or officer, or the equivalent of a director or officer, of the corporation) and/or (ii) pay the expenses of an eligible party reasonably incurred by that party in respect of such an eligible proceeding after final disposition. Section 161 provides that a British Columbia corporation must pay the expenses incurred by an eligible party in respect of an eligible proceeding if the eligible party is ultimately successful in defending any such proceeding on the merits. Notwithstanding the foregoing, Section 163 prohibits a British Columbia corporation from granting such an indemnity to an eligible party if:
| (a) | at the time the agreement to give indemnity was made the corporation was prohibited from agreeing to grant it by its memorandum or articles; | |
| (b) | at the time the indemnity is made or paid the corporation is prohibited from giving the indemnity or paying the expenses by its memorandum or articles; | |
| (c) | if, in relation to the subject matter of the proceeding, the eligible party did not act honestly and in good faith with a view to the best interests of the corporation; or | |
| (d) | in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the eligible party did not have reasonable grounds for believing his or her conduct was lawful. |
Section 164 of the Business Corporations Act (British Columbia) provides that, regardless of whether the payment of expenses or an indemnity is otherwise authorized under the corporation's Articles or whether it is authorized or declined under Division 5 of Part 5 of the Business Corporations Act, a court may:
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| (a) | order a corporation to indemnify an eligible party against any liability incurred in respect of an eligible proceeding; | |
| (b) | order a corporation to pay some or all of the expenses incurred by an eligible party in respect of an eligible proceeding; | |
| (c) | order the enforcement of, or a payment under, an agreement of indemnity; | |
| (d) | order payment of some or all expenses incurred by any eligible person in obtaining a court order under Section 164 of the Business Corporations Act; or | |
| (e) | make any other order that the court deems appropriate. |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 might be permitted to directors, officers or persons controlling our company under the provisions described above, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.
Item 7. Recent Sales of Unregistered Securities
In July 2004, we completed a private placement of 4,500,000 shares of common stock, at $0.001 per share, including 1,250,000 shares purchased by directors and officers of our company. We relied on various exemptions from registration provided by National Instrument 45-106, including the employee, executive officer, director and consultant exemption, the family, friends and business associates exemption and/or the accredited investor exemption.
In December 2006, we issued 600,000 shares of our common stock to various related parties in settlement of $165,700 of accounts payable. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
In December 2006, completed a private placement of 23,500,000 shares of our common stock at US$0.10 per share for aggregate proceeds of US$2,350,000. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
In December 2006, we granted 19,500,000 incentive warrants to three persons, including Endurance Energy Consulting Ltd., private company controlled by R. William Thornton, a director and senior officer of our company and Gladrock Energy LLC, a private company controlled by Dr. Gail Bloomer, a director of our company) that entitle such persons to purchase shares of our common stock at a price of US$0.10 per share for a period of six months after vesting if the holder thereof brings a project of merit (i.e. a project with a potential economic value in the amount of at least US$1.00 multiplied by the total number of warrants issued to the holder) to the directors of our company by December 21, 2007. Gladrock Energy LLC has been credited with identifying the Kentucky Reserves acquisition and the 9,000,000 warrants issued to Gladrock Energy LLC have vested. Endurance Energy Consulting Ltd. has assigned 8,200,000 of its warrants. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On December 20, 2006, we granted in aggregate 1,750,000 common share stock options to four directors. The options are exercisable at US$0.10 per share for a period of five years and vested on the grant date. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On January 5, 2007, we granted in aggregated 6,000,000 common share purchase warrants to various consultants. Each warrant is exercisable at US$0.50 per share until January 5, 2009. We relied on the exemptions from
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registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On January 8, 2007, we granted in aggregate 4,870,000 common share stock options to various senior officers, officers and employees. The options are exercisable at US$0.50 per share for a period of four years and vest on various dates between on the grant date and January 8, 2010. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On January 10, 2007, we granted 85,000 common share stock options to an employee. The options are exercisable at US$0.50 per share for a period of five years and vest on various dates between the grant date and January 10, 2010. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On January 15, 2007, we granted 500,000 common share stock options to a director. The options are exercisable at US$0.50 per share for a period of five years and vest on the grant date. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On January 19, 2007, we granted 250,000 common share stock options to an employee. The options are exercisable at US$0.50 per share for a period of four years and vest on various dates between the grant date and January 19, 2010. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On January 23, 2007, we completed a private placement of 8,425,000 units, at a price of US$0.50 per unit, for aggregate proceeds of US$4,212,500, each of which units consists of one share of our common stock and one-half of one share purchase warrant (each whole warrant entitles the holder to purchase an additional share of our common stock at an exercise price of US$1.00 per share for a period of one year). We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On February 20, 2007, we granted 500,000 common share stock options to a director. The options are exercisable at US$1.00 per share for a period of five years and vest on the grant date. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On February 22, 2007, we granted 64,000 common share stock options to a consultant. The options are exercisable at US$1.00 per share for a period of 13 months and vest on various dates between the grant date and March 1, 2008. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On February 28, 2007, we granted 300,000 common share stock options to an officer. The options are exercisable at US$1.00 per share for a period of four years and vest on various dates between the grant date and February 28, 2010. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On February 28, 2007, we completed an additional private placement of 27,448,550 units, at a price of US$1.00 per unit, for aggregate proceeds of US$27,448,550, each of which units consists of one share of our common stock and one-half of one share purchase warrant (each whole warrant entitles the holder to purchase an additional share of our common stock at an exercise price of US$1.30 per share a period of one year). We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
In conjunction with the February 2007 private placement, we issued 690,848 warrants (each of which entitles the holder to purchase one share of our common stock at US$1.30 per share for a period of one year) to finders, rights to
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buy an additional 180,000 units under the same terms as the January 2007 private placement and rights to buy a further 375,000 units under the same terms as the February 2007 private placement. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On March 1, 2007, we granted 200,000 common share stock options to a consultant. The options are exercisable at US$1.00 per share for a period of four years and vest on various dates between the grant date and March 1, 2008. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On March 7, 2007, we granted 250,000 common share stock options to a director. The options are exercisable at US$1.00 per share for a period of five years and vest on the grant date. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On March 13, 2007, we granted 100,000 common share stock options to a consultant. The options are exercisable at US$1.00 per share for a period of two years and vest on various dates between the grant date and March 3, 2009.
We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On March 15, 2007, we granted in aggregate 350,000 common share stock options to various employees and consultants. The options are exercisable at between US$1.00 and US$2.00 per share for a period of between one to five years and vest on various dates between the grant date and March 15, 2010. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On March 19, 2007, we granted 600,000 common share stock options to an officer. The options are exercisable at US$1.00 per share for a period of four years and vest on various dates between the grant date and March 19, 2010. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On March 21, 2007, we granted 300,000 common share stock options to an employee. The options are exercisable at US$1.00 per share for a period of four years and vest on various dates between the grant date and March 21, 2010. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On March 26, 2007, we issued 250,000 shares of our common stock to Deerfield Energy LLC in connection with our purchase (through our subsidiary, MegaWest Energy (USA) Corp.) all of the assets of Deerfield Energy Kansas Corp. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
In connection with our purchase of the assets of Deerfield Energy Kansas Corp. we also assumed a promissory note in the amount of US$500,000 payable to a private company, Agosto Corporation Limited. Pursuant to our assumption of the promissory note, we granted Agosto a conversion feature that enables the holder of the note to convert the principal amount of the loan plus accrued interest into shares of our common stock at a rate of US$0.25 per share until maturity on June 20, 2008. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On April 2, 2007, we issued 5,000,000 shares of our common stock to the unitholders of Kentucky Reserves, LLC in connection with our acquisition (through MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Kentucky Reserves. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
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On April 3, 2007, we issued 500,000 shares of our common stock to George T. Stapleton, a director and senior officer of our company, pursuant to his exercise of 500,000 stock options granted effective December 21, 2006 at an exercise price of US$0.10 per share. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On April 5, 2007, we issued 4,750,000 shares of our common stock to the unitholders of Deerfield Energy LLC in connection with our acquisition (through MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Deerfield Energy. Owing to potential issues related to certain oil development agreements, 4,750,000 shares of our common stock were placed in an escrow account, set-up for our indemnification in respect of the said claims. Pursuant to the escrow agreement, the shares can be released on a pro-rata basis to the previous unitholders of Deerfield Energy upon either the modification of certain oil development agreements into oil and gas leases or until 4,000 acres of replacement acreage have been leased. The escrow agreement provides for an escrow period of six months subject to certain adjustments. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On April 10, 2007, we granted 50,000 common share stock options to an employee. The options are exercisable at US$1.00 per share for a period of four years and vest on various dates between the grant date and April 10, 2010. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On April 25, 2007, MegaWest Energy (USA) Corp. issued 95,000 exchange shares to the unitholders of Trinity Sands Energy LLC in connection with our acquisition (through MegaWest Energy (USA) Corp.) of all of the issued and outstanding membership units of Trinity Sands Energy LLC in consideration for US$200,000 cash and 95,000 exchange shares of MegaWest Energy (USA) Corp.. Each exchange share may be exchanged for US$10 in cash or 100 shares of our common stock during the period January 1, 2008 to July 31, 2008, after this time, we may compel the holders of the exchange shares to convert their exchange shares into shares of our common stock. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
In connection with our purchase of the assets of Trinity we also assumed a promissory note in the amount of US$1,200,000 payable to Agosto. Pursuant to our assumption of the promissory note, we granted Agosto a conversion feature that enables the holder of the note to convert the principal amount of the loan plus accrued interest into shares of our common stock at a rate of US$0.25 per share until maturity on June 20, 2008. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On May 15, 2007, we issued 375,000 shares of our common stock to Mercury Capital Inc. as payment for consulting services rendered to out company. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On May 31, 2007, we granted 150,000 common share stock options to a consultant. The options are exercisable at US$1.85 per share for a period of four years and vest on various dates between the grant date and May 31, 2010.
We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On June 20, 2007, we granted 85,000 common share stock options to an employee. The options are exercisable at US$2.25 per share for a period of four years and vest on various dates between the grant date and June 20, 2010.
We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On July 3, 2007, we granted 85,000 common share stock options to an employee. The options are exercisable at US$2.10 per share for a period of four years and vest on various dates between the grant date and July 3, 2010. We
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relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On July 9, 2007, we granted 85,000 common share stock options to an employee. The options are exercisable at US$2.20 per share for a period of four years and vest on the grant date. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
On August 1, 2007, we granted 85,000 common share stock options to an employee. The options are exercisable at US$2.15 per share for a period of four years and vest on the grant date. We relied on the exemptions from registration provided by Regulation S and/or Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933, as applicable.
Item 8. Exhibits and Financial Statement Schedules
Exhibits Required by Form F-1:
| Exhibit | |
| Number | Description |
| 3.1 | Certificate of Incorporation (1) |
| 3.2 | Notice of Articles (1) |
| 3.3 | Transition Application (1) |
| 3.4 | Articles (1) |
| 3.5 | Notice of Articles (2) |
| 3.6 | Certificate of Name Change (2) |
| 3.7 | Articles (2) |
| 5.1 | Legal Opinion of Clark Wilson LLP (4) |
| 10.1 | Form of Subscription Agreement entered into with the following persons in December 2006: (2) |
| Firebird Global Master Fund II, Ltd. | |
| Firebird Global Master Fund, Ltd. | |
| F.T.S. Worldwide Corporation | |
| Pinetree Resource Partnership | |
| MB Picks Capital Corp. | |
| Treshnish Investment, Inc. | |
| Bob Faris | |
| Bill Brandes | |
| Steve McGuire | |
| Tarbo Resources Ltd. | |
| Woodburn Holdings Ltd. | |
| Dave Goodman & Jane Goodman | |
| Mike Parker | |
| Peter K. Spencer | |
| 10.2 | Form of Subscription Agreement entered into with the following persons in December 2006: (2) |
| Murdock Capital Partners Corp. |
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Murdock Opportunity Fund | |
| Jay S. Kennedy | |
| George T. Stapleton II | |
| Michael Berry | |
| 10.3 | Employment Agreement dated December 15, 2006 with R. William Thornton (2) |
| 10.4 | Letter of Intent dated December 20, 2006 with Deerfield Energy LLC (2) |
10.5 | Assumption and Loan Conversion Agreement dated December 20, 2006 with Agosto Corporation Limited and Deerfield Energy LLC (2) |
10.6 | First Supplemental Agreement to Assumption and Loan Conversion Agreement dated December 20, 2006 with Agosto Corporation Limited and Deerfield Energy LLC (2) |
| 10.7 | Letter of Intent dated December 20, 2006 with Trinity Sands Energy LLC (2) |
10.8 | Assumption and Loan Conversion Agreement dated December 20, 2006 with Agosto Corporation Limited and Trinity Sands Energy LLC (2) |
10.9 | First Supplemental Agreement to Assumption and Loan Conversion Agreement dated December 20, 2006 with Agosto Corporation Limited and Trinity Sands Energy LLC (2) |
10.10 | Form of Warrant Issuance Agreement dated December 20, 2006 entered into with: (2) |
| Gladrock Energy LLC | |
| Endurance Energy Consulting Ltd. | |
| 1187016 Alberta Ltd. | |
| 10.11 | Form of Debt Settlement and Subscription Agreement dated December 21, 2006 entered into with: (2) |
Karkrash Holdings Ltd. | |
| Carob Management Ltd. | |
| Brian Hanson | |
| Roy Brown | |
| Amisano Hanson | |
10.12 | Stock Option Plan dated August 24, 2004, amended and restated February 19, 2007 and August 9, 2007 (3) |
| 10.13 | Stock Option Plan dated January 5, 2007 (3) |
10.14 | Form of Subscription Agreement entered into with the following persons in January and February 2007: (2) |
| RSJN Holdings Ltd. | Michael Geleta | Kim Gulevich |
| Brent Rolufs | Hector L. Demers | 633430 Alberta Ltd. |
| Ethel Holmberg | Robert Douglas Gerbrandt | Darren Dzikowski |
| Douglas R. Anthony | Andiamo (Thunder Bay) Inc. | Frank Quinby |
| Terence Schorn | Kosta Tsoutsis | GKM Holdings Ltd. |
| James S. Unterschultz | Aeron T. Evans | John B. Ross |
| Marcel Brichon | Pinetree Resource Partnership | Ginette Maguire |
| HBK Resources Ltd. | Robert Steinborn | Richard J. Sorensen |
| Pacific West Ventures Inc. | Tom Rupprecht | Sandra Rupprecht |
| Laurie Anne Thornton | Steve Palmer | Gordon Elliott |
| Ian Downs | Sanjay Maharaj | Lawrence I. Hamm |
| Hilde Clovechok | Craig A. Mills | Donna G. Mills |
| Howard P. Prumer | Anne V. Pruner | Brian J. Evans |
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| Rayna Lynnette Elsdon | Fairview Capital (1978) Ltd. | Dale Loewen |
| Dean Duke | Julie Catling | Diane Winstanley |
| Myron Braun | Kalayra B. Angelyys | Ping Pong Toth |
| Shaun Kelbert | Suzanne Liptak | Bill Brandes |
| Michael and Cindy Mallett | George Kokonis | Tamara Ross |
| Shane Koh | Christine Sealock | MP Pics Capital Corp. |
| Fundarica Investments | Channing Investments Corp. | Richard A. Brook |
| Dr. Valerie Kuehne and John | Gary Danylchuk | Brian C. McIntosh |
| Kuehne | Brock Helm | Karen Gable |
| Larry Thompson | 624659 Alberta Ltd. | Jerry Chrzaszcz |
| Michael Geleta | Thomas Martin Christopher | Donald Rickard |
| Doug Ramsey | Garry Fizzell | Randy L. Oswald |
| Terrence G. Dingwell | Mike McCaffrey | Carole MacLeod |
| Barry Parsons | Hector L. Demers | Tyler Romanchuk |
| Cory Pichota | Gianni Sgambaro | Danny Dion |
| Ryan Larsh | B.R. (Ron) Voogel | Taras Pysyk |
| Monica McGrandle | 0750412 B.C. Ltd. | Michael McBride |
| Graham Dallimore | Randall Pow | Eat-Me Foods Ltd. |
| Michael Laidlaw | Dave Van Dyke | Carrie Louise Clark |
| In-Sook Leigh | George Hatch | James G. Taylor |
| Camille Hodge | Mark and Birgitta Redcliffe | Anita Datt |
| Ramona Vorberg | Terrance Sigmund | Faten Ardakani |
| Chris Vorberg | Fraser Hindson | Sandra E. Fopma |
| Nick Reeves | Rolf Tevely | Shane Meyers |
| PowerOne Capital Markets Limited | Minaz Devji | 1091096 Ontario Inc. |
| Mary K. Hill | Michael McMath | Franco Tormene |
| Arnold and Tricia Hughes | 563298 B.C. Ltd. | Karkrash Holdings Ltd. |
| Greg Burnett | David Berg | Jimmy S.H. Lee |
| Bruce Durnie | Dossche Bart | Cnudde Davy |
| Tiger Capital Corp. | Firebird Global Master Fund II, Ltd. | Manfid SA |
| Firebird Global Master Fund, Ltd. | F.T.S. Worldwide Corporation | Ironshore Trust |
| Treshnish Investment, Inc. | Stacy Broadoway | Marrandino Holdings Inc. |
| Doug Casey | Leslie Friesen, David Friesen |
| 10.15 | Form of Subscription Agreement entered into with the following persons in January and February 2007: (2) |
James L. and Ann C. Donnelly | |
| John Herby | |
| James P. Geiskoph | |
| Al O'Hara | |
| Kurt R. Gainer | |
| Murray Vernon | |
| Kenneth John Greenlaw | |
| 10.16 | Form of Subscription Agreement entered into with the following persons in March 2007: (2) |
| Byron Cook | Ethel Holmberg | Frank Quinby |
| Agosto Velenosi | Ping Pong Toth and Zoltan Toth | Shaun Kelbert |
| Craig Lytle | Ron Child | Pentor Capital Corp |
| Barrie Einarson | Kenneth Jabs | Firebird Global Master Fund II, Ltd. |
| Pinetree Resource Partnership | 0753829 BC Ltd. | George Kokonis |
| R. Douglas Gerbrandt | Cullen Kuzio | Brock Helm |
| 633430 Alberta Ltd. | Hazel Reid | Kenneth Santa |
| Deryl Williams | Dossche Bart | Vanderstraeten Luc |
| Cnudde Martin | Cnudde Davy | 2034511 Ontario Inc. |
| 2034512 Ontario Inc. | Iatima M da Rosa | Jeffery Berliner |
| Julia Della Maestra | Thomas Della Maestra | Gary Elman |
| Anne Fairfull | David Pinkus | Tom James |
| Nassrin Kabiri | Allen Koffman | Douglas Munkley |
| Tony Baldassarre | Vivien Roe-Perry | Rosenbloom Medicine Professional |
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| Aaron Shier | Cindy G. White | Corporation |
| 558859 BC Ltd. | Vital Beliveau | International Capital |
| Radcliff Foundation | Bateman and Company Ltd. | Dianna L Bull |
| Marcel Brichon | Aeron T. Evans | Kriston Sehn |
| Pauline Wong | Sturgeon Holdings Corp. | Brent Rolufs |
| Chang Wan Stephan Woo | Patrick Whibley | Donald Rickard |
| 1004387 Alberta Ltd. | Eric Negraeff | Lawrence Chernoff |
| Nathan Isbister | Garry Fizzell | Mike McCaffrey |
| Ron Carole MacLeod | Jack Cross Roberta Cross | Hector Demers |
| Christian Yoingco | Bruce Hudson | DKR Saturn Event Driven Holdings |
| Larry Krawchuk | Rupprecht Family Trust | Fund Ltd. |
| Hudson Family Trust | Joe Schaab | Myron Braun |
| Douglas Kurek | Shelley Sorensen | Deborah Schaab |
| Sukhbir Mann | George A. Brown | Andrew Thornton |
| Lawrence I Hamm | 6249659 Alberta Ltd. | Vertex One Asset Mgmt Inc. |
| Lorie-Anne Jensen | Morton Elman | Gerry Feldman |
| Peter Cozzi | Antonietta Gatto | Marty Herson |
| FX Inc. | Warren Manis | Les Tanzer |
| Incorporated International Capital | Blayne Johnson | Gary Danylchuk |
| Quarry Capital Corporation | Dr. Savvas Nicolaou Inc. | Yong-Jong Kim |
| Stefaniya Danylchuk | Vicki Koh | Teak-ky Min |
| 578159 BC Ltd. | Jin-Ho Chang | Medallion Capital Corp. |
| Waltraud Wilson | Shirley Lee | Denis Cooke Enterprises |
| Roland M. Labuan | Denis Wilson | Robert Steinborn |
| Craig A. Mills | Edward Thornton | Steve Mantel |
| Peter Holt | Donna Mills | James Wagner |
| 6287 Holdings Inc. | Bernard Oegema | Roberto Sgambaro |
| Scott & Heather Kyllo | Dale Johnson | In-Sook Leigh |
| Tom Matthes | Trevor Perepolkin | Dan Cuerrier & Sandra Cuerrier |
| Ron McDougall & Val McDougall | Susan Hamilton | Brian Chambers |
| Terry T. Jarton | Barry Reed | Paloduro Inv. Inc. |
| Lloyd Michaels | Juan-Pablo Santini | John Flynn |
| Fenyo Sandro | Ron Perry | France Couture |
| PowerOne Capital | David Mills | Renita Narayan |
| Shane Meyers | Miranda Bradley | Bolder Opportunities |
| Fundarica Investments | Channing Investments | Harvey W. Cole |
| Doug Simpson | Carley J Cole | Lee Berstein |
| Jonathan Lim Keng Hock | Setsiskas | Harry Pokrandt |
| Tim Sorensen | Alex Rothwell | Michael Nininger |
| Brenda Howard | Kevin Gould | John Frome |
| Diane Michaels | Suzanne Liptak | Chris Gray |
| Colleen Mulligan | Eymann Investments Corp. | Gill J Vincent |
| Maureen Gustafson | Joseph Gustafson | Merlin Peterson |
| Joseph Pau l McDonald | Ron Johnston | Sunita Prasad |
| RSJN Holdings Ltd. | Craig Bessie | Ian Downs |
| Gordon MacGregor | Sanjay Chand Maharaj | Timothy Turyk |
| Grant Scott | George Charles Durham | |
| Radsport Holdings Inc. | Charles Lyall | David Akselson |
| Greg Ledding | William Gordica | Dean Claridge |
| Robert Lim | Bill Brandis | Sam Magid |
| Dean Mockney | Ilja Troitscanski | Randy Johnson |
| Overdrive Enterprises Ltd. | Caulfield Trust | KR Lockett |
| Monarch Capital Fund Ltd. | James Lockett Family Trust | Rick Zeinot |
| Anatoly Langer | Asset Management Limited | Kelly Shibata |
| Ron Rubuliak | John McGoldrick | Victor Dario |
| Half Moon Foundation | Steve Krystofiak | Larry Thompson |
| Goma Foundation | Doug Casey | Carmen Martin |
| Todd Sharum | Paul Hickey | Dale Lowen |
| Frazer Loney | Adam Vary | Aly Mawji |
| Tango Corp Inc | Gillian Branson | Scott Calderwood |
| Scott Wilson | Gordon MacGregor Elliot | Shelly Shaw |
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| Larry Sostad | Randy Chan | Bill Griffis | |
| Jim Slipp | Bank Sal.oppenheim Jr. & Cie Zurich | James Treliving Holdings | |
| Trout Exploration & Mining Ltd. | Bradner |
| 10.17 | Form of Subscription Agreement entered into with the following persons in March 2007: (2) |
| John Herby | Hugo Liberti | Terrence J. Hankerson | |
| Murray Vernon | John Philip Mappin | Paul Yezzi | |
| Ken Danylchuck | Veron F. Ross | Barbara Yeomans | |
| Monika Campbell | Ted & Kim Williams | Kenneth & Stephanie Alton | |
| Gerard Gloisten | Charles B Simmons Jr. | Ronald Eisenberg | |
| Kurt Gainer | Robert Holtzclaw & Darlene | David Sparks | |
| David Batchelor | Holtzclaw | CMS Capital | |
| Gerald Dasbach | KJV Investment Family Limited | Will Harris | |
| John Krolick | Partnership | Ken Greenlaw | |
| Scott McNitt | James Geiskopf | Peter M Halloran | |
| Gary Olsen | Wei-Tek Tsai / Enyan Deng | Roy Holdings LLC | |
| Tradewinds Fund Ltd. | Robert Rushing | Al Ohara | |
| William Lee Buse | Cushing MLP Opportunity | Thomas D. Willis II | |
| Little Wing LP |
| 10.18 | Asset Purchase Agreement dated March 26, 2007 with Deerfield Energy Kansas Corp. (2) |
| 10.19 | Membership Unit Purchase Agreement dated March 26, 2007 with the members of Deerfield Energy LLC (3) |
| 10.20 | Membership Unit Purchase Agreement dated April 2, 2007 with the members of Kentucky Reserves, LLC (3) |
| 10.21 | Membership Unit Purchase Agreement dated April 25, 2007 with the members of Trinity Sands Energy LLC (3) |
| 10.22 | Escrow Agreement dated April 5, 2007 with the unitholders of Deerfield Energy LLC and Clark Wilson LLC (3) |
| 10.23 | Consulting Agreement dated as of February 15, 2007 with Mercury Capital Inc. (3) |
| 10.24 | Employment Agreement with George T. Stapleton, II (3) |
| 10.25 | Employment Agreement with George Orr (3) |
| 10.26 | Warrant Certificate dated February 28, 2007 for 375,000 units at US$1.30 evidencing Rights Agreement entered into with PowerOne Capital Markets Limited (3) |
| 10.27 | Warrant Certificate dated January 5, 2007 for 180,000 units at US$0.50 evidencing Rights Agreement entered into with PowerOne Capital Markets Limited (3) |
| 21.1 | Significant, direct and indirect, subsidiaries as at August 27, 2007: |
| MegaWest Energy (USA) Corp. - Nevada | |
| MegaWest Energy Missouri Corp (formerly Deerfield Energy LLC) – Delaware | |
| MegaWest Energy Kansas Corp (formerly Deerfield Energy Kansas Corp.) – Delaware | |
| MegaWest Energy Kentucky Corp (formerly Kentucky Reserves, LLC) – Ohio | |
| MegaWest Energy Texas Corp (formerly Trinity Sands Energy LLC) - Delaware | |
| 23.1 |
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| 23.2 |
________________
| (1) | Incorporated by reference to our Form 6-K filed with the Securities and Exchange Commission on March 6, 2006. |
| (2) | Incorporated by reference to our Form 20-F filed with the Securities and Exchange Commission on March 30, 2007. |
| (3) | Incorporated by reference to our Form 20-F filed with the Securities and Exchange Commission on August 10, 2007. |
| (4) | Filed herewith. |
Item 9. Undertakings
The undersigned company hereby undertakes as follows:
| (a) | We hereby undertake: | ||
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: | ||
| (i) | To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; | ||
| (ii) | To reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment hereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low and high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and | ||
| (iii) | To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement; | ||
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by our company pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement.
| (2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post- effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. | |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| (b) | We hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of our annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement |
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relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. | |
| (h) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and persons controlling our company pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by our company of expenses incurred or paid by a director, officer or controlling person of our company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, our company will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. |
[Remainder of page intentionally left blank; Signature Page to follow]
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, MegaWest Energy Corp. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement on Form F-1 to be signed on its behalf by the undersigned, hereunto duly authorized, in the City of Sugar Land, Texas, United States of America on September 4, 2007.
MEGAWEST ENERGY CORP.
/s/ George T. Stapleton, II
Name: George T. Stapleton, II
Title: President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: September 4, 2007
In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person who signature appears below constitutes and appoints George T. Stapleton, II as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or any of them, or of their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated.
| Signature | Title | Date |
| By: /s/ George T. Stapleton, II | ||
| George T. Stapleton, II | President, Chief Executive Officer and Director | September 4, 2007 |
| (Principal Executive Officer) | ||
| By: /s/ George Orr | ||
| George Orr | Chief Financial Officer and Director | September 4, 2007 |
| (Principal Accounting Officer) | ||
| By: /s/ R. William Thornton | ||
| R. William Thornton | Chief Operating Officer and Director | September 4, 2007 |
| By: /s/ Brad Kitchen | ||
| Brad Kitchen | Director | September 4, 2007 |
| By: /s/ Brian J. Evans | ||
| Brian J. Evans | Director | September 4, 2007 |
| By: /s/ Dr. Gail Bloomer | ||
| Dr. Gail Bloomer | Director | September 4, 2007 |