10-Q/A 1 f10qa.htm F10QA

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)

Mark One

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

         For the quarter ended May 31, 2009

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

         For the transition period from ______ to _______

Commission File No. 000-52782

Mainland Resources, Inc.
(Exact name of registrant as specified in its charter)

      

      

Nevada
(State or other jurisdiction of incorporation
or organization)

90-0335743
(I.R.S. Employer Identification No.)

      

      

21 Waterway Avenue, Suite 300

The Woodlands, Texas 77380
(Address of principal executive offices)
 

      

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

      

      

Securities registered pursuant to Section
12(b) of the Act:

Name of each exchange on which
registered:

None

  

      

      

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001

  

(Title of Class)

  

Indicate by checkmark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X ]   No[    ]

- 2 -

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer [  ]

Accelerated filer [ X ]

Non-accelerated filer [   ]

Smaller reporting company []

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [X]

Applicable Only to Issuer Involved in Bankruptcy Proceedings During the Preceding Five Years.

N/A

Indicate by checkmark whether the issuer has filed all documents and reports required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes[   ]  No[ ]

Applicable Only to Corporate Registrants

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the most practicable date:

Class

Outstanding as of July 7, 2009

Common Stock, $0.0001

40,484,750

 

 

 

 

 

 

 

- 3 -

 

MAINLAND RESOURCES, INC.

Form 10-Q

PART I

FINANCIAL INFORMATION

4

ITEM 1.

FINANCIAL STATEMENTS

4
 

BALANCE SHEETS

5
 

STATEMENTS OF OPERATIONS

6
 

STATEMENTS OF CASH FLOWS

7
 

NOTES TO FINANCIAL STATEMENTS

8

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

24

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

33

ITEM 4.

CONTROLS AND PROCEDURES

34

PART II.

OTHER INFORMATION

34

ITEM 1.

LEGAL PROCEEDINGS

34

ITEM 2.

REGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

45

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

45

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

45

ITEM 5.

OTHER INFORMATION

45

ITEM 6.

EXHIBITS

46

 

EXPLANATORY NOTE

          The Company is filing this amendment to this Quarterly Report on Form 10-Q to provide risk factor disclosure as required for non-smaller reporting companies and to provide revised disclosure with respect to disclosure controls and procedures.

 

- 4 -

PART I

ITEM 1.           FINANCIAL STATEMENTS

 

 

 

 

 

 

 

MAINLAND RESOURCES INC.

(An Exploration Stage Company)

FINANCIAL STATEMENTS

MAY 31, 2009

(unaudited)

 

 

 

 

 

 

 

- 5 -

MAINLAND RESOURCES INC.
(An Exploration Stage Company)

BALANCE SHEETS
(U.S. Dollars)

May 31,
2009

February 28,
2009
 
 

(unaudited)

(audited)

ASSETS
     

CURRENT ASSETS

    

Cash

$ 715,628 

$ 150,276 

Accounts receivable

403,620 

373,045 

      Deposit on properties (Note 4)

1,300,000 

1,100,000 
 

      Total current assets

2,419,248 

1,623,321 
 

OIL AND GAS PROPERTIES, (Note 4)

      Proved, net of accumulated depletion $36,918 (2009 -12,000)

750,093 

775,011 

      Unproved

1,404,879 

- 
 

Total Oil and Gas Properties

2,154,972 

775,011 
 

TOTAL ASSETS

$ 4,574,220 

$ 2,398,332 
 
     

LIABILITIES AND STOCKHOLDERS' EQUITY
     

CURRENT LIABILITIES

    

      Accounts payable and accrued liabilities

$ 1,361,678 

$ 70,230 
 

TOTAL CURRENT LIABILITIES

1,361,678 

70,230 
 
     

STOCKHOLDERS' EQUITY (Note 5)

    

Common stock, 200,000,000 shares authorized with $0.0001 par value

    

Issued and outstanding - 39,992,500 common shares
      (February 28, 2009 - 39,615,000)

3,999 

3,962 

Additional paid-in-capital

16,564,937 

16,056,099 

Deficit accumulated during exploration stage

(13,356,394)

(13,731,959)
 

TOTAL STOCKHOLDERS' EQUITY

3,212,542 

2,328,102 
 

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

$ 4,574,220 

$ 2,398,332 
 
     
     

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

- 6 -

MAINLAND RESOURCES INC.
(An Exploration Stage Company)

STATEMENTS OF OPERATIONS
(unaudited)

 


Three months ended May 31,


Three months ended May 31,

May 12, 2006 (inception) to May 31,
 

2009

2008

2009
 

REVENUES

      

   Oil and gas revenue

$ 909,121 

$               - 

$ 1,425,700 
 

GENERAL AND ADMINISTRATIVE EXPENSES

      

     Operating costs and taxes

215,123 

- 

364,446 

     Depletion allowance

24,918 

- 

36,918 

     Consulting fees (Note 6)

151,134 

317,780 

746,508 

     Management and rent fees - related party (Note 7)

35,372 

15,500 

176,192 

     Marketing expenses

17,495 

- 

938,602 

     Mineral property costs

- 

- 

14,510 

     Office and general

43,379 

170,744 

185,426 

     Professional fees

46,405 

31,567 

357,715 

     Salary expense (Note 6)

- 

2,457,000 

12,002,685 
 
 

533,826 

2,992,591 

14,823,002 
 

NET OPERATING INCOME (LOSS)

375,295 

(2,992,591)

(13,397,302)

OTHER INCOME

     Gain on settlement of debt

- 

33,239 

33,239 

     Interest income

270 

- 

7,669 
 

NET INCOME (LOSS)

375,565

(2,959,352)

(13,356,394)
 

Comprehensive income:

Foreign currency translation adjustment

- 

422 

- 
 

COMPREHENSIVE INCOME (LOSS)

$ 375,565

$ (2,958,930)

$ (13,356,394)
 

BASIC INCOME (LOSS) PER COMMON SHARE

$ 0.01 

$ (0.08)
 

DILUTED INCOME (LOSS) PER COMMON SHARE

$ 0.01

$ (0.00)
 

WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING - BASIC

39,690,409 

35,518,434 
 

WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING - DILUTED


42,321,203

- 
 

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

- 7 -

MAINLAND RESOURCES INC.
(An Exploration Stage Company)

STATEMENTS OF CASH FLOWS
(unaudited)

 

Three months ended May 31,

May 12, 2006 (inception) to May 31,
 

2009

2008

2009
 

CASH FLOWS FROM OPERATING ACTIVITIES

      

     Net income loss

$ 375,565 

$ (2,959,352)

$ (13,356,394)

     Adjustments to reconcile net loss to net cash used in operating activities:

     

     - Non-cash mineral property expenditures (recoveries)

- 

(33,239)

(28,799)

     - Depletion

24,918 

- 

36,918 

     - Stock-based compensation (Note 6)

- 

2,457,000 

12,002,685 

     - Non-cash consulting fees (Note 6)

8,875 

- 

8,875 

     - Donated services and expenses

- 

- 

14,420 

CHANGES IN OPERATING ASSETS AND LIABILITIES

      

     - Accounts receivable

(30,575)

- 

(403,620)

     - Accounts payable - related parties

- 

(6,138)

- 

       - Accounts payable and accrued liabilities

1,308 

159,568 

71,538 
 

NET CASH FROM (USED IN) OPERATING ACTIVITIES

380,091 

(382,161)

(1,654,377)
 

CASH FLOWS FROM INVESTING ACTIVITIES

      

     Investment in oil and gas property

(114,739)

(702,923)

(901,750)

   Deposit on properties

(200,000)

- 

(1,300,000)
 

NET CASH FLOWS USED IN INVESTING ACTIVITIES

(314,739)

(702,923)

(2,201,750)
 

CASH FLOWS FROM FINANCING ACTIVITIES

      

     Proceeds on sale of common stock

- 

3,675,000 

3,988,516 

     Proceeds from exercised warrants

500,000

  

500,000

     Advances from related party

- 

- 

83,239 
 

NET CASH PROVIDED BY FINANCING ACTIVITIES

500,000 

3,675,000 

4,571,755 
 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

- 

422 

- 
 

INCREASE IN CASH

565,352 

2,590,338 

715,628 
       

CASH, BEGINNING OF PERIOD

150,276 

19,495 

- 
 

CASH, END OF PERIOD

$ 715,628 

$ 2,609,833 

$ 715,628 
 

SUPPLEMENTAL CASH FLOW INFORMATION AND
  NONCASH INVESTING AND FINANCING ACTIVITIES:

     

     Cash paid for interest

$                    - 

$                    - 

$                    - 

     Cash paid for income taxes

$                    - 

$                    - 

$                    - 

     Common stock issued for acquisition of mineral property

$                    - 

$                    - 

$ 4,440 

     Common stock issued for satisfaction of liability

$                    - 

$                    - 

$ 50,000 

     Common stock issued for consulting fees

$ 8,875 

$                    - 

$ 8,875 

     Donated services and rent

$                    - 

$                    - 

$ 14,420 

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

- 8 -

 

 

 

MAINLAND RESOURCES INC.

(A Production Stage Company)

NOTES TO FINANCIAL STATEMENTS

MAY 31, 2009

 

 

 

 

 

 

 

- 9 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Mainland Resources Inc. (the "Company") is an exploration stage company that was incorporated May 12, 2006 in the State of Nevada for the purpose of mineral exploration. During 2008, the Company entered into an option agreement on certain oil and gas leaseholds in the state of Louisiana (refer to Note 4). The Company now intends to locate, explore, acquire and develop oil and gas properties in the United States. The Company began drilling its first well in October 2008. The first well was completed at the end of January 2009 and is in production. The Company began drilling its second well in April 2009. It is expected to be completed by the end of July 2009. The Company began drilling its third well in May 2009. It is expected to be completed by the middle of August 2009.

Going concern

The Company commenced operations on May 12, 2006. Although the Company has realized revenues, as of May 31, 2009, the Company has an accumulated deficit of $13,356,394. The ability of the Company to continue as a going concern is dependent on raising capital to fund ongoing operations and carry out its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the Company's ability to continue as a going concern. These financials do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty. To date, the Company has funded its initial operations by way of private placements of common stock and advances from related parties. During 2009, the Company completed a private placement of $4,000,000 at $0.67 per unit with each unit consisting of one common share and one half warrant at $1.33 per share exercisable for a period of one year from issuance (refer to Note 5). In addition, between March 1, 2009 and June 1, 2009 864,750 warrants were exercised at $1.33 for net proceeds to the company of $1,153,000.

Unaudited Interim Financial Statements

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. They do not include all information and footnotes required by United States generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended February 28, 2009 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. The interim unaudited financial statements should be read in conjunction with those financial statements included in the Form 10-K. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended May 31, 2009 are not necessarily indicative of the results that may be expected for the year ending February 28, 2010.

Organization

The Company was incorporated on May 12, 2006 in the State of Nevada. The Company's fiscal year end is February 28.

- 10 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION (Continued)

Basis of presentation

These financial statements are presented in United States dollars and have been prepared in accordance with United States generally accepted accounting principles.

Oil and gas properties

The Company follows the full cost method of accounting for its oil and gas operations whereby all costs related to the acquisition of methane, petroleum, and natural gas interests are capitalized. Under this method, all productive and non-productive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such costs include land and lease acquisition costs, annual carrying charges of non-producing properties, geological and geophysical costs, costs of drilling and equipping productive and non-productive wells, and direct exploration salaries and related benefits. Proceeds from the disposal of oil and gas properties are recorded as a reduction of the related capitalized costs without recognition of a gain or loss unless the disposal would result in a change of 20 percent or more in the depletion rate. The Company currently operates solely in the U.S.

Oil and gas properties (continued)

Depreciation and depletion of proved oil and gas properties is computed on the units-of-production method based upon estimates of proved reserves, as determined by independent consultants, with oil and gas being converted to a common unit of measure based on their relative energy content.

The costs of acquisition and exploration of unproved oil and gas properties, including any related capitalized interest expense, are not subject to depletion, but are assessed for impairment either individually or on an aggregated basis. The costs of certain unevaluated leasehold acreage are also not subject to depletion. Costs not subject to depletion are periodically assessed for possible impairment or reductions in recoverable value. If a reduction in recoverable value has occurred, costs subject to depletion are increased or a charge is made against earnings for those operations where a reserve base is not yet established.

Estimated future removal and site restoration costs are provided over the life of proven reserves on a units-of-production basis. Costs, which include production equipment removal and environmental remediation, are estimated each period by management based on current regulations, actual expenses incurred, and technology and industry standards. The charge is included in the

provision for depletion and depreciation and the actual restoration expenditures are charged to the accumulated provision amounts as incurred.

The Company applies a ceiling test to capitalized costs which limits such costs to the aggregate of the estimated present value, using a ten percent discount rate of the estimated future net revenues from production of proven reserves at year end at market prices less future production, administrative, financing, site restoration, and income tax costs plus the lower of cost or estimated market value of unproved properties. If capitalized costs are determined to exceed estimated future net revenues, a write-down of carrying value is charged to depletion in the period.

- 11 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION (Continued)

Asset retirement obligations

The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the related oil and gas properties. As of May 31, 2009, there has been no asset retirement obligations rendered.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant areas requiring management's estimates and assumptions are the determination of the fair value of transactions involving common stock, stock based compensation, financial instruments as well as deferred tax balances and asset impairment tests. Further, depreciation, depletion and amortization of oil and gas properties and the impairment of oil and gas properties are determined using estimates of oil and gas reserves. There are numerous uncertainties in estimating the quantity of reserves and in projecting the future rates of production and timing of development expenditures, including future costs to dismantle, dispose, plug, and restore the Company's properties. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. Proved reserves of oil and natural gas are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing conditions.

Financial instruments

The fair value of the Company's financial assets and financial liabilities approximate their carrying values due to the immediate or short-term maturity of these financial instruments.

Concentrations of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalent accounts in financial institutions. As of May 31, 2009, the Company's cash and cash equivalents exceed federally insured limits.

Earnings (loss) per common share

Basic earnings (loss) per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive earnings (loss) per share reflect the potential dilution of securities that could share in the earnings of the Company. Where applicable, dilutive loss per share is equal to that of basic loss per share as the effects of stock options and warrants have been excluded as they are anti-dilutive.

- 12 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION (Continued)

Revenue Recognition

Oil and natural gas revenues are recorded using the sales method, whereby the Company recognizes oil and natural gas revenue based on the amount of oil and gas sold to purchasers, when title passes, the amount is determinable and collection is reasonably assured. Actual sales of gas are based on sales, net of the associated volume charges for processing fees and for costs associated with delivery, transportation, marketing, and royalties in accordance with industry standards. Operating costs and taxes are recognized in the same period in which revenue is earned.

 

- 13 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Income taxes

The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. As at May 31, 2009, the Company had net operating loss carryforwards, however, due to the uncertainty of realization, the Company has provided a full valuation allowance for the deferred tax assets resulting from these loss carryforwards.

Stock-based compensation

The Company has adopted SFAS No. 123(R), "Share-Based Payment," which requires the compensation cost related to share-based payments, such as stock options and employee stock purchase plans, be recognized in the financial statements based on the grant-date fair value of the award.

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123(R) and the conclusions reached by the Emerging Issues Task Force ("EITF") in Issue No. 96-18. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.

Recent accounting pronouncements

In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"). SFAS 165 provides authoritative accounting literature related to evaluating subsequent events that was previously addressed only in the auditing literature, and is largely similar to the current guidance in the auditing literature with some exceptions that are not intended to result in significant changes in practice. SFAS 165 defines subsequent events and also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009. We plan to adopt SFAS 165 in the second quarter of Fiscal 2010 and do not expect it to have a material impact on our consolidated financial statements.

- 14 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent accounting pronouncements (continued)

In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts - An interpretation of FASB Statement No. 60.  SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise's risk-management activities. SFAS 163 requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. The Company has determined that the adoption of this standard did not have a significant impact on its financial position, cash flows or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. SFAS 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity's liquidity by requiring disclosure of derivative features that are credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. SFAS 161 will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, and will be adopted by the Company beginning in the first quarter of fiscal 2010. The Company has determined that the adoption of this standard did not have a significant impact on its financial position, cash flows or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS No. 160"), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. SFAS No. 160 is effective as of the beginning of an entity's first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company has determined that the adoption of this standard did not have a significant impact on its financial position, cash flows or results of operations.

- 15 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations ("SFAS No. 141R"). SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the entity's first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations completed by the Company prior to March 1, 2009 will be recorded and disclosed following existing GAAP. The Company has determined that the adoption of this standard did not have a significant impact on its financial position, cash flows or results of operations.

East Holly Prospect

On February 27, 2008, the Company entered into an option agreement (the "Option Agreement") with Kingsley Resources, Inc. ("Kingsley"), pursuant to which the Company acquired all the right, title and interest Kingsley has in and to certain leasehold estates in the state of Louisiana ("the Leases") which were the subject of a purchase agreement dated December 11, 2007, and modified February 1, 2008 (collectively, the "Leasehold Purchase Agreement") between Kingsley and Permian Basin Acquisition Fund ("Permian"), pursuant to which Kingsley had the right to acquire the sub-surface rights provided for in the Leases. In order to complete the acquisition of the Leases the Company was required to pay $100,000 on April 2, 2008 to Kingsley and assume all of Kingsley's obligations under the Leasehold Purchase Agreement. On March 14, 2008, the Company completed the Option agreement and the Leasehold Purchase Agreement at a total cost of $687,596, which includes the $100,000 that was paid on April 2, 2008, for approximately 2,551 net acres.

Cotton Valley/ Haynesville

The Company has leased various other properties totalling approximately 144 net acres, consisting of approximately 84 net acres leased as of February 29, 2008 and added 60 net acres leased during the year ended February 28, 2009 for an additional consideration of $22,753. These additional property leases, within the Cotton Valley/Haynesville trend in the state of Louisiana, are for three year terms. The Company has a 100% Working Interest and a 75% N.R.I. in the leases comprising a total of 2,695 net acres.

- 16 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 3 - OIL AND GAS PROPERTIES

Petrohawk Venture Agreement

On July 14, 2008, The Company entered into a binding venture agreement with Petrohawk Energy Corporation ("Petrohawk") for the joint development of the Haynesville Shale on the Company's properties ("the Leases") in De Soto Parish, Louisiana. Effective August 4, 2008, the Company entered into a definitive binding agreement with Petrohawk consummating the transaction on July 14, 2008.

Under the terms of the Agreement, Petrohawk has agreed to pay 100% of the costs of development associated with the first well drilled below the Cotton Valley Formation, including drilling, completing and fracture stimulating, as well as costs up to and including pipeline connection. Petrohawk has also agreed to pay 80% of all costs of the second well drilled on the Leases below the base of the Cotton Valley with the Company paying the remaining 20% of the costs. For the third and all subsequent wells drilled on the Leases below the base of the Cotton Valley Formation, Petrohawk will pay 60% and the Company will pay 40%.

The Company will transfer 60% of its De Soto Parish leases to Petrohawk at closing, but only as the Leases relate to all depths below the base of the Cotton Valley Formation, and specifically the Haynesville Shale. Petrohawk agrees to gather and market the Company's production from above the base of the Cotton Valley Formation, pursuant to a mutually acceptable agreement.

Griffiths 11- #1

The first well under the Petrohawk Agreement, the Griffiths 11- #1, began drilling in October 2008. The well commenced production at the end of January 2009.

Stevenson Douglas LLC. 16 - #1

The second well under the Petrohawk Agreement, the Steven Douglas LLC 16 - #1, began drilling in April 2009. The Company expects the well to be completed by the end of July 2009.

Dehan 15 - #1-H

The third well under the Petrohawk Agreement, the Steven Douglas LLC 16 - #1, began drilling in May 2009. The Company expects the well to be completed by the middle of August 2009.

 

- 17 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 3 - OIL AND GAS PROPERTIES (continued)

Mississippi Prospect

On September 3, 2008, the Company signed an Option Agreement with Westrock Land Corp to acquire 5,000 net acres in mineral oil and gas leases located in the State of Mississippi. In accordance with the terms and provisions of the Option Agreement; (i ) the Company will acquire a 100% working interest and a 75% net revenue interest in the Leases; (ii) the Company has agreed to pay certain acquisition costs per net mineral acres and also paid a $500,000 deposit on September 3, 2008 to secure the Option Agreement; (iii) the balance of the acquisition costs totalling $2,275,000 will be due and payable upon completion of the due diligence, to be completed by the Company no later than October 15, 2008. The Option Agreement was subsequently extended on each of October 15, 2008, November 30, 2008, April 16, 2009 and June 1, 2009 whereby the option period has been extended until December 31, 2009. Additional deposits of $250,000, $100,000, $250,000, $100,000, $100,000 and $100,000 were paid on October 17, 2008, December 1, 2008, December 29, 2008, April 27, 2009, May 6, 2009 and June 5, 2009 for a total deposit to date of $1,400,000 (May 31, 2009 - $1,300,000; February 28, 2009 - $1,100,000).

The Company's Oil and Gas properties are made up as follows:

 

May 31,
2009

February 29, 2009
     

Oil and Gas Properties:

    

     Proved, subject to depletion

$ 787,011 

$ 787,011 

     Unproved, not subject to depletion

1,404,879 

           - 
     
 

2,191,890 

787,011 

     Accumulated depletion

(36,918)

(12,000)
     

Total Oil and Gas Properties

$ 2,154,972 

$ 775,011 
     

 

- 18 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 3 - OIL AND GAS PROPERTIES (continued)

The following is a summary of the transactions involving the Company's unproven properties not subject to depletion:

 

Acquisition
Costs

Development
Costs


Total
       

Balance, February 28, 2008

$ 9,176 

$               - 

$ 9,176 
       

Incurred during the year

702,923 

74,912 

777,835 

Reallocated to proven and subject to depletion

(712,099)

(74,912)

(787,011)
       

Balance, February 29, 2008

- 

- 

- 
       

Incurred during the period

             - 

1,404,879 

1,404,879 
       

Balance, May 31, 2009

$               - 

$ 1,404,879 

$ 1,404,879 
       

Depletion of proved oil and gas properties during the period ended May 31, 2009 was computed on the units-of-production method based upon estimated proved reserves of 8.369 Bcf, reserves produced during the period of 269,075 Mcf and net capitalized costs to be amortized totaling $775,011, resulting in a depletion cost of $24,918 for the period and total accumulated depletion costs as of May 31, 2009 of $36,918.

- 19 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 4 - STOCKHOLDERS' EQUITY

(a)      Share Capital

The Company's capitalization is 200,000,000 common shares with a par value of $0.0001 per share.

On February 25, 2008, the directors of the Company approved a special resolution to undertake a forward split of the common stock of the Company on a basis of 20 new shares for 1 old share and was effective March 11, 2008. On May 12, 2008, the directors of the Company approved a special resolution to undertake a forward split of the common stock of the Company on a basis of 1.5 new shares for 1 old share and was effective March 29, 2008.

All references in these financial statements to number of common shares, price per share and weighted average number of common shares outstanding prior to the 20:1 forward stock split on March 11, 2008 and the 1.5:1 forward stock split on May 29, 2008 have been adjusted to reflect these stock splits on a retroactive basis, unless otherwise noted.

(b)       Private Placements

On June 15, 2006, the Company issued 6,000,000 unregistered shares of common stock at $0.00003 per share for proceeds of $172.

On October 6, 2006, the Company issued 12,510,000 unregistered shares of common stock at a price of $0.0014 per share for proceeds of $17,892.

On October 15, 2007, the Company issued 12,000,000 unregistered shares of common stock at a price of $0.0017 per share for proceeds of $20,452.

Between May 1, 2008 and July 22, 2008, the Company completed a private placement of 6,000,000 unregistered units at $0.67 per unit for proceeds of $4,000,000. Of this amount, $50,000 was by way of a settlement of debt and the remaining $3,950,000 was received in cash. Each unit consists of one common share and one-half non-transferable share purchase warrant; one whole non-transferable purchase warrant is exercisable at $1.33 per share for a period of one year from the date of issuance ending on May 1, 2009.

(c)       Other issuances

On July 15, 2006, the Company issued 3,105,000 shares of common stock at a price of $0.0014 per share on settlement of $4,440 for mineral property acquisition.

On March 17, 2009, the Company issued 2,500 shares of common stock at an estimated fair value of $3.55 per share as per the terms of a consulting agreement that became effective March 1, 2009.

Subsequent to the period on June 15, 2009, the Company issued 2,500 shares of common stock at an estimated fair value of $2.90 per share as per the terms of a consulting agreement that became effective March 1, 2009.

- 20 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 4 - STOCKHOLDERS' EQUITY (DEFICIT) (continued)

(d)       Share Purchase Warrants

Subsequent to the year end on April 29, 2009, the Company extended expiration of the 3,000,000 warrants from May 1, 2009 to June 1, 2009.

As of May 31, 2009, a total of 375,000 warrants were exercised at $1.33 per share with net proceeds of $500,000 to the Company.

Subsequent to the period on June 1, 2009, 489,750 warrants were exercised at $1.33 per share with net proceeds of $653,000 to the Company and the remaining 2,135,250 warrants expired unexercised.

Details of the Company's share purchase warrants outstanding as of May 31, 2009 are as follows:

Exercise
price

Weighted average
price

Number of warrants to purchase
             shares              

Expiry Date
       

$1.33

$1.33

2,625,000

June 1, 2009

(d)       Share Purchase Warrants (continued)

The Company's share purchase warrants activity for the period ended May 31, 2009 is summarized as follows:

 


Number of
Warrants

Weighted average exercise
Price per share

Weighted average remaining
In contractual life (in
     years)     
             

Balance, February 29, 2008

-

  

$           -

  

-

  

Issued

3,000,000

  

1.33

  

-

  

Expired

-

  

-

  

-

  

Exercised

           -

  

           -

  

           -

  
             

Balance, February 29, 2008

3,000,000

  

1.33

  

0.17 

  

Issued

-

  

-

  

-

  

Expired

-

  

-

  

-

  

Exercised

(375,000)

  

1.33

  

           -

  
             

Balance, May 31, 2009

2,625,000

  

$ 1.33

  

0.17

  

- 21 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 5 - STOCK OPTION PLAN

On April 7, 2008, the Board of Directors of the Company ratified, approved and adopted a Stock Option Plan for the Company allowing for the grant of up to 2,200,000 options to acquire common shares with terms of up to 10 years. On July 9, 2008, the Board of Directors of the Company ratified, approved and amended the Stock Option Plan for the Company increasing the allowable grant from 2,200,000 options to 3,800,000 options. In the event an optionee ceases to be employed by or to provide services to the Company for reasons other than cause, any Stock Option that is vested and held by such optionee maybe exercisable within up to ninety calendar days after the effective date that his position ceases. No Stock Option granted under the Stock Option Plan is transferable. Any Stock Option held by an optionee at the time of his death may be exercised by his estate within one year of his death or such longer period as the Board of Directors may determine.

As approved by the Board of Directors, on April 7, 2008, the Company granted 2,100,000 fully vested stock options to certain officers, directors and management of the Company at $1.17 per share for terms of ten years. The total fair value of these options at the date of grant was estimated to be $2,457,000 and was determined using the Black-Scholes option pricing model with an expected life of 5 years, a risk free interest rate of 2.75%, a dividend yield of 0% and expected volatility of 260% and was recorded as a stock based compensation expense in 2009.

As approved by the Board of Directors, between July 9, 2008 and August 19, 2008, the Company granted a total of 1,350,000 fully vested stock options to certain officers and directors of the Company at prices ranging from $4.20 per share to $6.35 per share for terms of ten years. The total fair value of these options at the date of grant was estimated to be $7,157,685 and was determined using the Black-Scholes option pricing model with the following assumptions; expected lives of 5 years, risk free interest rates ranging from 3.07% - 3.12%, dividend yields of 0% and expected volatility of 260% and was recorded as a stock based compensation expense in 2009.

As approved by the Board of Directors, on November 18, 2008, the Company granted a total of 250,000 fully vested stock options to a director of the Company at $5.00 per share for terms of ten years. The total fair value of these options at the date of grant was estimated to be $1,182,500 and was determined using the Black-Scholes option pricing model with the following assumptions; an expected life of 5 years, a risk free interest rate of 2.22%, a dividend yield of 0% and expected volatility of 260% and was recorded as a stock based compensation expense in 2009.

- 22 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 5 - STOCK OPTION PLAN (continued)

As approved by the Board of Directors, on February 4, 2009, the Company granted a total of 300,000 fully vested stock options to two directors of the Company at $3.00 per share for terms of ten years. The total fair value of these options at the date of grant was estimated at $1,197,000 and determined using the Black-Scholes option pricing model with the following assumptions; an expected life of 5 years, a risk free interest rate of 1.91%, a dividend yield of 0% and expected volatility of 260% and was recorded as a stock based compensation expense in 2009.

Also effective February 4, 2009, the Company cancelled 900,000 previously granted and fully vested options to a former director at $1.17 per share and repriced to $3.00 per share, 1,600,000 previously granted and fully vested options with original exercise prices ranging from $4.20 per share to $6.35 per share with all other terms remaining unchanged from the original issuances. The estimated incremental fair value resulting from the modification of these options of $8,500 was recorded as a stock based compensation expense in 2009.

The Company's stock option activity for the period ended May 31, 2009 is summarized as follows:

 


Number of
Options

Weighted average exercise
Price per share

Weighted average remaining
In contractual life (in
     years)     
             

Balance, February 29, 2008

- 

  

$              -

  

-

  

Granted

4,000,000 

  

2.82

  

-

  

Exercised

- 

  

-

  

-

  

Expired / cancelled

(900,000)

  

1.17

  

             

  
             

Balance, February 28, 2009

3,100,000 

  

2.29

  

9.36

  

Granted

-

  

-

  

-

  

Exercised

-

  

-

  

-

  

Expired / cancelled

                -

  

                -

  

              

  
             

Balance, May 31, 2009

3,100,000 

  

$ 2.29

  

9.11

  

 

NOTE 6 - RELATED PARTY TRANSACTIONS

The Company paid a total of $35,372 in management fees to officers and directors of the Company for the period ended May 31, 2009 (May 31, 2008 - $15,500).

 

- 23 -

MAINLAND RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2009

NOTE 7 - SUBSEQUENT EVENTS

On June 1, 2009, 489,750 warrants were exercised at $1.33 per share with net proceeds of $653,000 to the Company.

On June 15, 2009, the Company issued 2,500 shares of common stock at an estimated fair value of $2.90 per share as per the terms of a consulting agreement that became effective March 1, 2009 (refer to Note 4).

On June 22, 2009, the Company entered into an option agreement with Westrock Land Corp. to acquire up to 8,000 net acres in mineral oil and gas leases in certain properties located in the State of Mississippi. The Company has until August 31, 2009 to complete its due diligence.

 

- 24 -

FORWARD LOOKING STATEMENTS

Statements made in this Form 10-Q that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the Securities Exchange Act of 1934. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate" or "continue," or the negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Mainland Resources, Inc. was incorporated under the laws of the State of Nevada on May 12, 2006 and has been engaged in the business of acquisition, exploration and development of mineral properties in the United States since its inception. Our shares of common stock trade on the Over-the-Counter Bulletin Board under the symbol "MNLU:OB." We are a natural resource exploration and production company currently engaged in the exploration, acquisition and development of oil and gas properties in the United States and within North America. Our primary activity and focus is our lease in East Holly Field, De Soto Parish in northwest Louisiana (the "De Soto Parish") as more fully described below. To date, we have acquired approximately 2,695 net acres within the De Soto Parish. We have also leased various other properties totaling approximately 144 net acres within the Cotton Valley/Haynesville trend in the State of Louisiana as more fully described below.

Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "Mainland Resources," refers to Mainland Resources, Inc.

CURRENT BUSINESS OPERATIONS

We are a natural resource exploration and production company currently engaged in the exploration, acquisition and development of oil and gas properties in the United States and within North America. Our primary activity and focus is our lease in the De Soto Parish. To date, we have acquired approximately 2,695 net acres within the De Soto Parish. We have also leased various other properties totaling approximately 144 net acres within the Cotton Valley/Haynesville trend in the State of Louisiana as more fully described below.

 

- 25 -

East Holly Field, De Soto Parish, Louisiana

On February 27, 2008, we entered into an option agreement (the "Option Agreement") with Kingsley Resources, Inc., Nevada corporation ("Kingsley"), pursuant to which we acquired all the right, title and interest Kingsley has in and to certain leasehold estates (the "Leases") located in East Holly Field of the De Soto Parish. The Leases create a contiguous block of acreage on the southeast flank of the East Holly Field. The Leases were the subject of a certain purchase agreement dated December 11, 2007 and modified February 1, 2008 (collectively, the "Leasehold Purchase Agreement") between Kingsley and Permian Basin Acquisition Fund ("Permian"), pursuant to which Kingsley acquired the sub-surface rights provided for in the Leases.

In accordance with the terms and provisions of the Option Agreement: (i) Kingsley granted to us all of its right, title and interest in and to the Leases and we assumed all rights, duties and obligations of Kingsley under the Leasehold Purchase Agreement; (ii) we agreed to pay to Kingsley $100,000, which is payable as a reimbursement of a deposit paid by Kingsley to Permian under the Leasehold Purchase Agreement; and (iii) on or about March 15, 2008 or at the time we pay the $100,000 to Kingsley under the Option Agreement and such other amounts to Permian as required of Kingsley under the Leasehold Purchase Agreement, the right, title and interest of Permian and Kingsley in the Leases will be transferred and delivered to us, subject to residual royalty payment and other rights reserved under the Leasehold Purchase Agreement and the Option Agreement by Permian and Kingsley.

On March 14, 2008, we paid to Permian the aggregate amount of $587,596, which amount did not include the $100,000 required to be paid by us to Kingsley under the terms of the Option Agreement, the $100,000 was paid to Kingsley on April 2, 2008. In accordance thereof, the right, title and interest of Permian and Kingsley in the Leases were transferred to us effective March 14, 2008 by way of assignment. As of the date of this Quarterly Report, we have completed the Option Agreement and the Leasehold Purchase Agreement at a total cost of $687,596 for approximately 2,551 net acres.

Cotton Valley/Haynesville

As of the date of this Quarterly Report, we have leased various other properties totaling approximately 144 net acres consisting of approximately 84 net acres leased as of February 29, 2008 and an additional 60 net acres leased as of February 28, 2009 for payment of additional consideration of $22,753. These additional property leases within the Cotton Valley/Haynesville trend in the State of Louisiana are for a three-year term period. We have a 100% working interest and a 75% net revenue interest in the leases.

Drilling Initiatives. As of the date of this Quarterly Report, in conjunction with our joint venture partner, Petrohawk Energy Corporation ("Petrohawk"), our technical team (guided by management), will determine our drilling initiatives. These initiatives are based on project priority, leasehold requirements and availability of resources, access, costs and a number of factors that go into strategic planning. With regards to the East Holly Field, management intends to drill its initial well to a depth similar to that of other area participants in the Cotton Valley and Hosston formations and the Haynesville Shale. The technical team in conjunction with our joint venture partner expects that other wells drilled in this region will be based on the detailed data gained through the initial well drilling process.

 

- 26 -

Petrohawk Agreement. Effective on July 14, 2008, our Board of Directors entered into a binding venture agreement (the "Letter Agreement") with Petrohawk relating to the joint development of acreage of the Company's leases in DeSoto Parish, Louisiana. In accordance with the terms and provisions of the Letter Agreement: (i) Petrohawk agreed to pay 100% of the costs of development associated with the first well drilled below the Cotton Valley Formation, including drilling, completing and fracture stimulating, as well as costs up to and including pipeline connection; (ii) Petrohawk agreed to pay 80% and we agreed to pay 20% of all costs of the second well drilled below the base of the Cotton Valley Formation; and (iii) Petrohawk agreed to pay 60% and we agreed to pay 40% of all costs of the third well drilled below the base of the Cotton Valley Formation. In accordance with the further terms and provisions of the Letter Agreement, we agreed to transfer 60% of our leases in the DeSoto Parish to Petrohawk at closing, but only as such leases related to all depths below the base of the Cotton Valley Formation and specifically the Haynesville Shale. Petrohawk further agreed to gather and market our production from above the base of the Cotton Valley Formation pursuant to a mutually acceptable agreement. The Letter Agreement was subject to due diligence.

Effective August 4, 2008, we entered into a definitive binding agreement with Petrohawk consummating the transaction described above (the "Peotrhawk Agreement"), together with associated assignment, conveyance and bill of sale (the "Assignment"). In accordance with the terms and provisions of the Assignment, we have effectively transferred and conveyed to Petrohawk sixty percent (60%) of our 100% right, title and interest in and to the leases in the DeSoto Parish. Petrohawk has been designated as the operator on all development relating to the leases.

Griffiths 11-#1 Well. On October 20, 2008, the Griffith Well No. 10H was spudded. The Griffiths 11-#1 well commenced production at the end of January 2009. The approximate reading for total gas produced from the Griffiths 11-#1 well and shipped to market through March 31, 2009 was reported at 832,228 MCF or .832 BCF. We believe that the recoverable reserves for the Griffith 11-#1 well may ultimately be from 7.5 BCF to 15.81 BCF. The 15.81 BCF rate was determined by a reserve report prepared by T.W. McQuire & Associates, Inc. The ultimate recovery was determined by suing a type curve that uses 80% decline for the first year followed by a 30% decline for the second year, 15% decline for the third year, and a 10% decline over the remaining expected life of the well.

Stephenson Douglas LLC 16-#1. The second well under the Petrohawk Agreement, the Stevenson Douglas LLC 16-#1 well, began drilling in April 2009. As of the date of this Quarterly Report, the Stephenson Douglas LLC 16-#1 well has spud and we cemented surface casing at about 1800 feet. As of the date of this Quarterly Report, the Stephenson Douglas LLC 16-#1 has been successfully drilled to a depth of 10,700 feet and 7 5/8 inch intermediate casing has been run on the well to this depth. The rig has now been released. Management believes that the Stephenson Douglas LLC 16-#1 well shows similar potentially productive sands in the Hosston and Cotton Valley formations to those discovered in the Griffiths 11-#1Well. We are awaiting the scheduled arrival of a larger rig capable of whip stocking the well and drilling the lateral portion of the wellbore. We expect the well to be completed by the end of July 2009.

 

- 27 -

Dehan 15 -#1-H. The third well under the Petrohawk Agreement, the Dehan 15 #1-well, began drilling in May 2009. As of the date of this Quarterly Report, we expect the well to be completed by the middle of August 2009.

Mississippi Prospect/Westrock Land Corp.

Effective on September 4, 2008, our Board of Directors authorized the execution of an option agreement (the "2008 Option Agreement") with Westrock Land Corp. ("Westrock") to acquire 5,000 net acres in mineral oil and gas leases located in the State of Mississippi (the "Leases"). In accordance with the terms and provisions of the 2008 Option Agreement: (i) we will acquire a 100% working interest and a 75% net revenue interest in the Leases; (ii) we have agreed to pay certain acquisition costs per net mineral acre and also paid a $500,000 deposit to secure the 2008 Option Agreement; (iii) the balance of the acquisition costs will be due and payable upon completion of the due diligence, which 2008 Option Agreement is subject to the completion of standard due diligence review by us to be completed no later than October 15, 2008; and (iv) upon closing scheduled no later than October 15, 2008, Westrock shall assign to us all of its right, title and interest in and to the Leases free and clear of all liens and encumbrances. On October 15, 2008, November 30, 2008 and subsequently on April 16, 2009, the 2008 Option Agreement was extended pursuant to which the option period is currently extended until June 1, 2009. Additional deposits of $250,000, $100,000, $250,000, $100,000 and $100,000 were paid on October 17, 2008, December 1, 2008, December 29, 2008 and April 27, 2009, May 6, 2009 and June 5, 2009 respectively, for a total deposit to date of $1,400,000 (May 31, 2009 - $1,300,000, February 28, 2009 - $1,100,000) in connection with these extensions.

Effective on June 23, 2009, our Board of Directors authorized the execution of a further option agreement (the "2009 Option Agreement") with Westrock to acquire up to 8,000 net acres in mineral oil and gas leases in certain property located in the State of Mississippi (the "Acquired Properties"). Westrock owns all rights, title and interest in all depths pursuant to certain oil and gas leases comprising the Acquired Properties. In accordance with the terms and provisions of the 2009 Option Agreement: (i) we shall pay to Westrock consideration based on per net mineral acre, which is due and payable upon completion of due diligence by us and execution of appropriate assignments; (ii) Westrock grants to us until August 31, 2009 to complete our due diligence; and (iii) the effective date of the conveyance of the Acquired Properties shall be approximately August 31, 2009.

RESULTS OF OPERATION

We are an exploration stage company and although we have realized revenues, we have incurred recurring losses to date. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.

 

- 28 -

The summarized financial data set forth in the table below is derived from and should be read in conjunction with our unaudited financial statements for the three month periods ended May 31, 2009 and May 31, 2008, including the notes to those financial statements which are included in this Quarterly Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Our audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

 

 

 

 

 

 

 

 

- 29 -

The following table sets forth selected financial information for the periods indicated.

RESULTS OF OPERATION
 

Three Month Period Ended May 31, 2009
and May 31, 2008

For the Period from May
12, 2006 (inception) to
May 31, 2009

Revenues

      

     Oil and gas revenue

$909,121

-

$1,425,700

General and administrative expenses

      

     Operating costs and taxes

215,123

-

364,446

     Depletion allowance

24,918

-

36,918

     Consulting fees

151,134

317,780

746,508

     Management fees and rent fees -
     related party

35,372

15,500

176,192

     Marketing expenses

17,495

-

938,602

     Mineral property costs

-

-

14,510

     Office and general

43,379

170,744

185,426

     Professional fees

46,405

31,567

357,715

     Salary expense

          -

2,457,000

12,002,685

Net operating income (loss)

375,295

(2,992,591)

(13,397,302)

Other income

      

     Gain on settlement of debt

-

33,239

33,239

     Interest income

270

-

7,669

Net income (loss)

375,565

(2,959,352)

(13,356,394)

     Foreign currency translation
     adjustment

-

422

-

Comprehensive income (loss)

375,565

(2,958,930)

(13,356,394)

We have incurred recurring losses to date. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.

We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.

 

 

- 30 -

Three Month Period Ended May 31, 2009 Compared to Three Month Period Ended May 31, 2008.

Our comprehensive income for the three month period ended May 31, 2009 was $375,565 compared to a comprehensive loss of ($2,958,930) during the three month period ended May 31, 2008 (an increase in comprehensive income of $2,583,365). During the three month period ended May 31, 2009, we generated $909,121 in oil and gas revenue compared to $-0- generated during the three month period ended May 31, 2008.

During the three month period ended May 31, 2009, we incurred general and administrative expenses of $533,826 compared to $2,992,591 incurred during the three month ended May 31, 2008 (a decrease of $2,458,765). These general and administrative expenses incurred during the three month period ended May 31, 2009 consisted of: (i) operating costs and taxes of $215,123 (2008: $-0-); (ii) depletion allowance of $24,918 (2008: $-0-); (iii) consulting fees of $151,134 (2008: $317,780); (iv) management and rent fees-related party of $35,372 (2008: $15,500); (v) marketing expenses of $17,495 (2008: $-0-); (vi) office and general of $43,379 (2008: $170,744); (vii) professional fees of $46,405 (2008: $31,567); and (viii) salary expense of $-0- (2008: $2,457,000).

Of the $533,826 incurred as general and administrative expenses during the three month period ended May 31, 2009, we incurred management fees of $35,372 payable to our officers and directors.

General and administrative expenses incurred during the three month period ended May 31, 2009 compared to the three month period ended May 31, 2008 decreased primarily due to the decrease in salary expense to $-0- from $2,457,000 during the three month period ended May 31, 2008 relating to the valuation of stock based compensation, the decrease in consulting fees to $151,134 from $317,780 during the three month period ended May 31, 2008, and the decrease in office and general to $43,379 from $170,744 during the three month period ended May 31, 2008. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, marketing, and consulting costs.

Our net operating income during the three month period ended May 31, 2009 was $375,295 compared to a net operating loss of ($2,992,591) during the three month period ended May 31, 2008.

During the three month period ended May 31, 2009, we recorded other income in the amount of $-0- (2008: $33,239) in gain on settlement of debt and $270 (2008: $-0-) in interest income. This resulted in net income of ($375,565) for the three month period ended May 31, 2009 compared to a net loss of ($2,959,352) for the three month period ended May 31, 2008.

Our net loss of ($2,959,352) for the three month period ended May 31, 2008 was offset for foreign currency translation adjustment of $422 (2009: $-0-). This resulted in comprehensive income of $375,565 for the three month period ended May 31, 2009 as compared to a comprehensive loss of ($2,958,930) for the three month period ended May 31, 2008. The weighted average number of shares outstanding was 39,690,409 for the three month period ended May 31, 2009 compared to 35,518,434 for the three month period ended May 31, 2008.

 

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LIQUIDITY AND CAPITAL RESOURCES

Three Month Period Ended May 31, 2009

As at the three month period ended May 31, 2009, our current assets were $2,419,248 and our current liabilities were $1,361,678, which resulted in a working capital surplus of $1,057,570. As at the three month period ended May 31, 2009, current assets were comprised of: (i) $715,628 in cash; (ii) $403,620 in accounts receivable; and (iii) $1,300,000 in deposit on properties. As at the three month period ended May 31, 2009, current liabilities were comprised of $1,361,678 in accounts payable and accrued liabilities.

As at the three month period ended May 31, 2009, our total assets were $4,574,220 comprised of: (i) current assets in the amount of $2,419,248; (ii) valuation of proved oil and gas properties, net of accumulated depletion of $750,093; and (iii) valuation of unproved oil and gas properties of $1,404,879. The increase in total assets during the three month period ended May 31, 2009 from fiscal year ended February 29, 2009 was primarily due to the increase in cash and the valuation of the unproved oil and gas properties of $1,404,879.

As at the three month period ended May 31, 2009, our total liabilities were $1,361,678 comprised entirely of current liabilities. The increase in liabilities during the three month period ended May 31, 2009 from fiscal year ended February 29, 2008 was primarily due to the increase in accounts payable and accrued liabilities.

Stockholders' equity increased from $2,328,102 for fiscal year ended February 29, 2009 to $3,212,542 for the three month period ended May 31, 2009.

Cash Flows from Operating Activities

We have generated positive cash flows from operating activities during the quarter. For the three month period ended May 31, 2009, net cash flows from operating activities was $380,091 consisting primarily of net income of $375,565. Net cash flows from operating activities was adjusted by $24,918 in depletion and $8,875 in non-cash consulting fees. Net cash flows from operating activities was further changed by $1,308 in accounts payable and accrued liabilities and ($30,575) in accounts receivable.

For the three month period ended May 31, 2008, net cash flows used in operating activities was ($382,161) consisting primarily of a net loss of ($2,959,352). Net cash flows used in operating activities was adjusted by $2,457,000 in stock based compensation and ($33,239) in non-cash mineral property recoveries. Net cash flows used in operating activities was further changed by $159,568 in accounts payable and accrued liabilities and ($6,138) in accounts payable - related parties.

 

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Cash Flows from Investing Activities

For the three month period ended May 31, 2009, net cash flows used in investing activities was ($314,739) consisting of investment in oil and gas property of ($114,739) and deposit on properties of ($200,000) compared to net cash flows used in investing activities during the three month period ended May 31, 2008 of ($702,923) consisting of investment in oil and gas property.

Cash Flows from Financing Activities

We have financed our operations primarily from either advancements or the issuance of equity and debt instruments. For the three month period ended May 31, 2009, net cash flows provided from financing activities was $500,000 compared to $3,675,000 for the three month period ended May 31, 2008. Cash flows from financing activities for the three month period ended May 31, 2009 consisted of $500,000 in proceeds from the exercise of warrants. Cash flows from financing activities for the three month period ended May 31, 2008 consisted of $3,675,000 in proceeds on sale of common stock.

We expect that working capital requirements will continue to be funded through a combination of our existing funds and further issuances of securities. Our working capital requirements are expected to increase in line with the growth of our business.

PLAN OF OPERATION AND FUNDING

Existing working capital, further advances and debt instruments, and anticipated cash flow are expected to be adequate to fund our operations over the next six months. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt instruments. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) oil and gas operating properties; (ii) possible drilling initiatives on current properties and future properties; and (iii) future property acquisitions. We intend to finance these expenses with further issuances of securities, and debt issuances. Thereafter, we expect we will need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations.

During fiscal year ended February 28, 2009, we engaged in the 2008 Private Placement Offering pursuant to which we raised $4,000,000 under Regulation S of the Securities Act.

 

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MATERIAL COMMITMENTS

As of the date of this Quarterly Report, and other than our obligations under the Option Agreement as incurred, we do not have any material commitments.

PURCHASE OF SIGNIFICANT EQUIPMENT

We do not intend to purchase any significant equipment during the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this Quarterly Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

GOING CONCERN

The independent auditors' report accompanying our February 28, 2009 and February 29, 2008 financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared "assuming that we will continue as a going concern," which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business.

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse change in foreign currency and interest rates. 

Exchange Rate

Our reporting currency is United States Dollars ("USD").  In the event we acquire any properties outside of the United States, the fluctuation of exchange rates may have positive or negative impacts on our results of operations. However, since all of our properties are currently located within the United States, any potential revenue and expenses will be denominated in U.S. Dollars, and the net income effect of appreciation and devaluation of the currency against the U.S. Dollar would be limited to our costs of the acquisition of property.

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Interest Rate

Interest rates in the United States are generally controlled. Any potential future loans will relate mainly to acquisition of properties and will be mainly short-term. However our debt may be likely to rise in connection with expansion and if interest rates were to rise at the same time, this could have a significant impact on our operating and financing activities. We have not entered into derivative contracts to hedge existing risks for speculative purposes.

ITEM 4.           CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of May 31, 2009, because we did not include certain required disclosure for accelerated filers in our Quarterly Report on Form 10-Q for our quarter ended May 31, 2009, as originally filed with the SEC.

Changes in internal controls

No significant changes were implemented in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.           OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS

Management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Quarterly Report, no director, officer or affiliate is (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties.

ITEM 1A.         RISK FACTORS

An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that are facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks.

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We have a history of operating losses and there can be no assurance we will be profitable in the future.

We have a history of operating losses, expect to continue to incur losses, and may never be profitable, and we must be considered to be in the exploration stage. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred losses totalling ($13,356,394) from May 12, 2006 (inception) to May 31, 2009. Further, we do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that: (i) the costs to acquire additional leases are more than we currently anticipate; (ii) drilling and completion costs for additional wells increase beyond our expectations; or (iii) we encounter greater costs associated with general and administrative expenses or offering costs.

Our development of and participation in what could evolve into an increasing number of oil and gas prospects may require substantial capital expenditures. The uncertainty and factors described throughout this section may impede our ability to economically find, develop, produce, and acquire natural gas and oil reserves. As a result, we may not be able to achieve or sustain profitability or positive cash flows from operating activities in the future.

Our Company's continuation as a going concern is dependent upon our ability to fund ongoing operations, carry out our business plan, and ultimately to attain profitable operations, all of which is uncertain.

Our Company's continuation as a going concern is dependent upon our ability to fund ongoing operations, carry out our business plan and ultimately to attain profitable operations, all of which is uncertain. Our audited financial statements for the year ended February 28, 2009 contain additional note disclosures to this effect, and the audited financial statements do not include any adjustments that might result from the outcome of this uncertainty. In addition, the report of our Company's independent registered accounting firm accompanying our audited financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

There can be no assurance that we will be able to raise sufficient additional capital or have positive cash flow from operations to address all of our cash flow needs. If we are not able to find alternative sources of cash or generate sufficient positive cash flow from operations, our business and shareholders will be materially and adversely affected.

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We will need to raise additional financing to complete further exploration and production activities.

We will require significant additional financing in order to continue our exploration and development activities and our production activities and our assessment of the commercial viability of certain of our oil and gas properties. Furthermore, if the cost of our planned exploration, development and production programs are greater than anticipated, we may have to seek additional funds through public or private share offerings or arrangements with corporate partners. There can be no assurance that we will be successful in our efforts to raise these required funds, or on terms satisfactory to us. The continued exploration and development and production of our oil and gas properties and the development of our business will depend upon our ability to establish the commercial viability of our oil and gas properties and to ultimately develop cash flow from operations and reach profitable operations. We currently are in the exploration and production stage. Although we have revenues from operations, we are experiencing significant negative cash flow. Accordingly, the only other sources of funds presently available to us are through the sale of equity. We presently believe that debt financing will not be an alternative to us as certain of our properties are in the exploration stage. Alternatively, we may finance our business by offering an interest in our oil and gas properties to be earned by another party or parties carrying out further exploration and development thereof or to obtain project or operating financing from financial institutions, neither of which is presently intended. If we are unable to obtain this additional financing, we will not be able to continue our exploration activities and our assessment of the commercial viability of our oil and gas properties. Further, if we are able to establish that development of our oil and gas properties is commercially viable, our inability to raise additional financing at this stage would result in our inability to place our oil and gas properties into production and recover our investment.

Certain of our properties have no known bodies of reserves, may not have reserves and may never come into production.

Certain of our properties contain proven reserves in accordance with the definitions adopted by the SEC. However, there is no assurance that any exploration and development program that we carry out will establish further proven reserves. Certain of our other oil and gas properties are in the exploration stage as opposed to the development stage and have no known body of reserves. The known reserves at these projects have not yet been determined to be economic, and may never be determined to be economic. We plan to conduct further exploration activities on our oil and gas property, which future exploration may include the completion of feasibility studies necessary to evaluate whether additional commercial proven reserves exist on our mineral property. There is a substantial risk that these exploration activities will not result in discoveries of commercially recoverable reserves of oil or gas. Any determination that our property contains further commercially recoverable quantities of oil or gas may not be reached until such time that final comprehensive feasibility studies have been concluded establishing that a potential reserve is likely to be economic. There is a substantial risk that any preliminary or final feasibility studies carried out by us will not result in a positive determination that our oil and gas property can be commercially developed.

Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

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We have received an "Estimated Future Reserves and Income Attributable to Certain Leasehold Interests" report from Ryder Scott Company, L.P. The process of estimating oil and natural gas reserves is complex.  It requires interpretations of available technical data and many assumptions, including assumptions relating to economic factors.  Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of our reported reserves.  In order to prepare our estimates, we must project production rates and the timing of development expenditures.  We must also analyze available geological, geophysical, production and engineering data.  The extent, quality and reliability of this data can vary.  The process also requires that economic assumptions be made about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.  Therefore, estimates of oil and natural gas reserves are inherently imprecise

Actual future production, oil and natural gas prices received, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates.  Any significant variance could materially affect the estimated quantities and present value of our reported reserves.  In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.

Our exploration and development activities on our oil and gas properties may not be commercially successful, which could lead us to abandon our plans to develop the property and our investments in exploration.

Our long-term success depends on our ability to establish commercially recoverable quantities of oil and natural gas on our properties that can then be developed into commercially viable operations. Oil and gas exploration is highly speculative in nature, involves many risks and is frequently non-productive. These risks include unusual or unexpected geologic formations, and the inability to obtain suitable or adequate machinery, equipment or labour. The success of oil and gas exploration is determined in part by the following factors:

  • identification of potential oil and natural gas reserves based on superficial analysis;

  • availability of government-granted exploration permits;

  • the quality of management and geological and technical expertise; and

  • the capital available for exploration.

Substantial expenditures are required to establish proven and probable reserves through drilling and analysis, to develop processes to extract oil and gas, and to develop the drilling and processing facilities and infrastructure at any chosen site. Whether an oil and gas reserve will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the reserve; oil and natural gas prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of oil and gas and environmental protection. We may invest significant capital and resources in exploration activities and abandon such investments if we are unable to identify commercially exploitable reserves. The decision to abandon a project may reduce the trading price of our common stock and impair our ability to raise future financing. We cannot provide any assurance to investors that we will discover or acquire any oil or gas reserves in sufficient quantities on any of our properties to justify commercial operations. Further, we will not be able to recover the funds that we spend on exploration if we are not able to establish commercially recoverable reserves of oil or natural gas on our property.

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Our business is difficult to evaluate because we have a limited operating history.

In considering whether to invest in our common stock, you should consider that there is only limited historical financial and operating information available on which to base your evaluation of our performance. Our inception was May 12, 2006 and, as a result, we have a limited operating history.

As part of our growth strategy, we intend to acquire additional oil and gas properties.

As part of our growth strategy, we intend to acquire additional oil and gas production properties. Current and subsequent acquisitions may pose substantial risks to our business, financial condition, and results of operations. In pursuing acquisitions, we will compete with other companies, many of which have greater financial and other resources to acquire attractive properties. Even if we are successful in acquiring additional properties, some of the properties may not produce revenues at anticipated levels or failure to conduct drilling on prospects within specified time periods may cause the forfeiture of the lease in that prospect. There can be no assurance that we will be able to successfully integrate acquired properties, which could result in substantial costs and delays or other operational, technical, or financial problems. Further, acquisitions could disrupt ongoing business operations. If any of these events occur, it would have a material adverse effect upon our operations and results from operations.

We are a new entrant into the oil and gas exploration and development industry without profitable operating history.

Since inception, our activities have been limited to organizational efforts, obtaining working capital and acquiring and developing a very limited number of mineral properties. Subsequently, we changed our business strategy from mineral exploration to oil and gas exploration. As a result, there is limited information regarding oil and gas property related production potential or revenue generation potential. Certain of our oil and gas properties have proven reserves. Other properties have no probable or proved reserves. As a result, our future revenues may be limited or non-existent.

The business of oil and gas exploration and development is subject to many risks and if oil and natural gas is found in economic production quantities, the potential profitability of future possible oil and gas ventures depends upon factors beyond our control. The potential profitability of oil and natural gas properties if economic quantities are found is dependent upon many factors and risks beyond our control, including, but not limited to: (i) unanticipated ground conditions; (ii) geological problems; (iii) drilling and other processing problems; (iv) the occurrence of unusual weather or operating conditions and other force majeure events; (v) lower than expected reserve quantities; (vi) accidents; (vii) delays in the receipt of or failure to receive necessary government permits; (viii) delays in transportation; (ix) labour disputes; (x) government permit restrictions and regulation restrictions; (xi) unavailability of materials and equipment; and (xii) the failure of equipment or drilling to operate in accordance with specifications or expectations.

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Our drilling operations may not be successful.

There can be no assurance that our current well re-completion activities or drilling activities will be successful, and we cannot be sure that our overall drilling success rate or our production operations within a particular area will ever come to a successful fruition and, if it does, will not decline over time. We may not recover all or any portion of our capital investment in the wells or the underlying leaseholds. Unsuccessful drilling activities would have a material adverse effect upon our results of operations and financial condition. The cost of drilling, completing, and operating wells is often uncertain, and a number of factors can delay or prevent drilling operations including: (i) unexpected drilling conditions; (ii) pressure or irregularities in geological formations; (iii) equipment failures or accidents; (iv) adverse weather conditions; and (iv) shortages or delays in availability of drilling rigs and delivery of equipment.

Our production initiatives may not prove successful.

The properties from which we intend to produce natural gas frequently contain water, which may hamper our ability to produce gas in commercial quantities. The amount of natural gas that can be commercially produced depends upon the coal quality, the original gas content of the coal seam, the thickness of the seam, the reservoir pressure, the rate at which gas is released from the coal, and the existence of any natural fractures through which the gas can flow to the well bore. However, coal beds frequently contain water that must be removed in order for the gas to detach from the coal and flow to the well bore. The average life of a coal bed well is only five to six years. Our ability to remove and dispose of sufficient quantities of water from the coal seam will determine whether or not we can produce coal bed methane in commercial quantities.

There is no guarantee that the potential drilling locations we have or acquire in the future will ever produce natural gas or oil, which could have a material adverse effect upon our results of operations.

Prospects that we decide to drill may not yield natural gas or oil in commercially viable quantities.

We describe our East Holly Field and our Cotton Valley prospects in this Annual Report. Our prospects were in the stage of preliminary evaluation and assessment and development and we have decided to drill on the property. However, the use of seismic data, historical drilling logs, offsetting well information, and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling and testing whether natural gas or oil will be present or, if present, whether natural gas or oil will be present in sufficient quantities or quality to recover drilling or completion costs or to be economically viable. In sum, the cost of drilling, completing and operating any wells is often uncertain and new wells may not be productive.

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We may be unable to identify liabilities associated with the property or obtain protection from sellers against them.

One of our growth strategies is to capitalize on opportunistic acquisitions of oil and natural gas reserves. However, our review of our current acquired property is inherently incomplete because it generally is not feasible to review in depth every individual property involved in each acquisition. A detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Further, environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken. We may not be able to obtain indemnification or other protections from the sellers against such potential liabilities, which would have a material adverse effect upon our results of operations.

The potential profitability of oil and gas ventures depends upon global political and market related factors beyond our control.

World prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. The potential profitability of oil and gas properties is dependent on these and other factors beyond our control. These factors may materially affect our financial performance if we are successful in our exploration activities and ultimately place any oil or gas wells into production, and, in the near term, may impact on our ability to raise financing for our exploration activities.

Production or oil and gas resources if found are dependent on numerous operational uncertainties specific to the area of the resource that affects its profitability.

Production area specifics affect profitability. Adverse weather conditions can hinder drilling operations and ongoing production work. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. Production and treatments on other wells in the area can have either a positive or negative effect on our production and wells. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The content of hydrocarbons is subject to change over the life of producing wells. The marketability of oil and gas from any specific reserve which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include, but are not limited to, the proximity and capacity of oil and gas pipelines, availability of room in the pipelines to accommodate additional production, processing and production equipment operating costs and equipment efficiency, market fluctuations of prices and oil and gas marketing relationships, local and state taxes, mineral owner and other royalties, land tenure, lease bonus costs and lease damage costs, allowable production, and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in us not receiving an adequate return on our invested capital.

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If production results from operations, we are dependent upon transportation and storage services provided by third parties.

We will be dependent on the transportation and storage services offered by various interstate and intrastate pipeline companies for the delivery and sale of our gas supplies. Both the performance of transportation and storage services by interstate pipelines and the rates charged for such services are subject to the jurisdiction of the Federal Energy Regulatory Commission or state regulatory agencies. An inability to obtain transportation and/or storage services at competitive rates could hinder our processing and marketing operations and/or affect our sales margins.

Our results of operations are dependent upon market prices for oil and gas, which fluctuate widely and are beyond our control.

Our revenue, profitability, and cash flow depend upon the prices and demand for oil and natural gas. The markets for these commodities are very volatile and even relatively modest drops in prices can significantly affect our financial results and impede our growth. Prices received also will affect the amount of future cash flow available for capital expenditures and may affect our ability to raise additional capital. Lower prices may also affect the amount of natural gas and oil that can be economically produced from reserves either discovered or acquired. Factors that can cause price fluctuations include: (i) the level of consumer product demand; (ii) domestic and foreign governmental regulations; (iii) the price and availability of alternative fuels; (iv) technical advances affecting energy consumption; (v) proximity and capacity of oil and gas pipelines and other transportation facilities; (vi) political conditions in natural gas and oil producing regions; (vii) the domestic and foreign supply of natural gas and oil; (viii) the ability of members of Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; (ix) the price of foreign imports; and (x) overall domestic and global economic conditions.

The availability of a ready market for our oil and gas depends upon numerous factors beyond our control, including the extent of domestic production and importation of oil and gas, the relative status of the domestic and international economies, the proximity of our properties to gas gathering systems, the capacity of those systems, the marketing of other competitive fuels, fluctuations in seasonal demand and governmental regulation of production, refining, transportation and pricing of oil, natural gas and other fuels.

The oil and gas industry in which we operate involved many industry related operating and implementation risks that can cause substantial losses, including, but not limited to, unproductive wells, natural disasters, facility and equipment problems and environmental hazards.

Our drilling activities are subject to many risks, including the risk that we will not discover commercially productive reservoirs. Drilling for oil and natural gas can be unprofitable, not only from dry holes, but from productive wells that do not produce sufficient revenues to return a profit. In addition, our drilling and producing operations may be curtailed, delayed or cancelled as a result of other drilling and production, weather and natural disaster, equipment and service failure, environmental and regulatory, and site specific related factors, including but not limited to: (i) fires; (ii) explosions; (iii) blow-outs and surface cratering; (iv) uncontrollable flows of underground natural gas, oil, or formation water; (v) natural disasters; (vi) facility and equipment failures; (vii) title problems; (viii) shortages or delivery delays of equipment and services; (ix) abnormal pressure formations; and (x) environmental hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases.

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If any of these events occur, we could incur substantial losses as a result of: (i) injury or loss of life; (ii) severe damage to and destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of our operations; or (vii) repairs necessary to resume operations.

If we were to experience any of these problems, it could affect well bores, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations. We may be affected by any of these events more than larger companies, since we have limited working capital.

The oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring leases.

The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration activities during periods of low oil and natural gas market prices. Our larger competitors may be able to absorb the burden of present and future federal, state, local and other laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our industry, we may be at a disadvantage in bidding for exploratory prospects and producing oil and natural gas properties.

Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our business operations.

Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend material amounts on compliance with environmental regulations. However, we may be required to do so in the future and this may affect our ability to expand or maintain our operations.

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In general, our exploration activities are, and any future production activities will be, subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry.

We believe that our operations comply, in all material respects, with all applicable environmental regulations.

We do not insure against all risks, and we may be unable to obtain or maintain insurance to cover the risks associated with our operations at economically feasible premiums. Losses from an uninsured event may cause us to incur significant costs that could have a material adverse effect upon our financial condition.

Our insurance will not cover all the potential risks associated with the operations of an exploration stage oil and gas company. We may also be unable to obtain or maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, we expect that insurance against risks such as environmental pollution or other hazards as a result of exploration and production may be prohibitively expensive to obtain for a company of our size and financial means. We might also become subject to liability for pollution or other hazards for which insurance may not be available or for which we may elect not to insure against because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that could have a material adverse effect upon our financial condition and results of operations.

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

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitability.

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We may be unable to retain key employees or consultants or recruit additional qualified personnel.

Our extremely limited personnel means that we would be required to spend significant sums of money to locate and train new employees in the event any of our employees resign or terminate their employment with us for any reason. Due to our limited operating history and financial resources, we are entirely dependent on the continued service of our Chief Executive Officer and our Chief Financial Officer. Further, we do not have key man life insurance on either of these individuals. We may not have the financial resources to hire a replacement if one or both of our officers were to die. The loss of service of either of these employees could therefore significantly and adversely affect our operations.

Our officers and directors may be subject to conflicts of interest.

Our officers and directors serve only part time and are subject to conflicts of interest. Each devotes part of his working time to other business endeavours, including consulting relationships with other entities, and has responsibilities to these other entities. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Because of these relationships, our officers and directors will be subject to conflicts of interest. Currently, we have a policy in place to address such conflicts of interest.

Nevada law and our articles of incorporation may protect our directors from certain types of lawsuits.

Nevada law provides that our officers and directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as officers and directors. Our Bylaws permit us broad indemnification powers to all persons against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our officers and directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our officers and directors against claims, including claims arising out of their negligence, poor judgment, or other circumstances.

ITEM 2.           UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Consulting Agreement

Effective on March 17, 2009, we issued 2,500 shares of our restricted common stock at a per share price of $3.55 in accordance with the terms and provisions of a consulting services agreement. The shares of common stock were issued in reliance on Regulation S promulgated under the Securities Act. The per share price of the Units were valued at the fair market value of the Company's stock at the date of issuance.

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ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

No report required.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No report required.

ITEM 5.           OTHER INFORMATION

Consulting Agreement

Effective on June 15, 2009, we issued 2,500 shares of our restricted common stock at a per share price of $2.90 in accordance with the terms and provisions of a consulting services agreement. The shares of common stock were issued in reliance on Regulation S promulgated under the Securities Act. The per share price of the Units were valued at the fair market value of the Company's stock at the date of issuance.

July 2008 Private Placement Offering

Effective May 2008, we completed a private placement offering (the "2008 Private Placement") with certain non-United States residents (collectively, the "Investors"). In accordance with the terms and provisions of the 2008 Private Placement, we issued to the Investors an aggregate of 6,000,000 units at a per unit price of $0.67 (the "Unit") in our capital for aggregate proceeds of $4,000,000. Of the amount of $4,000,000 received, $50,000 was as settlement of debt and the remaining $3,950,000 was received in cash. Each Unit was comprised of one share of restricted common stock and one-half non-transferable warrant (the "Warrant"). Each Warrant is exercisable at $1.33 per share for a period of one year from the date of issuance ending on May 1, 2009 (the "Exercise Period").

On April 29, 2009, our Board of Directors pursuant to written consent resolutions approved a thirty-day extension to the Exercise Period to June 1, 2009 based on current market conditions. As of the date of this Quarterly Report, an aggregate of 864,750 Warrants were exercised at $1.33 per share with net proceeds of $1,153,000. Therefore, we issued an aggregate of 432,375 shares of our restricted common stock. The remaining 2,135,250 Warrants expired unexercised.

ITEM 6.           EXHIBITS

 

Exhibits:

  
 

31.1

Certification of the registrant's Principal Executive Officer under the Exchange Act Rules, 12a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act 2002.

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31.2

Certification of the registrant's Principal Financial Officer under the Exchange Act Rules, 12a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act 2002.
 

32.1

Certifications of the registrant's Principal Executive Officer and Principal Financial Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

MAINLAND RESOURCES, INC.

Dated: November 8, 2010

By: "Nicholas W. Atencio"
Nicholas W. Atencio, Chief Executive Officer
   

Dated: November 8, 2010

By: "William D. Thomas"
William D. Thomas, Chief Financial Officer