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EX-32.1 - 906 CERTIFICATION OF CEO AND CFO - FOX PETROLEUM INC.ex-32_1.htm
EX-31.1 - 302 CERTIFICATION OF CEO - FOX PETROLEUM INC.ex-31_1.htm
EX-31.2 - 302 CERTIFICATION OF CFO - FOX PETROLEUM INC.ex-31_2.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
AMENDMENT NO. 1 TO
Form 10-Q

Mark One
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the period ended May 31, 2010
   
 
OR
   
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from ______ to _______

Commission file number: 000-52721

FOX PETROLEUM INC.
(Name of small business issuer in its charter)
   
Nevada n/a
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
64 Knightsbridge
London, England United Kingdom SW1X 7JF
(Address of principal executive offices)
   
44-207-590-9630
(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 par value
 
(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 ¨

 
 

 

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.

Yes ¨   No ¨

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
¨
           
 
Non-accelerated filer
¨
 
Smaller reporting company
x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the most practicable date:
Outstanding as of July 19, 2010
Class Common Stock, $0.001 par value
88,168,245

Transitional Small Business Disclosure Format (Check one): Yes ¨  No x


 
 

 


FOX PETROLEUM INC.

FORM 10-Q

Part I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.   
Financial Statements
 
 
Consolidated Balance Sheets (Unaudited)
5
 
Consolidated Statements of Operations (Unaudited)
6
 
Consolidated Statements of Cash Flows (Unaudited)
7
 
Notes to Consolidated Financial Statements (Unaudited)
8
 
 
 
Item 2.
Management’s Discussion and Analysis (MD&A)
32
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
 
 
 
Item 4.
Controls and Procedures
43
 
 
 
Part II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
44
 
 
 
Item 1A.  
Risk Factors
44
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
44
 
 
 
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
45
 
 
 


 
 

 


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 
 
 

 
 
Fox Petroleum, Inc.
(A Development Stage Company)
Interim Consolidated Balance Sheets
(unaudited)

ASSETS
 
   
May 31,
   
May 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
 
 
CURRENT ASSETS
           
Cash and cash equivalents
  $ -     $ 4,870  
VAT refund and other receivables
    -       139,894  
 
    -       -  
Total Current Assets
    -       144,764  
Oil and Gas Interests – Note 4
            588,270  
 
    -       -  
                 
TOTAL ASSETS
  $ -     $ 733,034  
                 
CURRENT LIABILITIES
               
Accounts payable and accrued liabilities – Notes 4 and 5 and 8(c)
  $ 18,360,246     $ 17,272,502  
Due to related parties – Note 6
    -       17,500  
Notes payable – Note 5
    5,312,333       4,885,333  
      23,672,579       22,175,335  
Fees payable in stock and warrants – Notes 5(e), 8(b), (d) and (e)
    44,461       75,672  
 
               
                 
TOTAL LIABILITIES
    23,717,040       22,251,007  
 
               
STOCKHOLDERS' EQUITY
               
                 
Capital stock – Notes 4, 5, 6, 7, and 8 Authorized:
               
90,000,000 common shares, par value $0.001 per share
    -       -  
84,818,245 common shares (February 28, 2009: 69,818,245)
    84,818       84,818  
Additional paid-in capital
    44,937,395       44,937,395  
Subscriptions receivable
    (26,000,000 )     (26,000,000 )
Deficit accumulated during the development stage
    ( 42,739,253 )     (40,540,186 )
              -  
                 
                 
Total Dolat Ventures, Inc. Stockholders' Equity
    --     $ 733,034  

Ability to Continue as a Going Concern – Note 2
Commitments – Notes 4, 5, 6, 7, and 8

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


 
5

 

Fox Petroleum, Inc.
(A Development Stage Company)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS for the three months ended May 31, 2010 and 2009 and
for the period November 4, 2004 (Date of Inception) to May 31, 2010
(Stated in US Dollars )
(unaudited)

               
Period from
 
               
04-Nov-04
 
   
Three Months Ended
   
(inception)
 
   
May 31,
   
to May 31,
 
   
2010
   
2009
   
2010
 
REVENUES
                 
Sales revenues
  $ -     $ -     $ -  
Cost of revenues
    -       -       -  
Gross Profit
    -       -       -  
                         
OPERATING EXPENSES
                       
Accounting and Audit Fees
    16,000       29,967       338,381  
Accretion of convertible note
    -       -       2,575,492  
Advertising and public relations
    -       -       2,001,045  
Bank charges
    -       4,306       29,868  
Consulting fees – Note 6
    -       86,657       755,239  
Filing and transfer agent
    -               49,690  
Finance fees – Notes 5 and 8(c)
    -       4,870,617       9,712,804  
Foreign exchange
    -       243,989       415,308  
Insurance
    -       -       72,590  
Impairment of oil & gas assets
    -         -       10,046,683  
Legal fees
    -       10,300       567,848  
Loss on failure to perform obligations under oil and gas commitments – Note 8(c)
    -       -       12,910,000  
License fees
    -       25,126       67,328  
Management fees – Note 6
    -       188,956       1,380,186  
Mineral property acquisition and exploration costs
    -       -       17,000  
Office and miscellaneous – Note 6
    -       16,133       426,556  
Travel and Entertainment
    -       -       260,758  
Loss for the period before other items
    -       (5,582,760 )     (42,952,833 )
                         
Other items:
                       
Gain on recovery of VAT receivable
                    78,451  
Interest and other income
    -       -       9,986  
Gain on recovery of payables
    -       -       125,143  
Net loss for the period
  $ (16000 )   $ (5,582,760 )     (42,739,253 )
 
                       
Basic and diluted loss per share
    -       (0.20 )        
Weighted average number of shares outstanding
    24,063,670       27,763,897          

The accompanying notes are a integral part of these consolidated financials statements.


 
6

 
 
Fox Petroleum, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows for the three months ended May 31, 2010 and 2009 and
for the period November 4, 2004 (Date of Inception) to May 31, 2010
( Stated in US Dollars )
(unaudited)

   
 
         
Period from
 
   
Three Months Ended
   
November 4, 2006 (inception)
 
   
May 31,
   
to May 31,
 
   
2010
   
2009
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net income (loss)
  $ -     $ (5,582,760 )   $ (42,739,253 )
Donated services and rent
    -               21,000  
Amortization of deferred financing costs
    -                  
Accretion of convertible debt discount
    -       -       2,575,492  
Fees payable in stock and warrants
    -       2,090       37,087  
Finance fee paid in stock and warrants
    -       4,870,671       8,270,294  
Gain on settlement of amounts payable
    -               (125,143 )
Impairment of oil and gas assets
    -               10,046,683  
Gain of VAT receivable written off
    -               (78,451 )
Change in non-cash working capital balances related to operations:
                       
VAT refund and other receivables
    -       17,824       78,451  
Prepaid expenses
    -                  
Accounts payable and accrued liabilities
    -       687,394       19,019,627  
Net cash used in operating activities
    -       (4,835 )     (2,894,213 )
Investing Activities
                       
Proceeds (investment) in oil and gas interests
    -       20,000       (7,702,687 )
Decrease (increase) in restricted cash
    -       5,468          
Net Cash Used in Investing Activities
    -       25,468       (7,702,687 )
                         
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from issuance of common stock
    -       -       6,196,900  
Proceeds from related party advances
    -       (16,500 )     -  
Proceeds from notes payable
                    4,400,000  
Net Cash Provided (Used) in Financing Activities
    -       (16,500 )     10,598,900  
                         
 
            -          
                         
NET INCREASE IN CASH
    -       4133       -  
CASH AT BEGINNING OF PERIOD
    -       737       -  
                         
CASH AT END OF PERIOD
  $ -     $ 4870     $    
                         
 Non-cash transactions – Note 9
                       
   
   
The accompanying notes are an integral part of these consolidated financial statements.


 
7

 

FOX PETROLEUM INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 
 
Note 1             Nature of Operations and Ability to Continue as a Going Concern
 
The Company was incorporated in the State of Nevada on November 4, 2004 and is in the development stage.  The Company has oil and gas interests in the North Sea and Texas and has not yet determined whether these properties contain reserves that are economically recoverable.  The recoverability of amounts from the properties will be dependent upon the discovery of economically recoverable reserves, confirmation of the Company’s interest in the underlying properties, the ability of the Company to obtain necessary financing to satisfy the expenditure requirements under the property agreements and to complete the development of the properties and upon future profitable production or proceeds for the sale thereof.
 
These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next twelve months.  Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.  At February 28, 2010, the Company has a working capital deficiency of $23,672,579, has not yet achieved profitable operations, has accumulated losses of $42,739,253 since its inception and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern.  The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.  Management has no formal plan in place to address this concern but considers that the Company will be able to obtain additional funds by equity financing and/or related party advances, however there is no assurance of additional funding being available or on acceptable terms, if at all.
 
 
8

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 
 
Note 2             New Accounting Standards
 
In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF07-5”). EITF07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.  It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation.  EITF07-5 is effective for fiscal years beginning after December 15, 2008.  The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under SFAS 133. Convertible debt instruments within the scope of FSP APB 14-1 are not addressed by the existing APB 14. FSP APB 14-1 requires that the liability and equity components of convertible debt instruments within the scope of FSP APB 14-1 be separately accounted for in a manner that reflects the entity’s nonconvertible debt borrowing rate. This requires an allocation of the convertible debt proceeds between the liability component and the embedded conversion option (i.e., the equity component). The difference between the principal amount of the debt and the amount of the proceeds allocated to the liability component will be reported as a debt discount and subsequently amortized to earnings over the instrument’s expected life using the effective interest method. The FSP APB 14-1 is effective for the Company’s fiscal year beginning March 1, 2009 and has been applied retrospectively to all periods presented.
 
The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
 
9

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 
 
Note 3             New Accounting Standards – (cont’d)
 
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (Revised 2007), “Business Combinations,” and other U.S. generally accepted accounting principles (GAAP). This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In January 2008, Staff Accounting Bulletin (“SAB”) 110, “Share-Based Payment” was issued.  Registrants may continue, under certain circumstances, to use the simplified method in developing estimates of the expected term of share options as initially allowed by SAB 107, “Share-Based Payment”. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”. SFAS 141 (Revised) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The guidance will become effective for the first fiscal year beginning after December 15, 2008. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
 
10

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 
 
Note 3             New Accounting Standards – (cont’d)
 
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance is effective for the first fiscal year beginning after December 15, 2008. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In December 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 07-01, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (“EITF 07-01”). EITF 07-01 discusses the appropriate income statement presentation and classification for the activities and payments between the participants in arrangements related to the development and commercialization of intellectual property. The sufficiency of disclosure related to these arrangements is also specified. EITF 07-01 is effective for fiscal years beginning after December 15, 2008. As a result, EITF 07-01 was effective for the Company as of March 1, 2009. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In April 2009, the FASB issued FASB Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP 141(R)-1), to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination under SFAS 141(R). Under the new guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In April 2009, the FASB issued FSP SFAS No. 107-1, Interim Disclosures about Fair Value of Financial Instruments, which amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting. FSP SFAS No. 107-1 will require disclosures about fair value of financial instruments in financial statements for interim reporting periods and in annual financial statements of publicly-traded companies. This FSP also will require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods. The effective date for this FSP is interim and annual periods ending after June 15, 2009. As a result, the FSP was effective for the Company as of June 1, 2009. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
 
11

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 
 
Note 3             New Accounting Standards – (cont’d)
 
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The FSP is effective for interim and annual periods ending after June 15, 2009. As a result, the FSP was effective for the Company as of June 1, 2009. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" The FSP provides additional guidance for estimating fair value when the market activity for an asset or liability has declined significantly. The FSP is effective for interim and annual periods ending after June 15, 2009. As a result, the FSP was effective for the Company as of June 1, 2009. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
 
In June 2009, the FASB issued FSP No. FAS 167, Amendments to FASB Interpretation No. 46(R).  The FSP significantly changes the consolidation model for variable interest entities. This statement requires companies to qualitatively assess the determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The new accounting statement is effective March 1, 2011 and will be applied retrospectively. As a result, the Company is evaluating the impact on the consolidated financial statements.
 
In June 2009, the FASB issued FAS No. 168 The FASB Accounting Standards Codification, which establishes the FASB’s Accounting Standards Codification as the exclusive authoritative reference for nongovernmental U.S. GAAP for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretative releases, which are also authoritative for SEC registrants. As a result, FAS 168 replaces FAS 162 and provides guidance that all codification standards will carry the same level of authority. The Company is currently evaluating the impact of this FSP, but would not expect it to have a material impact on the Company’s consolidated financial statements.
 
 
12

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 
 
Note 4                 Oil and Gas Interests
 
   
February 28, 2010
 
   
United
   
United
       
   
States
   
Kingdom
   
Total
 
                   
Unproved properties
                 
- acquisition costs
  $ 3,701,871     $ 23,439     $ 3,725,310  
- exploration costs
    2,347,394       4,084,668       6,432,062  
                         
      6,049,265       4,108,107       10,157,372  
Less: Write-down of oil & gas interests
    (5,938,576 )     (4,108,107 )     (10,046,683 )
Less: Incidental revenue
    (110,689 )     -       (110,689 )
                         
    $ -     $ -     $ -  
 
   
February 28, 2009
 
   
United
   
United
       
   
States
   
Kingdom
   
Total
 
                   
Unproved properties
                 
- acquisition costs
  $ 3,701,871     $ 23,439     $ 3,725,310  
- exploration costs
    2,347,394       4,084,668       6,432,062  
                         
      6,049,265       4,108,107       10,157,372  
Less: Write-down of oil & gas interests
    (5,438,576 )     (4,019,837 )     (9,458,413 )
Less: Incidental revenue
    (90,689 )     -       (90,689 )
                         
    $ 520,000     $ 88,270     $ 608,270  
 
a)
North Slope, Alaska
 
On May 29, 2007, the Company entered into a Lease Purchase and Sale Agreement with a company to acquire a combined 100% working interest in 12 state-issued oil and gas leases in the North Slope of Alaska.  These leases are subject to a royalty of 16.66667% to the State of Alaska and a private royalty equal to 5% of net revenue.  In consideration for the oil and gas leases, the Company issued 4,000,000 restricted common shares of the Company valued at $1,001,702, the transferor’s historical cost.  The valuation is based the SEC Staff Accounting Bulletin, Topic 5, G.
 
Pursuant to underlying agreements on the property, the Company is obligated to drill one test well to at least 10,000 feet on or before November 14, 2011, four test wells to at least 4,000 feet on or before February 20, 2012, and one test well to at least 4,000 feet on or before January 16, 2012.  The Company is currently unable to quantify an estimate of the cost of these wells.
 
 
13

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)

Note 4
Oil and Gas Interests – (cont’d)
 
 
a)
North Slope, Alaska – (cont’d)
 
By a purchase agreement dated October 10, 2007 and amended November 2, 2007, the Company acquired 8 additional oil and gas leases in the North Slope of the State of Alaska for $850,000 including cash of $250,000 and $600,000 paid by the issuance of 80,000 common shares of the Company.  The fair value of the shares issued was $964,000 (based on the quoted market price of the Company’s common shares on the transaction date) and consequently a further $364,000 has been recorded for this portion of the purchase agreement.  These leases are subject to a royalty of 16.66667% to the State of Alaska and a private royalty equal to 5%.  Two of the leases acquired pursuant to this agreement are part of the Cook Inlet project described below.
 
On January 30, 2009, the Company entered into an agreement with the original lease vendors (the “Payers”) regarding twelve of the North Slope oil and gas leases (the “Twelve Leases”). Under the terms of the Agreement, the Payers agreed to use their best efforts to make, on the Company's behalf, annual rental payments for the Twelve Leases totaling up to $64,980 on or before the February 1, 2009 due date.
 
The Company agreed to repay to the Payers by March 2, 2009 any portion of the Payments made by the Payers (the "Repayment Amount"). The Repayment Amount is subject to an 18% interest rate per annum. The Company also granted the Payers a security interest in the Company's right, title, and interest in the Twelve Leases. The Company further agreed to transfer and assign its right, title, and interest in the Twelve Leases to the Payers in the event of the Company's failure to pay the Repayment Amount in a timely manner.
The Company failed to pay the Repayment Amount and by an agreement dated May 14, 2009, the Payers agreed to extend the repayment date until August 14, 2009 in return for the lease assignment documents for the Twelve Leases being executed and delivered into escrow.
 
The Company entered into an agreement dated May 16, 2009 with the Payers in respect of five of the remaining North Slope oil and gas leases (the “Five Leases”).  Pursuant to this agreement, the Payers made annual lease payments totaling $25,126 for the Five Leases on behalf of the Company.  The amount paid on behalf of the Company is subject to an 18% interest rate per annum. The Company also executed an assignment to the Payers of the Company's right, title, and interest in the Five Leases to be delivered into escrow in the event the Company fails to repay the payers by August 14, 2009.
The Company could provide no assurance that it would be able to obtain financing arrangements to repay the Payers by August 14, 2009 and consequently, all costs incurred of $2,401,282 were written off on the statement of operations during the year ended February 28, 2009.  During the years ended February 28, 2010, the Company failed to repay the Payers by the due date and assignment of the related leases to the Payers was triggered. Consequently, the fees were no longer payable and outstanding lease fees and accrued interest of $98,400 were recorded as a gain on recovery of payables.

 
14

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 

 
Note 4
Oil and Gas Interests – (cont’d)
 
 
b)
Anglesey, North Sea, United Kingdom
 
Pursuant to a farm-in agreement dated June 8, 2007, the Company agreed to acquire a 33.33% interest in two UK petroleum production licenses (“Licenses”).  The Licenses are located in the UK North Sea and have since been merged into one traditional license.  As consideration for the Licenses, the Company agreed to fund 100% of the seismic costs and its 33.33% share of the License budget costs as agreed by the parties.  The Company also has the option to acquire an additional 26.67% interest in the Licenses by paying an additional 46.67% of the dry-hole costs of an exploration well.
 
The option is effective from completion of the transfer of the assigned interest to the Company and shall continue to be valid and exercisable until 28 days after receipt by the Company of the processed seismic data and final interpretation.
 
During the year ended February 28, 2010, the Company returned the Licenses to the UK government and consequently all costs incurred of $2,512,856 were written-off on the statement of operations during the year ended February 28, 2010.
 
 
c)
Spears Gas Well, Texas, United States
 
Pursuant to a subscription agreement dated October 9, 2007, the Company acquired a 22.5% joint venture interest in a gas well called the Spears Gas Unit 2, Well #1 in the Gomez Field, Pecos County, Texas in consideration for US$500,000.
 
As at February 28, 2010, the gas well is shut-in awaiting further financing.
 
 
d)
Cook Inlet, Alaska, United States
 
By a purchase agreement dated October 10, 2007, the Company acquired 6 oil and gas leases located in Cook Inlet of the State of Alaska for $750,000, payable in installments on or before March 7, 2008.  At February 28, 2008, the Company had paid $750,000.  Included in these leases were 3 unissued leases that the vendors owned the rights thereto.  The leases are subject to a royalty of 16.66667% to the State of Alaska and a private royalty equal to 5% of net revenue.
 
Subsequent to February 28, 2010, the Company entered into an agreement dated May 29, 2009 with the Payers in respect of three these oil and gas leases (the “Three Leases”).  Pursuant to this agreement, the Payers made annual lease payments totaling $25,780 for the Three Leases on behalf of the Company.  The amount paid on behalf of the Company is subject to an 18% interest rate per annum. The Company also executed an assignment to the Payers of the Company's right, title, and interest in the Five Leases to be delivered into escrow in the event the Company fails to repay the payers by August 14, 2009.

 
15

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 

Note 4
Oil and Gas Interests – (cont’d)
 
 
d)
Cook Inlet, Alaska, United States – (cont’d)
 
The Company could provide no assurance that it would be able to obtain financing arrangements to repay the Payers by August 14, 2009 and consequently, all costs incurred of $1,061,727 were written-off on the statement of operations during the year ended February 28, 2009.  During the years ended February 28, 2010, the Company failed to repay the Payers by the due date and the assignment of the related leases to the Payers was triggered. Consequently, outstanding lease fees and accrued interest of $26,743 were recorded as a gain on write off of amounts payable.
 
 
e)
Bourbon, North Sea, United Kingdom
 
On November 16, 2007, the Company entered into a farm-out agreement dated November 8, 2007 wherein the Company would be assigned a total of 46% interest in a license block in the UK North Sea.  In consideration for the assignment, the Company must pay for 89% of the cost of drilling and exploration well.
 
The Company is also required to pay for 46% of license costs.  On January 24, 2008, the Company agreed to jointly participate with another company to identify a potential farm-in or acquisition opportunity and transferred a 4.6% carried interest in the license block to that company until a full development plan is approved by the U.K. government.  Thereafter, that company will be responsible for its 4.6% share of the costs (10% of the Company’s interest).  Subsequent to the transfer, this company became related to the Company as two of its beneficial owners became directors of the Company.
During the year ended February 28, 2009, the license holders terminated the Farm-out agreement effective February 27, 2009. Consequently, all costs incurred of $1,419,627 were written off on the statement of operations during the year ended February 28, 2009.
 
 
f)
Geneseo-Edwards, Kansas, United States
 
By a letter agreement dated February 27, 2008, the Company purchased an 80% net revenue interest in three oil leases in Ellsworth County, Kansas, USA by the payment of $80,000.  The leases are subject to a landowner royalty of 12.5% and an overriding royalty of 7.5% retained by vendors.  The Company was required to drill at least one well on each lease before the leases expire on November 19, 2008, November 19, 2009 and November 30, 2009 or pay the vendor a penalty of $150,000.
 
During the year ended February 28, 2009 the Company had drilled four wells on these leases and earned incidental revenue of $90,689 from two of these wells, which was credited against oil and gas interests on the consolidated balance sheet as a result of the wells not yet reaching full commercial production.  Since January 2009 production has been suspended due to the need for implementation of water disposal facilities for which further funding is not currently available.

 
16

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 

 
Note 4
Oil and Gas Interests – (cont’d)
 
 
f)
Geneseo-Edwards, Kansas, United States – (cont’d)
 
During the year ended February 28, 2009, two trade creditors issued mechanical liens against the oil and gas leases and its facilities for non-payment of outstanding invoices totaling $528,079.
 
During the year period ended February 28, 2010, the Company assigned its interest in these oil and gas leases to a creditor in return for a loan rescheduling (Note 5) and entering into an agreement not to sue the Company for defaulting on a loan agreement.  The creditor also received 15,000,000 common shares pledged as security from the Company’s treasury against the notes payable.
 
Pursuant to the above, costs incurred of $1,975,567 were written-off on the statement of operations and deficit for the year ended February 28, 2009 leaving a net book value of $20,000 recovered during the year period ended February 28, 2010 for the sale of certain furniture and equipment held for use on the property.
 
 
g)
UK Onshore, United Kingdom
 
On June 3, 2008, the Company was granted a 90% interest in four UK petroleum production licenses, located in the south of England.  In order to maintain the licenses, the Company must undertake seismic exploration estimated to cost $500,000 within the six year term of the license.
 
Pursuant to a letter agreement dated September 5, 2008, the Company will pay 100% of all costs, expenses, liabilities and obligations arising in respect of operations conducted in respect of each license block until a filed development plan is formally approved by the UK Secretary of State responsible for such matters, for the development of a discovery of petroleum in the blocks. Thereafter, the Company will each be responsible for 90% of all costs, expenses, liabilities and obligations.
 
 
h)
25th Round License Blocks 13/17 & 210/20e, United Kingdom
 
Pursuant to a letter agreement dated September 5, 2008, the Company was granted a 90% interest in an application made for four UK petroleum production licenses.  In order to maintain the licenses, the Company must carry out geological and seismic modeling before forming up a drilling location and must begin drilling within the four year term of the license.
 
Pursuant to the letter agreement, the Company will pay 100% of all costs, expenses, liabilities and obligations arising in respect of operations conducted in respect of each license block until a filed development plan is formally approved by the UK Secretary of State responsible for such matters, for the development of a discovery of petroleum in the blocks. Thereafter, the Company will each be responsible for 90% of all costs, expenses, liabilities and obligations.
 
17

Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
Note 4
Oil and Gas Interests – (cont’d)
 
 
h)
25th Round License Blocks 13/17 & 210/20e, United Kingdom – (cont’d)
 
On November 12, 2008 Fox was formally notified by the UK Department of Energy and Climate Change (DECC) of its success in the 25th Seaward Licensing Round Awards, the rights to explore and develop the block 13/17 concession in the North Sea by the UK government.
 
On May 1, 2009 Fox received notification from the UK Department of Energy and Climate Change that this Secretary of State’s offer of this license in the 25th round had been withdrawn due to fact that they consider there to have been a material change in the circumstances relating to Fox having adequate funding arrangements already in place. Consequently, all costs incurred of $87,354 were written-off on the statement of operations and deficit for the year ended February 28, 2009.
 
Note 5
Notes Payable
 
         
February 28,
   
February 29,
 
         
2010
   
2008
 
                   
Promissory notes (a), (b), (c)
        $ 450,000     $ 450,000  
Loan agreement (d)
          450,000       450,000  
Convertible notes payable (e)
  $ 3,500,000                  
Add: liquidating damages due under registration rights agreement
    914,667                  
Less: financing costs
    (75,545 )                
Add: amortization of financing costs
    75,545       4,414,667       3,770,667  
                         
            $ 5,314,667     $ 4,670,667  

 
a)
On April 2, 2008 the Company was loaned $250,000 by the issuance of a promissory note, to be paid on the earlier of (i) the date that the Company obtains equity financing from a third party in the minimum amount of $1,000,000 net to the Company, or (ii) April 1, 2009.  For the period from the date of advance of the loan up to and including the date that the loan is repaid, interest will accrue on the balance of principal outstanding at the rate of 10% per annum, compounded monthly. Interest will be payable in a balloon payment on the date the loan is repaid. The note is unsecured.

As at February 28, 2010, this loan has not been repaid as the lender has agreed to extend the terms of the loan until the Company is able to obtain further financing.

 
18

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 


Note 5
Notes Payable – (cont’d)

 
b)
On May 6, 2008 the Company was loaned $150,000 by the issuance of a promissory note, to be paid on the earlier of (i) the date that the Company obtains equity financing from a third party in the minimum amount of $1,000,000 net to the company, or (ii) May 1, 2009.  For the period from the date of advance of the loan up to and including the date that the loan is repaid, interest will accrue on the loan on the balance of principal outstanding at the rate of 10% per annum, compounded monthly.  Interest will be payable in a balloon payment on the date the loan is repaid. The note is unsecured.

As at February 28, 2010, this loan has not been repaid as the lender has agreed to extend the terms of the loan until the Company is able to obtain further financing.

 
c)
On May 23, 2008 the Company was loaned $50,000 by the issuance of a promissory note, to be paid on the earlier of (i) the date that the Company obtains equity financing from a third party in the minimum amount of $1,000,000 net to the company, or (ii) May 23, 2009.  For the period from the date of advance of the loan up to and including the date that the loan is repaid, interest will accrue on the loan on the balance of principal outstanding at the rate of 10% per annum, compounded monthly. Interest will be payable in a balloon payment on the date the loan is repaid. The note is unsecured.

As at February 28, 2010, this loan has not been repaid as the lender has agreed to extend the terms of the loan until the Company is able to obtain further financing.

 
d)
On May 30, 2008 the Company was loaned $450,000 pursuant to a loan agreement.  The principal and interest is to be paid on the earlier of (i) cash being available from operations, (ii) the date that the Company obtains equity or debt financing from a third party in the minimum amount of $1,000,000, or (iii) November 30, 2008.  This loan bears interest at 12% per annum, calculated annually.  The loan is secured by the Company’s assets.  As additional compensation for the loan, the Company issued to the lender 150,000 common shares of the Company.  The fair value of these shares was determined to be $514,500 based on the quoted market price of the shares on the date of issuance and was recorded as a financing fee on the consolidated statement of operations.

As at February 28, 2010, this loan has not been repaid as the lender has agreed to extend the terms of the loan until the Company is able to obtain further financing.

 
e)
Pursuant to an Amendment to Securities Purchase Agreement, Secured Debenture, Registration Rights Agreement and Security Agreement dated October 31, 2008 ("Amendment Agreement"), the Company amended a Securities Purchase Agreement, Debentures, a Registration Rights Agreement, an Escrow Agreement and a Pledge and Escrow Agreement ("Original Agreements") all originally dated June 24, 2008.  Under the Amendment Agreement the Company issued three secured convertible debentures totaling $3,500,000 consisting of two “Amended Debentures” and one “New Debenture”:
 
 
 
19

Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)

 
Note 5
Notes Payable – (cont’d)

 
e) – (cont’d)

(i)           Amended Debentures - $2,500,000

The Original Debenture which was a $2,500,000 senior secured convertible note was amended on November 11, 2008 into two debentures each of which are for a total principal amount of $1,250,000 (the “Amended Debentures).

The Amended Debentures bear interest at 10% per annum, compounded monthly. The principal and any unpaid accrued interest owing on the debentures are convertible into common stock of the Company in the event of a default or at the option of the holder at the rate of the lesser of i) 100% of the volume weighted average stock price (“VWAP”) on the date of issuance and ii) at 85% of the lowest daily closing VWAP as quoted by Bloomberg L.P. during the 5 trading days immediately preceding the conversion date.  The Amended Debentures also contain a redemption option whereby the Company can redeem the Amended Debentures provided its common stock is trading below 100% of the VWAP as quoted by Bloomberg L.P on October 31, 2008 by paying the unpaid principal and interest accrued and a prepayment premium of 15%. The Company must redeem the entire principal amount outstanding on one of the Amended Debentures on April 30, 2009 at a 15% redemption premium; however, there is no mandatory redemption premium on the second Amended Debenture.

In consideration for the holder's agreement to extend the maturity date of the original convertible debt from October 24, 2008 to April 30, 2009, the Company cancelled the original 500,000 warrants issued in connection with the Original Debenture and replaced them with 2,000,000 warrants with a term of 5 years and a decreased exercise price of $0.001.

The exercise price is subject to an adjustment if, during the term of the warrants, the Company issues shares, options or convertible securities for consideration less than the exercise price, then the exercise price will be adjusted to 85% of such consideration.  Additional warrants will be issued if the Company becomes in default under the transaction agreements.

The Company determined the allocation of the net proceeds of the Original convertible debenture based on the relative fair value of the convertible debenture, the 500,000 share purchase warrants and the 200,000 common shares.  The fair value of the warrants of $910,000 and the common shares of $580,000 were determined using the Black-Scholes valuation model and the quoted market price of the shares on the date of issuance, respectively.

The resulting discount of $839,292 was being accreted over the term of the debenture. The assumptions used in the Black-Scholes calculation are as follows:  expected life – 5 years; volatility – 78.26%; Dividend rate – 0%; and risk free interest rate is 0.95%.

 
20

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)


Note 5
Notes Payable – (cont’d)

 
e) – (cont’d)

(i) Amended Debentures - $2,500,000 – (cont’d)

The Company recorded a beneficial conversion feature of $1,388,320 with respect to the Original Debentures pursuant to EITF 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.  The conversion feature was contingently exercisable in an event of default of the debenture; which occurred on October 24, 2008 when the debenture came due but was not repaid by the Company.  Therefore the amount was recorded as a financing fee during the year ended February 28, 2009.

The Company determined the allocation of the net proceeds of the Amended Debentures based on the relative fair value of the convertible debenture, the share purchase warrants and the common shares.  The fair value of the warrants of $1,578,000 and the common shares of $1,975,000 were determined using the Black-Scholes valuation model and the quoted market price of the shares on the date of issuance, respectively.  The resulting discount of $1,736,200 was being accreted over the term of the debentures. The assumptions used in the Black-Scholes calculation are as follows:  expected life – 5 years; volatility – 78.26%; Dividend rate – 0%; and risk free interest rate is 3.52%.

The Company was required to pay to the investor at closing of the Original Agreements: $17,500 in legal costs, a $10,000 due diligence fee, a 7% commitment fee and a 2% facility fee, 500,000 share purchase warrants and 200,000 shares of common stock.  Finder’s fees of $150,000 and 52,265 share purchase warrants were paid to Partners Consulting in connection with the Original Agreements pursuant to a finder agreement dated February 15, 2008.  This amount is included in fees payable in stock and warrants at February 28, 2010.  The warrants expire three years from the date of issuance.

At the closing of the Amended Debentures, the Company also issued 2,500,000 shares of common stock.

In no event shall the Holder be entitled to convert this Debenture for a number of shares of Common Stock in excess of that number of shares of Common Stock which, upon giving effect to such conversion, would cause the aggregate number of shares of Common Stock beneficially owned by the Holder and its affiliates to exceed 9.99% of the outstanding shares of the Common Stock following such conversion without the approval of the Company.

Upon the occurrence of an Event of Default by the Company, the Holder has the option to elect that the interest due and payable be paid in cash or in stock at the rate of 85% of the lower of:  (i) the VWAP on the date the interest payment is due; or (ii) if the interest payment is not made when due, the VWAP on the date the interest payment is made.

 
21

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)


Note 5
Notes Payable – (cont’d)

 
e) – (cont’d)

(i)  Amended Debentures - $2,500,000 – (cont’d)
 
The Debentures are secured by all of the assets and property of the Company and its subsidiaries pursuant to a Security Agreement.  The debentures were further secured by a Pledge and Escrow Agreement pursuant to which 15,000,000 common shares of the Company to be held in escrow on behalf of the investor.
 
Further, the debenture is subject to a currency adjustment clause whereby the exchange rate between the US Dollar and the Euro will be fixed at the date of closing and if the exchange rate moves unfavorably for the holder of the debenture, the Company will be required to adjust conversion and redemption rates to compensate the holder for any such loss.
 
The debenture also contains certain restrictions on the Company for new share or debt issuances as long as any principal or interest amount remains outstanding on the debenture.
 
(ii)  New Debenture - $1,000,000
 
The New Debenture and has a principal amount of $1,000,000 and matures on October 31, 2010 (the “New Debenture”).  The New Debenture bears interest at a rate of 10% per annum compounded monthly.  The principal and any unpaid accrued interest owing on the debentures are convertible into common stock of the Company in the event of a default or at the option of the holder at the rate of the lesser of i) 100% of the volume weighted average stock price on the date of issuance and ii) at 85% of the lowest daily closing VWAP as quoted by Bloomberg L.P. during the 5 trading days immediately preceding the conversion date.
 
The Company may redeem any or all of the New Debenture at any time, provided that the Common Stock is trading below the Fixed Price at the time the Company gives the Holder the redemption notice, by paying the unpaid principal and interest accrued and a prepayment premium of 15% redemption premium on the amount redeemed.  In any case, the Company must redeem the $1,000,000 debenture maturing October 31, 2010 in equal monthly installments commencing January 31, 2009 until maturity at a 15% redemption premium.
 
At the closing of the New Debentures the Company incurred: $7,500 in legal costs, a $45,000 commitment fee, a $1,000 due diligence fee
 
The Company recorded a beneficial conversion feature of $1,710,300 with respect to the Original Debentures.  The amount was being amortized over the term of the debentures, however after an event of default (see below), the entire amount was immediately recognized into income as a financing fee during the year ended February 28, 2009.

 
22

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)



Note 5
Notes Payable – (cont’d)

 
e) – (cont’d)

(ii) New Debenture - $1,000,000 – (cont’d)
 
Pursuant to the securities purchase agreement, the Company entered into a freestanding investor registration rights agreement dated June 24, 2008 and amended October 31, 2008.  Under the terms of this agreement, the Company must have registered at least three (3) times the number of shares which are anticipated to be issued upon conversion of the Debentures issued and shares of common stock issuable to the purchaser upon exercise of the warrants.  The Company has the obligation to use their best efforts to keep the registration of these securities effective by the SEC until all of the securities had been sold by the purchaser.  Failure to meet this obligation would result in the Company incurring liquidated damages in the amount of 2% of the liquidated value of the debentures for each 30 day period registration of the securities is not effective.
 
Under the provisions of FSP EITF 00-19-2 “Accounting for Registration Payment Arrangements (“EITF 00-19-2”), the Company is required to separately recognize and measure a contingent obligation in respect of the liquidating damages in accordance with FASB No.5 “Accounting for Contingencies” and FSB Interpretation No.14 “Reasonable Estimation of the Amount of a Loss”.  At February 28, 2010, an amount of $914,667 (February 28, 2009 - $270,667) has been recognized as the Company has determined that a loss is probable because the Company has failed to maintain effectiveness of its registration statement.
 
Included in accounts payable and accrued liabilities at February 28, 2010 is $573,892 (February 28, 2009 - $429,167) for accrued interest and redemption premiums on these notes payable.
 
During the year period ended February 28, 2010 and the year ended February 28, 2009, the Company failed to make any of the required redemption payments on the New Debenture.  This triggered a default, which resulted in all of the debentures immediately becoming due and payable and the remaining discounts on the debentures were immediately recognized in income.
As at February 28, 2010, the Company had not repaid the $1,250,000 debenture that matured on April 30, 2009.
 
As consideration for entering into negotiations to effect a loan rescheduling and the holder entering into an agreement not to sue, the Company assigned its interest in certain oil and gas leases to the holder (Note 4(f)).  The holder also received the 15,000,000 common shares pledged as security against for debentures valued at $4,650,000, based on the quoted market price of the Company’s common shares on the date they were released from escrow.

 
23

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)


Note 5
Notes Payable – (cont’d)

 
e) – (cont’d)

   
Face
Amount
   
Discount
   
Deferred
Financing Costs
   
Carrying
Value
 
Balance, March 1, 2008
  $ -     $ -     $ -     $ -  
Issuance of Original Debenture, June 24, 2008
    2,500,000       (839,292 )     (252,500 )     1,408,208  
                                 
Commissions paid – cash
    -       -       (150,000 )     (150,000 )
Finder’s fees – warrants
    -       -       (7,592 )     (7,592 )
Event of default, October 24, 2008
    -                          
Beneficial conversion feature
    -       -       (1,388,320 )     (1,388,320 )
Accretion of debt discount
    -       839,292       1,798,412       2,637,704  
Extinguishment of Original          debenture, October 31, 2008
    (2,500,000 )     -       -       (2,500,000 )
Issuance of Amended Debentures
    3,500,000       (1,736,200 )     (53,500 )     1,710,300  
Beneficial conversion feature
    -       -       (1,710,300 )     (1,710,300 )
Commissions paid – cash
    -       -       (60,000 )     (60,000 )
Finder’s fee – warrants
    -       -       (15,545 )     (15,545 )
Event of default, January 31, 2009
                               
Accretion of debt discount
    -       1,736,200       1,839,345       3,575,545  
Liquidating damages
    270,667       -       -       270,667  
Balance, February 28, 2009
    3,770,667       -       -       3,770,667  
Liquidating damages
    700,000                       700,000  
Balance, February 28, 2010
  $ 4,414,667     $ -     $ -     $ 4,414,667  

Note 6
Related Party Transactions – Note 8

The officers of the Company provide consulting and management services to the Company as follows:

               
November 4,
 
               
2004 (Date of
 
   
Years ended
   
Inception) to
 
   
February 28,
   
February 28,
 
   
2010
   
2009
   
2010
 
                   
Consulting fees
  $ -     $ 240,129     $ 394,859  
Management fees
    528,725       642,021       1,331,798  
Office and miscellaneous
    -       -       7,000  
                         
    $ 528,725     $ 882,150     $ 1,733,657  
 
 
 
24

Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)


Note 6
Related Party Transactions – Note 8 – (cont’d)

Included in accounts payable and accrued liabilities at February 28, 2010 is $1,070,732 (February 28, 2009: $504,293) owed to directors of the Company and companies with directors in common for expenses incurred on behalf of the Company and for unpaid management and consulting fees.

The amounts due to related parties are unsecured, non-interest bearing and have no specific terms for repayment.  These amounts were due to the director of the Company and a company controlled by a director of the Company.

Effective May 6, 2008, the Company adopted a compensation policy for its directors pursuant to which the Company will compensate each director, as follows:

i)           a fee of $1,000 per month;
ii)           1,000 restricted shares of the common stock of the Company per month;
iii)           a fee of $1,000 per each quarterly board meeting attended.

Included in accounts payable and accrued liabilities is $65,347 (February 28, 2009: $Nil) for amounts owing to directors of the Company pursuant to this compensation policy.

Note 7
Capital Stock – Notes 4, 5, 6, 8 and 10

Effective January 11, 2007 the Company completed a forward stock split of the authorized, issued and outstanding shares of common stock on a nine new for one old basis.  Authorized capital increased from 75,000,000 common shares to 450,000,000 common shares.  Effective April 21, 2008 the Company completed a reverse stock split of authorized, issued and outstanding shares of common stock on a one new for five old basis.  Authorized capital decreased from 450,000,000 to 90,000,000.  In January 2009, the Company obtained shareholder approval to amend its authorized share capital from 90,000,000 common shares, par value $0.001 to 500,000,000 common shares, par value $0.001. These financial statements have been retroactively restated to reflect reverse stock split, however the increase in authorized share capital will not become effective until not less than 20 days after the information statement regarding the increase is first mailed to stockholders and until the appropriate filing is made with the Nevada Secretary of State.  Subsequent to February 28, 2010, these required filings had not been made but it is management’s intention to do so.

 
25

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)

Note 7
Capital Stock – Notes 4, 5, 6, and 8

 
a)
Share Issuance Agreements:

i)           On May 17, 2007, the Company entered into a share issuance agreement with a subscriber that will allow the subscriber to advance up to $8,000,000 to the Company in exchange for units of the Company.  The units will be issued at a price equal to 80% of the volume-weighted average of the closing price of common share for the 10 banking days immediately preceding the date of the notice.  Each unit will consist of one common share of the Company and one common share purchase warrant.  Each common share purchase warrant will entitle the subscriber to purchase one additional common share at 125% of the price of the units for a period of three years.  Should the Company seek alternative sources of financing this subscriber has the right to approve the terms.
Shares issued under the agreement were as follows:

   
Number of
   
Issue
   
Total
 
Issue Date
 
Units
   
Price
   
Proceeds
 
                   
May 17, 2007
    377,358     $ 5.30     $ 2,000,000  
August 1, 2007
    31,056     $ 8.05       250,000  
September 18, 2007
    44,199     $ 9.05       400,000  
September 18, 2007
    52,133     $ 10.55       550,000  
September 27, 2007
    28,708     $ 10.45       300,000  
October 26, 2007
    16,381     $ 12.21       200,000  
October 26, 2007
    21,097     $ 11.85       250,000  
October 26, 2007
    35,897     $ 9.75       350,000  
November 28, 2007
    47,337     $ 8.45       400,000  
January 16, 2008
    43,478     $ 3.45       150,000  
January 24, 2008
    96,154     $ 5.20       500,000  
January 30, 2008
    48,387     $ 3.10       150,000  
February 11, 2008
    89,286     $ 2.80       250,000  
February 26, 2008
    96,774     $ 3.10       300,000  
                         
      1,028,245             $ 6,050,000  


 
26

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)


Note 7
Capital Stock – Notes 4, 5, 6, and 8

 
a)
Share Issuance Agreement: – (cont’d)

 
i) – cont’d

As at February 28, 2010, there are 3,028,246 share purchase warrants outstanding entitling the holders thereof the right to purchase one common share for each warrant held as follows:

Number of
Exercise
 
Warrants
Price
     Expiry Date
     
377,358
$6.65
May 17, 2010
31,056
$10.05
August 1, 2010
44,199
$11.30
September 10, 2010
52,133
$13.20
September 10, 2010
28,708
$13.05
October 1, 2010
16,381
$15.25
October 26, 2010
21,097
$14.80
October 26, 2010
35,897
$12.20
October 26, 2010
47,337
$10.55
November 28, 2010
43,478
$4.30
January 16, 2011
96,154
$6.50
January 24, 2011
48,387
$3.90
January 30, 2011
89,286
$3.50
February 11, 2011
96,775
$3.90
February 26, 2011
2,000,000
$0.001
October 31, 2013
     
3,028,246
   


 
ii)
On November 5, 2008, the Company entered into a subscription agreement with Carbon Energy Investments Limited (“Carbon Energy”) for the sale of 80,000,000 shares of common stock at a price of $0.50 per share for the aggregate price of $40,000,000. Carbon Energy agreed to pay for the shares as follows:

 
$15,000,000 on or before November 30, 2008 (later amended to December 12, 2008);
 
-
$15,000,000 on or before January 31, 2009; and
 
-
$10,000,000 on or before March 31, 2009.

 
27

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)


Note 7
Capital Stock – Notes 4, 5, 6, and 8 – (cont’d)

 
a)
Share Issuance Agreement: – (cont’d)

ii) – cont’d
On November 5, 2008, the Company entered into an agreement to purchase shares in Alaska Oil & Gas Resources Limited (“Alaska Oil & Gas”) with Carbon Energy. Carbon Energy is the sole owner of Alaska Oil & Gas. Pursuant to the agreement, the Company agreed to acquire 100% of the issued shares of Alaska Oil & Gas from Carbon Energy in consideration for $57,500,000, $250,000 of which was to be paid in cash and the remainder by the issuance of 57,250,000 shares of common stock. On the same day, two of the Company’s directors were appointed as directors of Alaska Oil & Gas.
 
On November 28, 2008, the Company entered into an amendment agreement with Carbon Energy relating to purchase of Alaska Oil & Gas whereby it was agreed that the consideration to be paid pursuant to the agreement was varied such that the consideration would amount to $57,500,000, payable by the issuance of 2,000,000 shares of common stock within three business days of November 2008 (issued subsequently) and 55,500,000 shares on completion of the transaction.
 
On December 3, 2008, the Company entered into a letter agreement with Carbon Energy whereby Carbon Energy agreed to return 2,000,000 shares of common stock to the company upon demand unless certain conditions are fulfilled or waived. The conditions are, among others, that Carbon Energy must complete in full the subscription agreement dated November 5, 2008 except that the first $20,000,000 must be paid to the company on or before December 7, 2008 and that Carbon Energy must sell to the Company Alaska Oil & Gas which must own certain oil and gas leases pursuant to the agreement relating to the purchase of Alaska Oil & Gas.
On November 26, 2008, the Company issued 50,000,000 shares of restricted common stock to Carbon Energy in consideration for $25,000,000 to be received pursuant to the above-mentioned subscription agreement.
On December 2, 2008, the Company issued an additional 2,000,000 shares of restricted common stock to Carbon Energy pursuant to the terms of the amendment agreement for $1,000,000 to be received.
The Company never received payment for the shares issued to Carbon and Carbon never completed on the sale of Alaska Oil & Gas.  As a result, the shares that were previously subscribed were cancelled along with the agreements to purchase Alaska Oil & Gas.  Consequently, shares have been excluded from the calculation of loss per share.  The Company is currently reviewing its legal position and any associated remedies relating to the above.

 
28

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)


Note 7
Capital Stock – Notes 4, 5, 6, and 8  – (cont’d)

 
b)
Share Purchase Warrants

There were no changes in the Company’s share purchase warrants for the periods ended February 28, 2010 and February 28, 2009 as presented below:

 
February 28, 2010
 
February 28, 2009
   
Weighted
   
Weighted
   
Average
   
Average
 
Number of
Exercise
 
Number of
Exercise
 
Warrants
Price
 
Warrants
Price
Balance, end of period
3,028,246
$2.53
 
3,048,246
$2.53

The remaining average life of the warrants at February 28, 2010 is 2.61 years (February 28, 2009: 3.61 years).
 
A finder's fee of $60,000 and 52,265 share purchase warrants exercisable at $2.87 for a period of three years from the date of issuance (6% of proceeds) were paid to Partners Consulting in connection with the Original Debenture (Note 5(e)) pursuant to a finder agreement dated February 15, 2008.  The fair value of the warrants was determined using the Black-Scholes valuation model.  The assumptions used in the Black-Scholes calculation are as follows:  expected life – 3 years; volatility – 192%; Dividend rate – 0%; and risk free interest rate is 1.0%.  At February 28, 2010 these warrants had not yet been issued and are included in fees payable in stock and warrants.
 
A finder's fee of $60,000 and 76,923 share purchase warrants exercisable at $0.78 for a period of three years from the date of issuance (6% of additional proceeds) were paid to Partners Consulting in connection with the Amended Debentures (Note 5(e) pursuant to a finder agreement dated February 15, 2008.  The fair value of the warrants was determined using the Black-Scholes valuation model.  The assumptions used in the Black-Scholes calculation are as follows:  expected life – 3 years; volatility – 192.6%; Dividend rate – 0%; and risk free interest rate is 1.0%.  At February 28, 2010 these warrants had not yet been issued and are included in fees payable in stock and warrants.
 


 
29

 
Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)


Note 8
Commitments – Notes 4, 5, 7 and 10

 
a)
By agreements dated June 8, 2007, the Company agreed to pay three directors of the Company a total amount of $20,000 per month for an indefinite period for consulting and management services to the Company.  The agreements may be terminated at any time with cause and with three months notice without cause.  On October 19, 2007 two of these agreements were amended from $12,000 to £9,000 ($17,900) per month and from $5,000 per month to £7,000 ($13,900).  Effective June 1, 2008 these agreements were amended from £9,000 to £15,000 per month and from £7,000 to £12,500 per month. All other terms remained the same. Effective June 1, 2009, the agreement for £12,500 per month was terminated.

 
b)
On May 8, 2008 the Company entered into a consulting agreement with Partners Consulting Inc. (“PCI”), a Florida Corporation, to introduce the Company to potential new investors. The consideration payable to PCI is warrants to purchase 50,000 shares of common stock due upon signing the agreement.  In addition, PCI will receive 6% of the gross proceeds from any potential financing, payable in cash and share purchase warrants equal to 6% of the gross proceeds.  In the event a financing is facilitated through an investment banker introduced by PCI, PCI will instead receive 3% of the gross proceeds, payable in cash and share purchase warrants equal to 3% of the gross proceeds.  All warrants will have a cashless exercise and will be priced at market value as of the date of the financing and with a minimum expiry period of three years. The consulting agreement is for a period of one year.

At February 28, 2010 the Company had not yet issued the warrants for 50,000 common shares due upon signing of the agreement but the fair value of these warrants was determined to be $4,364, which was included in fees payable in stock and warrants at February 28, 2010.  The fair value of these warrants was determined to be $7,344 at February 28, 2010 and, consequently an amount of $2,982 has been shown as a credit to consulting fees for the years ended February 28, 2010. These warrants are exercisable at $2.77 and will expire three years from the date of issuance.  The fair value of these warrants was determined using the Black Scholes valuation model.  The assumptions used in the Black-Scholes calculation are as follows:  expected life – 3 years; volatility – 192%; Dividend rate – 0%; and risk free interest rate is 1.0%.

 
c)
On May 21, 2008, the Company signed a letter of commitment whereby the Company agreed to commit to the use of a drilling rig commencing no earlier than October 1, 2008 for a total cost of $8,910,000 which has been accrued in accounts payable and accrued liabilities as at February 28, 2010.  The Company also committed to enter into a well project management and integrated services contract for the management of a well program on the rig.  The Company is also obligated to pay a fee of 1.75% of the operating rig rate in acknowledgement of the value provided with the rig opportunity, if the Company uses the rig, but not the integrated project management services. The Company also incurred and accrued penalties of $2,000,000 as compensation for lost revenues of the rig owners for its failure to fulfill its obligations under the rig provision contract and may be liable to pay up to an additional $2,000,000 for its share of additional costs incurred by the rig owners during the Company’s allotted rig slot.
 
 
 
30

Fox Petroleum Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2010
(Stated in US Dollars)
(Unaudited)
 

Note 8
Commitments – Notes 4, 5, 7 and 10 – (cont’d)

 
c)
- (cont’d)

 
This additional $2,000,000 amount is subject to a commercial discussion between the parties involved and has been accrued at February 28, 2010 as it is likely that will be incurred. A total of $12,910,000 was recorded as a loss on failure to perform obligations under oil & gas commitments and has been charged to the statement of operations during the year ended February 28, 2009.

 
d)
By a bonus agreement dated May 22, 2008, the Company agreed to issue 5,000 common shares and £5,000 ($10,000) (paid during the year ended February 29, 2008) to an officer and director of the Company as a performance bonus. At February 28, 2008, the Company had not yet issued the shares due.  The fair value of the shares was determined to be $22,150, which was included in fees payable in stock and warrants at February 28, 2009.

 
e)
During the years ended February 28, 2010, the Company recorded a recovery of $8,500 (2008: $Nil) in consulting fees for the change in fair value of 50,000 common shares issuable pursuant to Board of Advisors (“BOA”) agreements dated November 17, 2007 as compensation to the members of the BOA.  An amount of $6,500 is included in fees payable in stock and warrants at February 28, 2009 for these shares.

 
f)
During the years ended February 28, 2010, the Company accrued $8,460 (2008: $Nil) in consulting fees for the fair value of 11,000 common shares issuable to a former employee of the Company. This amount is included in fees payable in stock and warrants at February 28, 2010.

Note 9
Additional Cash Flow Information

During the three and year periods ended February 28, 2010 and 2009 no amounts were paid for income taxes.
During the three and year periods ended February 28, 2010 and 2009 no amounts were paid for interest charges.
 
 
31

 
 
PART I.  FINANCIAL INFORMATION

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)

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.

All references in this Annual Report on Form 10-K to the terms “we,” “our,” “us,” “FXPT.OB,” and the “Company” refer to Fox Petroleum Inc. and/or its wholly owned subsidiaries, Fox Petroleum (Alaska) Inc., Fox Petroleum, Inc. (a Kansas corporation) and Fox Energy Exploration Limited, as the case may be.

AVAILABLE INFORMATION

Fox Petroleum Inc. files annual, quarterly, current reports, proxy statements, and other information with the Securities and Exchange Commission (the "Commission"). You may read and copy documents referred to in this Annual Report on Form 10-K that have been filed with the Commission at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission filings by going to the Commission's website at http://www.sec.gov.
 
This Quarterly Report on Form 10-Q is being amended to reflect a comparison of certain line items on the financial statements with the three month period ended May 31, 2009. There were no revisions to the actual figures reflecting the three month period ended May 31, 2010.

GENERAL

Fox Petroleum Inc. was incorporated under the laws of the State of Nevada on November 4, 2004 under the name of “Nova Resources Inc.” Subsequently, our Board of Directors decided to change our name to “Fox Petroleum Inc” to better reflect the new direction of our business of exploration and development activities to the oil and gas sectors. Therefore, on February 5, 2007, we changed our name to “Fox Petroleum Inc.”. The name change was accomplished through a merger with our wholly owned subsidiary, Fox Petroleum Inc., which was incorporated for the sole purpose of changing our name with our company carrying on as the surviving corporation under the new name of “Fox Petroleum Inc.” As of the date of this Annual Report, we are a development stage company engaged in the identification, acquisition, exploration and, if warranted, development of prospective oil and gas properties. We have oil and gas interests in a United Kingdom onshore license and joint venture interests in Texas.


 
32

 


Subsidiaries

 
Fox Petroleum (Alaska) Inc.

On April 17, 2007, we incorporated a wholly owned subsidiary, Fox Petroleum (Alaska) Inc. (“Fox Petroleum Alaska”) under the laws of the State of Alaska in order to carry out our Alaska operations after completing a lease purchase and sale agreement with Fox Petroleum LLC. In order to hold Alaska oil and gas leases, we either had to be registered in Alaska or operate through an Alaska subsidiary.

 
Fox Energy Exploration Limited.

On May 17, 2007, we incorporated a wholly owned subsidiary, Fox Energy Exploration Limited (“Fox Energy Exploration Limited”), in England and Wales to hold assets in the United Kingdom under a farm-in agreement with Granby Enterprises Limited and Atlantic Petroleum UK Limited.

SHARE EXCHANGE AGREEMENTS

Ontario Share Exchange Agreement

Effective July 15, 2010, our Board of Directors authorized the execution of that certain share exchange agreement dated July 15, 2010 (the “Ontario Share Exchange Agreement”) among us, 1536692 Ontario Inc., a private corporation duly registered under the laws of the Province of Ontario, Canada (“Ontario”) and the shareholders of Ontario (the “Ontario Shareholders”). In accordance with the terms and provisions of the Ontario Share Exchange Agreement: (i) the Ontario Shareholders tendered all of their shares held of record, which constituted one hunred percent (100%) of the total issued and outstanding shares of Ontario, to us; (ii) we issued to the Ontario Shareholders 1,750,000 shares of our restricted common stock; and (iii) we assumed a debt due and owing by Ontario to Davfam Investments (1998) Ltd.  in the amount of $225,000, which debt was incurred by Ontario during fiscal years 1994 through 1995 . Ontario is the owner of a scrap plastic processing plant with certain equipment, fixtures and improvements and assets located in Hamilton, Ontario, Canada. Ontario is our wholly-owned subsidiary as a result of the Ontario Share Exchange Agreement.

Resource Share Exchange Agreement

Effective July 15, 2010, our Board of Directors further authorized the execution of that certain share exchange agreement dated July 15, 2010 (the “Resource Share Exchange Agreement”) among us, Resource Polymers Inc., a private corporation duly registered under the laws of the Province of Ontario, Canada (“Resource”) and the shareholders of Resource (the “Resource Shareholders”). In accordance with the terms and provisions of the Resource Share Exchange Agreement: (i) the Resource Shareholders tendered all of their shares held of record, which constituted one hunred percent (100%) of the total issued and outstanding shares of Resource, to us; (ii) we issued to the Resource Shareholders 1,750,000 shares of our restricted common stock; and (iii) ) we assumed a debt due and owing by Resource to Consolidated Recyclers Inc. in the amount of $350,000, which debt was incurred by Resource during fiscal years 1994 through 1997. Resource is also the owner of a scrap plastic processing plant with certain equipment, fixtures and improvements and assets located in Hamilton, Ontario, Canada. Resource is our wholly-owned subsidiary as a result of the Ontario Share Exchange Agreement.


 
33

 


CURRENT BUSINESS OPERATIONS

As of the date of this Quarterly Report, we are a development stage company engaged in the identification, acquisition, exploration and, if warranted, development of prospective oil and gas properties. Our properties are described below. Furthermore, after consummation of the Ontario Share Exchange Agreement and the Resource Share Exchange Agreement, we will be entering the scrap plastic processing industry.    

Spears Gas Well, Texas

On October 9, 2007, we entered into a subscription agreement (the “Subscription Agreement”) with Trius Energy LLC (“Trius Energy”), pursuant to which we acquired a 22.5% joint venture interest in a gas well called the Spears Gas Unit 2, Well #1 in the Gomez Field, Pecos County, Texas in consideration for $500,000. The joint venture consists of Trius Energy’s 72.75% working interest in the Spears Gas Unit 2, Well #1 and was formed to reopen the gas well. Drilling activities commenced in November 2007 for the reworking of the gas well and initial test production from the gas well took place in early January 2008. The well has been dormant since then and is still shut in. Trius Energy is unable to finance the well further and is currently seeking additional finance/partners to continue works. Therefore, as of the date of this Quarterly Report, the Spears Gas Unit 2, Well #1 is shut-in awaiting further financing.

Bourbon, North Sea, United Kingdom

 
Farm-In Agreement

On November 8, 2007, through our wholly owned subsidiary, Fox Energy Exploration Limited, we entered into a farm-in agreement (the “Farm-In Agreement”) with Valiant North Sea Limited (“Valiant”) and Petrofac Energy Developments Limited (“Petrofac”). Pursuant to the terms and provisions of the Farm-In Agreement, Valiant and Petrofac agreed to assign a total of 46% interest in the southern part of block 211/17 located in the United Kingdom North Sea. In consideration for the 46% interest, we agreed to pay for 89% of the cost of drilling an exploration well on the southern part of the block and perform certain related works to the drilling an exploration well. Our primary target for the exploration well was the Bourbon prospect located in the southern part of block 211/17.

 
Aimwell Energy Agreement

Under a separate agreement with Aimwell Energy Ltd. (“Aimwell”), we agreed to transfer a 4.6% interest out of above 46% interest to Aimwell when we acquired the 46% interest from Valiant and Petrofac. Following the transfer of the 4.6% interest to Aimwell, we agreed to pay Aimwell’s share of all costs, expenses, liabilities, and obligations arising in respect of the operations on the southern part of block 211/17 until a field development plan is formally approved by the UK Secretary of State responsible for such matters, for the development of a discovery of petroleum in the block. Thereafter, we and Aimwell each agreed each to be responsible for its respective share of costs. Michael Rose and Robert Frost, who were our directors from May 5, 2008 to April 2, 2009, are the beneficial owners and directors of Aimwell.

 
Senergy Limited Letter of Commitment

On April 15, 2008, we signed a letter of commitment (the “Letter of Commitment”) with Senergy Limited, an international integrated oil services company (“Senergy”), to utilize the Byford Dolphin semi-submersible drilling rig to drill a well on our Bourbon prospect. On May 20, 2008, we signed a new Letter of Commitment with Senergy, which was countersigned by Senergy on May 21, 2008. We agreed to commit to the use of a drilling rig commencing no earlier than October 1, 2008 for a total rig cost of $8,910,000. We also committed to enter into a well project management and integrated services contract for the management of a well program on the rig. We are also obligated to pay a fee


 
34

 


of $1.75% of the operating rig rate, for the duration of the use of the rig, if we use the rig, but not the integrated project management services of Senergy. We also committed to enter into a side letter agreement with Senergy and its other clients who will be using the rig to share any mobilization and demobilization or other costs that can be reasonably and equitably be shared on a pro-rata basis (based on days the rig is used).

On November 19, 2008, Blackhawk Investments Limited, a party related to Carbon Energy, agreed in a written commitment to irrevocably underwrite our commitment to Senergy in respect of all costs related to the drilling of the 211/17 Bourbon prospect in a sum not to exceed $30,000,000. The first tranche of $15,000,000 was to be transferred to us no later than November 30, 2008 with the balance arriving no later than March 2009. To date, we have received no funding whatsoever from either Carbon Energy or Blackhawk. We are currently reviewing our legal position and any associated remedies relating to this.

Effective February 27, 2009, Valiant and Petrofac terminated the Farm-In Agreement. Consequently all costs incurred of $1,419,627 were written off on the statement of operations during fiscal year ended February 28, 2009.

We have incurred substantial costs (approximately $10,910,000) under this Letter of Commitment, which was entered into to fulfill our obligations under the Farm-In Agreement, and may be liable to incur a further $2,000,000 in penalties for our failure to fulfill our commitment for the use of the rig. This additional amount has been accrued in full as at February 28, 2009. We are currently negotiating a memorandum of understanding with Senergy to convert this debt into a strategic alliance between the companies whereby we will contract to have Senergy as a preferred contractor and offer Senergy a revenue stream and an option to participate in our stock. There is no guarantee that we will negotiate and agree upon a binding agreement.

RESULTS OF OPERATIONS

The following selected financial information is qualified by reference to, and should be read in conjunction with our consolidated financial statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” contained elsewhere herein. The selected consolidated income statement data for the three month period ended May 31, 2010 and May 31, 2009 and the selected consolidated balance sheet data as of May 31, 2010 and 2009 are derived from our audited consolidated financial statements which are included elsewhere herein.

We are a developmental stage company and have not generated any revenue to date. The following table sets forth selected financial information for the periods indicated. We have incurred recurring losses to date. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.

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

Three Month Period Ended May 31, 2010 Compared to Three Month Period Ended May 31, 2009.

Our net loss for the three month period ended May 31, 2010 was ($16,000) compared to a net loss of ($5,582,760) during the three month perio d ended May 31, 2009, a decrease of $5.566,760. During the three month periods ended May 31, 2010 and 2009, we did not generate any revenue from operations.


 
35

 


During thethree month period ended May 31, 2010, we incurred operating expenses of $16,000 compared to $5,582,760 incurred during the three month period ended May 31, 2009, a decrease of $5,566,760. The decrease in operating expenses was primarily attributable to the following items: (i) finance fees of $-0- (2009: $4,870,617); and (ii) foreign exchange of $-0- (2009: $243,989). During the three month period ended May 31, 2009, we incurred substantial costs under the Letter of Commitment with Senergy, which was entered into to fulfill our obligations under the Farm-In Agreement with Valiant and Petrofac and further penalties (which was also expensed and accrued during the year) for our failure to fulfill our commitment for the use of the rig. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, marketing, and consulting costs.

During the three month period ended May 31, 2010, we incurred a loss for the period of ($16,000) or ($0.00) per share as compared to a loss for the period of ($5,582,760) or ($0.20) per share during the three month period ended May 31, 2009. The basic weighted average number of shares outstanding was 24,063,670 for the three month period endedMay 31, 2010 compared to 27,763,897 for the three month period ended May 31, 2009.

LIQUIDITY AND CAPITAL RESOURCES

Three Month Period Ended May 31, 2010

As at May 31, 2010, our current assets were $-0- and our current liabilities were $23,717,040, which resulted in a working capital deficit of $23,717,040. As of May 31 , 2010, current liabilities were comprised of: (i) $18,360,246 in accounts payable and accrued liabilities; (ii) $5,312,333 in notes payable ; and (iii) fees payable in stock and warrants of $44,461 . See “ – Material Commitments.”
 
As of May 31, 2009, our current assets were $144,764 and our current liabilities were $22,251,007, which resulted in a working capital deficit of $         .  As of May 31, 2009, current assets were comprised of: (i) $4,870 in cash and cash equivalents; (ii) $139,894 in VAT refund and other receiables. As of May 31, 2009, total assets were $733,034 consisting of current assets and $588,270 in valuation of oil and gas interests.

As of May 31, 2010, our total assets were $-0-. The decrease in total assets during the three month period ended May 31, 2010 from the three mont h period ended May 31, 2009 was primarily due to our decrease in valuation of oil and gas interests, which we no longer hold as an assent, and the VAT refund and other receivable.

As at May 31, 2010, our total liabilities were $23,717,040 comprised entirely of current liabilities compared to total liabilities of $22,251,007 at May 31, 2009 . The increase in liabilities during the three month period ended May 31, 2010 from the three month period ended May 31, 2009 was primarily due to the increase in accounts payable and accrued liabilities.

Cash Flows from Operating Activities

We have not generated positive cash flows from operating activities. For the three month period ended May 31, 2010, net cash flows used in operating activities was $16,000 consisting primarily of a net loss of ($16,000) .

Cash Flows from Investing Activities

For the three month period ended May 31, 2010, net cash flows provided by investing activities was $-0- .

Cash Flows from Financing Activities

We have financed our operations primarily from debt or the issuance of equity instruments. For the three month period ended May 31, 2010, net cash flows provided from financing activities was -0-.


 
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PLAN OF OPERATION AND FUNDING

We have no access to capital to repay our debt or fund our current or ongoing operations. Unless we can secure additional capital and renegotiate the terms of our outstanding debts, we may be required to discontinue our operations at any time. We will need additional further advances and issuance of debt instruments to fund our operations over the next six months. In connection with our future business plan, management anticipates additional increases in operating expenses and capital expenditures relating to acquisition of further interests in gold mining concessions. We would finance these expenses with further issuances of securities and debt issuances. We expect we would need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities would result in dilution to our current shareholders. Further, such securities may have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If we are not able to obtain additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.

MATERIAL COMMITMENTS

As of the date of this Quarterly Report, we have the following material commitments as described below.

Financing from EuroEnergy Growth Capital S.A.

On May 17, 2007, we entered into a share issuance agreement (the “Share Issuance Agreement”) with EuroEnergy Growth Capital S.A. (“EuroEnergy”), whereby EuroEnergy agreed to advance up to $8,000,000 to us under our drawdown requests, in exchange for units of our common stock. Pursuant to the agreement, the price of a unit is equal to 80% of the volume weighted average of the closing price of common stock as quoted on Yahoo! Finance for the ten banking days immediately preceding the date of our drawdown request. Each unit consists of one common share and one warrant. One warrant will entitle EuroEnergy to purchase one additional common share at an exercise price equal to 125% of the unit price. The warrants will be exercisable for three years from the date of issue. For the fiscal year ended February 29, 2008, we received the funds from EuroEnergy in the aggregate amount of $6,050,000 after giving EuroEnergy a total of fourteen drawdown requests.

Subsequent to the fiscal year ended February 29, 2008, EuroEnergy requested its financing to us to be debt financing instead of equity financing because of changes in market conditions. As a result, we obtained funds from EuroEnergy by issuing promissory notes and entering into a loan agreement.

We issued a total of three promissory notes dated April 1, 2008, May 1, 2008, and May 23, 2008 to EuroEnergy for the loans in the principal amounts of $250,000, $150,000, and $50,000, respectively. The principal amounts of the loans were to be paid on the earlier of (i) the date that we obtain equity financing from a third party in the minimum amount of $1,000,000 net to our company, or (ii) one year anniversary of the date of the promissory notes. For the period from the date of advance of the loan up to and including the date that we repay the loan, interest will accrue on the loan on the balance of principal outstanding at the rate of 10% per annum, calculated and compounded monthly not in advance, until paid. Interest will be payable in a balloon payment on the date that we repay the loan.

On June 12, 2008, we entered into a loan agreement (the “Loan Agreement”) with EuroEnergy for the $450,000 loan that EuroEnergy provided us on May 30, 2008. Pursuant to the terms and provisions of the Loan Agreement, we agreed to pay the principal and interest to EuroEnergy in full by August 31, 2008. However, if we have cash available from our operations or raise funds from any third party in a private placement of equity or debt of at least $1,000,000, we agreed to use the net proceeds from such events to repay the principal and interest then outstanding. The loan bears interest at 12% per annum, calculated annually. The loan is secured by all of our assets. On June 23, 2008, pursuant to the Loan Agreement, we issued 150,000 shares of our restricted common stock to EuroEnergy as additional compensation for the loan.


 
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Under the Share Issuance Agreement with EuroEnergy, we may not obtain financing from anyone other than EuroEnergy for 24 months from the date of the Share Issuance Agreement with EuroEnergy, without the prior written consent of EuroEnergy. EuroEnergy also retains first right of refusal, relating to any future financing of our company. On April 22, 2008, EuroEnergy gave us a written consent to seek alternative financing and on June 18, 2008, EuroEnergy accepted the terms of the debenture issued to Trafalgar Capital Specialized Investment Fund, Luxembourg, discussed below.

EuroEnergy has agreed, in light of the current market climate, to extend the term of the Share Issuance Agreement until we are able to raise further financing. Other terms of loans remain.

Financing from Trafalgar Capital Specialized Investment Fund, Luxembourg

On June 24, 2008, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Trafalgar Capital Specialized Investment Fund, Luxembourg (“Trafalgar”) pursuant to which we sold to Trafalgar $2,500,000 of a senior secured convertible redeemable debenture. Pursuant to the terms of the Securities Purchase Agreement, we agreed to pay to Trafalgar a legal and documentation review fee of $17,500, a due diligence fee of $10,000, a warrant to purchase 500,000 shares of our common stock for five years at an exercise price of $2.9851 (issued), a commitment fee equal to 7% of the principal amount of the debenture, a facility fee equal to 2% of the principal amount of the debenture, and 200,000 restricted shares of our common stock (issued). In connection with the Securities Purchase Agreement, we executed a nonbinding term sheet to enter into a committed equity facility with Trafalgar, which would be entered into upon the debenture being repaid in full by us.

Effective October 31, 2008 we amended the Securities Purchase Agreement and related transaction documents dated June 24, 2008 (collectively, the “Original Transaction Documents”) between us and Trafalgar. The amendment and certain related transaction documents (collectively, the “Amended Transaction Documents”) are dated October 31, 2008 and were executed and delivered to us by Trafalgar on November 11, 2008.

Under the Amended Transaction Documents, we sold to Trafalgar $3,500,000 of secured convertible redeemable debentures consisting of: (i) the original debenture sold to Trafalgar under the Original Transaction Documents in the principal amount of $2,500,000, which was amended and extended such that the debenture was separated into two debentures, each of which are for a total principal amount of $1,250,000 (the “Amended Debentures”); and (ii) a new debenture in the total principal amount of $1,000,000 (the “New Debenture” and together with the Amended Debentures, the “Debentures”).

The Amended Debentures mature as to $1,250,000 on April 30, 2009 (later extended to October 31, 2009) and $1,250,000 on April 30, 2010 and bear an annual interest rate of 10% compounded monthly until the unpaid principal is paid. Trafalgar is entitled, at its option, to convert and sell the principal amount of the Amended Debenture plus accrued interest into shares of our common stock at the price per share equal to the lesser of: (i) 100% of the volume weighted average price as quoted by Bloomberg L.P. on October 31, 2008, or (ii) 80% of the lowest daily closing volume weighted average price as quoted by Bloomberg L.P. during the 5 trading days immediately preceding the date of conversion. In no event will Trafalgar be entitled to convert the Amended Debentures for a number of shares of our common stock in excess of that number of shares of our common stock, upon giving effect to such conversion, would cause the aggregate number of shares of our common stock beneficially owned by Trafalgar and its affiliates to exceed 9.99% of the outstanding shares of our common stock following such conversion without our approval. We may redeem the Amended Debentures provided that our common stock is trading below 100% of the volume weighted average price as quoted by Bloomberg L.P. on October 31, 2008 at the time we give Trafalgar the redemption notice, by paying the unpaid principal and interest accrued to such date and a prepayment premium of 15% redemption premium on the amount redeemed. We must redeem the entire principal amount


 
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outstanding on only one of the Amended Debentures on April 30, 2009 at a 15% redemption premium; there is no mandatory redemption requirement for the other Amended Debenture.

The New Debenture matures on October 31, 2010 and bears an annual interest rate of 10% compounded monthly until the unpaid principal is paid. An event of default occurs if: (i) we fail to pay amounts due under the New Debenture, (ii) our transfer agent fails to issue freely tradeable common stock to Trafalgar within three days of our receiving a notice of conversion or exercise after our registration statement is declared effective, (iii) we fail to comply with any of our other agreements in the New Debenture for five business days after receiving notice to comply, (iv) we enter into bankruptcy or become insolvent, or (v) we breach any of covenants under the securities purchase agreement and do not cure within five business days of receiving a written notice of the breach. Upon an event of default, Trafalgar may accelerate full repayment of the New Debenture outstanding and accrued interest thereon. Also, Trafalgar is entitled, at its option, to convert and sell the principal amount of the New Debenture plus accrued interest into shares of our common stock at the price per share equal to the lesser of (i) 100% of the volume weighted average price as quoted by Bloomberg L.P. on October 31, 2008, or (ii) 80% of the lowest daily closing volume weighted average price as quoted by Bloomberg L.P. during the five trading days immediately preceding the date of conversion. However, if we issue or sell shares of our common stock without consideration or for a consideration per share less than the bid price of our common stock determined immediately prior to its issuance, the conversion price will be reset to 85% of such sales price if the reset price is lower than the conversion price. In no event will Trafalgar be entitled to convert the New Debenture for a number of shares of our common stock in excess of that number of shares of our common stock, upon giving effect to such conversion, would cause the aggregate number of shares of our common stock beneficially owned by Trafalgar and its affiliates to exceed 9.99% of the outstanding shares of our common stock following such conversion without our approval. We may redeem the debentures provided that our common stock is trading below 100% of the volume weighted average price as quoted by Bloomberg L.P. on October 31, 2008 at the time we give Trafalgar the redemption notice, by paying the unpaid principal and interest accrued to such date and a prepayment premium of 15% redemption premium on the amount redeemed. We must begin redeeming the New Debenture monthly beginning on January 31, 2009 by making equal payments of principal over the term of the New Debenture plus any outstanding interest payments and at a 15% redemption premium on the principal redeemed each month. So long as any of the principal of or interest on the New Debenture remains unpaid, we may not, without the prior consent of Trafalgar: (i) issue or sell shares of our common stock without consideration or for a consideration per share less than the bid price of our common stock determined immediately prior to its issuance, (ii) issue or sell any warrant, option, right, contract, call, or other security instrument granting the holder thereof, the right to acquire our common stock without consideration or for a consideration less than our common stock’s bid price value determined immediately prior to its issuance, (iii) enter into any security instrument granting the holder a security interest in any of our or our subsidiary’s assets, (iv) permit any of our subsidiaries to enter into any security instrument granting the holder a security interest in any assets of such subsidiary, (v) file any registration statement on Form S-8, or (vi) incur any additional debt or permit any of our subsidiaries to incur any additional debt without Trafalgar’s prior written consent.

Our use of the $1,000,000 received pursuant to the New Debenture will require the prior written approval of Trafalgar. Upon the disbursement of the $1,000,000 relating to the purchase of the New Debenture, we paid to Trafalgar one interest payment due on each of the three Debentures, which was paid directly from the proceeds of the closing for the Amended Transaction Documents.

We agreed to enter into a “lock box” agreement covering revenue generated by us which shall be executed prior to November 21, 2008. Failure by our company to execute such “lock box” agreement is deemed an event of default under Amended Transaction Documents including the Debentures and the Pledge and Escrow Agreement. We have negotiated the terms of this agreement with Trafalgar and we expect that the “lock box” agreement will be in place to receive first revenue.


 
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The original warrant issued by us to Trafalgar was amended and replaced such that it is exercisable for a total of 2,000,000 shares of common stock at an exercise price of $0.001 per share. Also, we agreed to register the shares of common stock into which the warrant is exercisable within thirty days of October 31, 2008, subject to compliance with Rule 415 as promulgated under the Securities Act of 1933, as amended, or any Rule 415 comments or restrictions placed by the Securities and Exchange Commission on the registration statement for the shares underlying the warrant.

We agreed to issue to Trafalgar 2,500,000 shares of common stock (issued). Also, we agreed to register such shares of common stock within thirty days of October 31, 2008, subject to compliance with Rule 415 as promulgated under the Securities Act of 1933, as amended, or any Rule 415 comments or restrictions placed by the Securities and Exchange Commission on the registration statement for such shares.

We entered into a Pledge and Escrow Agreement with Trafalgar and James G. Dodrill II, P.A. as escrow agent, whereby we agreed to issue to Trafalgar an additional 15,000,000 shares of common stock (the “Pledged Shares”), which shall serve as additional pledged property under the Security Agreement, as amended, between us and Trafalgar. The Pledged Shares were to be held by the escrow agent until the full payment of all amounts due to Trafalgar under the Debentures or the termination or expiration of the Pledge and Escrow Agreement. Upon the occurrence of an event of default under the Debentures, the Securities Purchase Agreement, the Pledge and Escrow Agreement, the Security Agreement and all other contracts between us and Trafalgar, Trafalgar will be entitled to receive physical delivery of the Pledged Shares, vote the Pledged Shares, to receive dividends and other distributions thereon, to sell the Pledged Shares, and to enjoy all other rights and privileges incident to the ownership of the Pledged Shares. Upon full payment of all amounts due to Trafalgar under the Debentures, the Pledge Agreement and Trafalgar’s security interest and rights in and to the Pledged Shares will terminate.

Also in connection with the Amended Transaction Documents: (i) we gave Trafalgar the first right of refusal to provide additional funding to us; (ii) we agreed to enter into an exclusive investment banking agreement with Trafalgar Capital Advisors, an affiliate of Trafalgar, within ten business days of October 31, 2008, and as of the date of this quarterly report, we are currently negotiating the terms of this agreement with Trafalgar Capital Advisors; (iii) we agreed to pay a legal and documentation review fee to James G. Dodrill II, P.A. of $7,500, which was paid directly from the proceeds of the closing for the Amended Transaction Documents; (iv) we entered into a side letter agreement whereby we agreed to redeem all of the Debentures if we successfully complete an equity financing for gross amounts of a minimum of $5 million; and (v) we entered into irrevocable transfer agent instructions with our transfer agent.

We failed to make most payments due to Trafalgar Capital Specialized Investment Fund, Luxembourg under the various loan arrangements (approximately $196,000 in scheduled principal, premium and interest repayments at February 28, 2009). We later were not in a position to repay the $1,250,000 principal due at the end of April 2009 under a loan agreement with Trafalgar (which would have left $2,250,000 principal outstanding). We have also incurred trade creditor and direct salary related debt of over $1,000,000 to date for our operations in Kansas. Several of these key trade creditors have issued mechanical liens against our facilities in Kansas.

As a result, in April 30, 2009, we and Trafalgar entered into amendment to the securities purchase agreement, secured debenture, registration rights agreement and security agreement, whereby Trafalgar agreed to extend the maturity date of a secured debenture in the principal amount of $1,250,000 until October 31, 2009 from April 30, 2009. In consideration for Trafalgar’s agreeing to extend the maturity date of that secured debenture, we released 15,000,000 shares of our common stock from escrow to Trafalgar as payment of an extension fee. These shares were originally intended to serve as additional pledged property under the security agreement that we entered into with Trafalgar in connection with the sale of the debentures to Trafalgar and in fact were described by


 
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Trafalgar as being made available for a CEF type arrangement to repay creditors. This was later reneged on by Trafalgar.

In addition, pursuant to the bill of sale and assignment in lieu of foreclosure and the certificate of seller, we sold and assigned to TCF Oil and Gas Corp., a Florida corporation owned by Trafalgar, all of our properties located in Ellsworth County, Kansas, including three oil and gas leases located in Ellsworth County, Kansas in consideration of the payment of $100 from TCF Oil and Gas to us and of the simultaneous execution by Trafalgar of a covenant not to sue us for an in personam judgment under the obligations evidenced or secured by the various loan documents between Trafalgar and us. TCF Oil and Gas did not assume our obligations and liabilities under the loan documents between Trafalgar and us and such obligations and liabilities remain our responsibility. In addition, this bill of sale and assignment does not restrict the right of Trafalgar as holder of such loan documents to enforce the same or to institute or proceed with foreclosure or any other remedial proceedings under the same. We also released Trafalgar from any claims arising out of the loans from Trafalgar

In consideration of the simultaneous execution by our company of the bill of sale and assignment in lieu of foreclosure and the certificate of seller, Trafalgar, FIS entered into the covenant not to sue. Pursuant to this covenant, Trafalgar agreed not to sue for an in personam judgment against our company under the various loan documents between our company and Trafalgar. Nevertheless, in connection with the enforcement of its rights under such loan documents, Trafalgar reserved the right to sue our company in rem.

In addition, Trafalgar expressly reserved all rights of action, claims, and demands against any and all persons or entities, including without limitation any guarantor of any of the loans, indebtedness or obligations evidenced or secured by such loan documents other than our company, and expressly reserved all rights of action, claims and demands against and all persons or entities including our company under or arising out of or related to any mechanics’ liens and/or mechanics’ lien claims filed on, asserted against or related to any of the mortgaged properties (mostly three oil and gas leases in Ellsworth County, Kansas and related properties) from our company to Trafalgar. This instrument was not a release and does not operate to discharge any of the loans, indebtedness or obligations evidenced or secured by the loan documents.

Partners Consulting, Inc.

On May 8, 2008 we entered into a consulting agreement (the “Consulting Agreement”) with Partners Consulting, Inc., a Florida corporation (“Partners Consulting”), with a view to introducing us to potential new investors. We engaged Partners Consulting on a 90 day exclusive basis commencing on May 8, 2008. The consideration payable is 6% of the gross proceeds from any financing whose funding source is introduced by Partners Consulting payable in cash and by issuance of share purchase warrants equal to 6% of the gross proceeds. The warrants will have a cashless exercise and will be priced at market value as of the date of the financing and with a minimum expiry period of three years. In addition, if the financing is facilitated through an investment banker introduced by Partners Consulting, the consideration payable is reduced to 3% of the gross proceeds for cash and 3% of the gross proceeds for share purchase warrants. We also agreed to pay Partners Consulting share purchase warrants equal to 50,000 shares of our common stock for the services of Partners Consulting relating to the assembling, formatting, and compiling certain presentation documentation. These warrants will have a cashless exercise and will be priced at the market value as of May 8, 2008, exercisable in 90 days, and have a minimum expiry period of three years. In the event that Partners Consulting introduces us to potential new investors for successful financing, Partners Consulting has the right to represent us as a finder in all subsequent equity or debt financing undertaken by us, for two years from May 8, 2008, on an exclusive basis for a 180 day period from formal engagement of Partners Consulting in respect of each such subsequent financing round. The consulting agreement is for a period of one year. On June 27, 2008, we paid $150,000 to Partners Consulting for financing from Trafalgar. In addition, we are required to issue warrants for financing from Trafalgar pursuant to the Consulting Agreement.


 
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Pollard Financial Ltd.

On September 25, 2008, our wholly owned subsidiary, Fox Energy Exploration Limited, entered into a letter agreement (the “Letter Agreement”) with Pollard Financial Ltd. (“Pollard Financial”) pursuant to which Pollard Financial agreed to provide general corporate finance services with respect to Fox Energy Exploration Limited’s financing needs and listing on the TSX Venture Exchange via entering into definitive and binding agreement with a capital pool company in Canada. The term of the Letter Agreement was for a period of twelve months, and thereafter, renewable monthly at the option of Fox Energy Exploration Limited. In consideration for the services of Pollard Financial, Fox Energy Exploration Limited agreed to: (i) pay an engagement fee of 25,000 shares of our common stock payable upon signing of the Letter Agreement; (ii) pay 7% in cash of the gross proceeds of the financing, to be deducted from the gross proceeds, and paid upon the closing of each and any portion of the financing; (iii) issue common stock warrants equal to 7% of the gross proceeds, with the warrants having a cashless exercise and being priced as mutually agreed upon by us and Pollard Financing Ltd. at the time of each closing and having a term of two years; and (iv) pay a corporate finance fee of 100,000 shares of our common stock payable upon completion of the qualifying transaction with the capital pool company. Any amounts due and payable under the letter agreement and outstanding for in excess of 45 calendar days will accrue interest at the rate of 1.5% per month, compounding on a monthly basis. Fox Energy Exploration Limited also agreed to reimburse all reasonable out of pocket costs, charges and expenses, including travel, incurred by Pollard Financial in the performance of its obligations under the Letter Agreement.

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.

ITEM 3.  QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our activities expose us to a variety of financial risks: market risk (including currency risk and cash flow); credit risk and liquidity risk. Our overall risk management program focuses on the unpredictability of the financial market and seeks to minimize potential adverse effects on our financial performance. We do not use derivative financial instruments to hedge these risks. Our subsidiaries are exposed to financial risks that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates.

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. We are exposed to fluctuation in our future cash flows arising from changes in interest rates through its variable rate financial assets and liabilities. Other liabilities negotiated at a fixed rate expose us to fair value interest rate risk.


 
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ITEM 4.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  We conducted an evaluation (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report pursuant to Rule 13a-15 of the Exchange Act.  Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls were effective as of the end of the period covered by this report.

Changes in Internal Controls

We have also evaluated our internal controls for financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.


 
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CEO and CFO Certifications

Appearing immediately following the Signatures section of this report there are Certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this report, which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

Audit Committee report

Our Board of Directors has not established an audit committee. The respective role of an audit committee has been conducted by our Board of Directors. We intend to establish an audit committee during fiscal year 2010. When established, the audit committee's primary function will be to provide advice with respect to our financial matters and to assist our Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance. The audit committee's primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as its compliance with laws and regulations; (iv) oversee management's establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our Board of Directors.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Except for claims, if any, arising out of our letter of commitment with Senergy Limited (as disclosed elsewhere in this Quarterly Report) and trade creditor related debt for our operations in Kansas (as disclosed elsewhere in this Quarterly Report), we know of no material, existing or pending legal proceedings to which we are a party or of which any of our property is the subject.

Management is not aware of any other 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.  RISKS FACTORS

No report required.

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

Share Exchange Agreements

Effective July 15, 2010, we entered into the Ontario Share Exchange Agreement and the Resource Share Exchange Agreement. In accordance with the terms and provisions of the Ontario Share Exchange Agreement, we acquired one hundred percent (100%) of the total issued and outstanding shares of common stock of Ontario helld of record by the Ontario Shareholders in exchange for issuance of an aggregate 1,750,000 shares of our restricted common stock to the Ontario


 
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Shareholders. The shares of common stock were issued to the Ontario Shareholders under Regulation S of the Securities Act. In accordance with the terms and provisions of the Resource Share Exchange Agreement, we acquired one hundred percent (100%) of the total issued and outstanding shares of common stock of Resource helld of record by the Resource Shareholders in exchange for issuance of an aggregate 1,750,000 shares of our restricted common stock to Resource Shareholders. The shares of common stock were issued to the Resource Shareholders under Regulation S of the Securities Act.

ITEM 3.  DEFAULTS UPON SENOIR SECURITIES

No report required.

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

No report required.

ITEM 5.  OTHER INFORMATION

No report required.

ITEM 6.  EXHIBITS

Exhibits:

 





 
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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.

 
 
FOX PETROLEUM INC.
 
       
Dated: July 2 7 , 2010 
By:
/s/  William Lieberman
 
   
William Lieberman, President and
 
   
Chief Executive Officer
 



Dated: July 2 7 , 2010 
By:
/s/  William Lieberman
 
   
William Lieberman, Chief Financial Officer