ITEM 1. BUSINESS
Name and Organization
We were incorporated under the laws of the State of Nevada on August 27, 2004 under the name ST Online Corp. On June 22, 2007, we entered into a business combination agreement with Park Place Energy Inc., a private company incorporated under the laws of the Province of Alberta, Canada, and 0794403 B.C. Ltd., a wholly-owned subsidiary of our company incorporated under the laws of British Columbia. Pursuant to this business combination agreement, Park Place Energy Inc. and 0794403 B.C. Ltd. amalgamated under the provisions of the British Columbia Business Corporations Act and continued as Park Place Energy Inc., a company governed by the British Columbia Business Corporations Act.
On July 6, 2007, we completed a forward split of our shares of common stock on the basis of eight new shares of common stock for each one share of common stock outstanding on that date and increased the authorized share capital from 100,000,000 shares of common stock to 800,000,000 shares of common stock. At the same time, we merged with our wholly-owned subsidiary, Park Place Energy Corp. which we incorporated under the laws of the State of Nevada in contemplation of the acquisition of all of the issued and outstanding shares of Park Place Energy Inc. and our name was then changed to Park Place Energy Corp.
On July 23, 2007, we completed a forward split of our shares of common stock on the basis of one and one-half new shares of common stock for each one share of common stock outstanding on that date and increased the authorized share capital from 800,000,000 shares of common stock to 1,200,000,000 shares of common stock.
On July 30, 2007, pursuant to the terms of a business combination agreement, we issued to each shareholder of record of Park Place Energy Inc. one share of our common stock for every two shares they held of Park Place Energy Inc. As a result, we issued 8,995,662 shares of common stock to the former shareholders of Park Place Energy Inc. Additionally, as part of this transaction, a total of 45,000,000 shares of our common stock held by former principals of our company were surrendered for cancellation. We thereby acquired Park Place Energy Inc. For accounting purposes, the acquisition was treated as a recapitalization with Park Place Energy Inc. being the accounting acquirer and the go-forward financial statements reflect the history of Park Place Energy Inc. from its inception on May 4, 2006. As a result of the acquisition, the business of our company is now the acquisition and exploration of oil and gas properties.
We hold exploration interests in a property in Tennessee, USA. Our wholly owned subsidiary, Park Place Energy (Canada) Inc., holds the exploration interests in five properties in the provinces of British Columbia and Alberta, in Canada. In addition, on July 24, 2008, our subsidiary, Park Place Energy (Canada) Inc., acquired an interest in certain 5 Year Northern Petroleum and Natural Gas Leases located in Alberta, Canada. We have completed test drilling at certain of the properties in which we hold
interests. We are underway to develop certain of these properties for production. A limited amount of oil and gas is produced currently at one of our properties.
Our principal business offices are located at Suite 300, 840 - 6th Avenue SW, Calgary, Alberta, Canada, T2P 3E5 and our telephone number is (403) 260-5375.
General
We are currently an exploration stage company engaged in exploring for conventional oil and natural gas. In the projects in which we hold interests, another party typically acts as the operator of the project. With respect to the projects that we participate in, we provide to the operator timely funding for our proportionate share of costs as well as technical input on how best to develop the property. As a way to keep our overhead down, we engage the services of consultants who have technical expertise to best represent our interests. We currently have interests in oil and gas properties in the Canadian provinces of British Columbia and Alberta and in Morgan County, Tennessee. Our principal capital expenditures to date have been $4,583,877 to acquire the interests in the oil and gas properties. See “Properties” for more information about our interests.
In March 2007, we had entered into a letter agreement to purchase a 50% interest in the Cecil Eureka property located in Alberta, Canada by agreeing to fund 50% of the proprietor’s obligations in respect of the property. In March 2008, we elected to drop our right to participate in this property due to a risk assessment of the property.
In June 2008, we sold all of our right, title, estate and interests in our Kerrobert property located in Saskatchewan, Canada for $205,000 (less outstanding operating cost of $75,521.86) .
In May 2006, we had entered into a farmout agreement in respect of a property located in the Atlee Buffalo area of Alberta, Canada pursuant to which we had agreed to pay all of the costs to drill, completed, equip, and tie in or abandoned two test wells. In June 2008, we elected to not to complete the wells drilled on the property and terminated the agreement due to a risk assessment of the property.
In September 2006, we had entered into a farmout agreement in respect of a property located in the Worsley area of Alberta, Canada pursuant to which we had agreed to conduct a seismic and test well program at the property. In June 2008, we elected not to drill a test well on the property and terminated the agreement due to a risk assessment of the property.
In March 2008 we acquired a 51% interest in 5 diamond concessions in Central Brazil in exchange for the payment of $250,000. On April 1, 2008, we acquired a sixth diamond concession in Central Brazil consisting of 356.25 hectares. In July 2008, we divested our entire interest in the 6 diamond concessions for $385,000 paid by way of a promissory note repayable from sales of diamonds recovered from these concessions.
Revenues from our Eight Mile Gas Property in north-east British Columbia commenced in April 2008. We continue to work on developing our other properties as well identifying new properties for acquisition.
Patents and Trademarks
We do not own, either legally or beneficially, any patent or trademark.
Research and Development Expenditures
We have not incurred any research or development expenditures since our incorporation.
Government Regulation
General
Our oil and gas operations are subject to various federal, provincial, state and local governmental regulations in Canada and the United States. Matters subject to regulation include exploration permits, discharge permits for drilling operations, drilling and abandonment bonds, operating practices, reports concerning operations, the spacing of wells, pooling of properties, taxation and environmental protection. These laws and regulations are under constant review for amendment or expansion. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, provincial and local laws and regulations relating primarily to the protection of human health and the environment. To date, expenditures related to complying with these laws, and for remediation of existing environmental contamination, have not been significant in relation to the results of operations of our company. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. Changes in these regulations could require us to expend significant resources to comply with new laws or regulations or changes to current requirements and could have a material adverse effect on us.
Oil and Gas Regulation
In addition to federal regulation, each province and state has legislation and regulations which govern land tenure, royalties, production rates, environmental protection and other matters. The royalty regime is a significant factor in the profitability of oil and natural gas production. Royalties payable on production from lands other than government lands are determined by negotiations between the mineral owner and the lessee. Royalties on government land are determined by government regulation and are generally calculated as a percentage of the value of gross production, and the rate of royalties payable generally depends upon prescribed reference prices, well productivity, geographical location, field discovery date and the type or quality of the petroleum product produced.
Management believes that we are in substantial compliance with current applicable environmental laws and regulations.
Competition
We operate in highly competitive industries, competing with other oil and gas exploration companies, independent producers and institutional and individual investors, which are actively seeking oil and gas properties throughout the world together with the equipment, labor and materials required to operate such properties. Most of our competitors have financial resources, staffs and facilities substantially greater than our company’s. The principal area of competition is encountered in the financial ability for our company to acquire acreage positions and drill wells to explore for oil and gas, then, if warranted install production equipment. Competition for the acquisition of oil and gas wells is intense with many oil and gas properties and or leases or concessions available in a competitive bidding process in which we may lack technological information or expertise available to other bidders. Therefore, we may not be successful in acquiring and developing profitable properties in the face of this competition. No assurance can be given that we will be successful in its efforts to secure additional properties and or develop its existing oil and properties.
Employees
As of December 31, 2008, we have no employees. However, as a cost saving measure, we rely on consultants to carry out our corporate activities and to oversee our best interests in our non-operated oil and gas properties.
ITEM 1A.
ITEM 1A. RISK FACTORS
Much of the information included in this annual report includes or is based upon estimates, projections or other “forward looking statements”. Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein. We undertake no obligation to update forward looking statements to reflect events or circumstances occurring after the date of such statements.
Such estimates, projections or other “forward looking statements” involve various risks and uncertainties as outlined below. We caution readers of this annual report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other “forward looking statements”. In evaluating us, our business and any investment in our business, readers should carefully consider the following factors.
Risks Relating to Our Business
We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations.
We have a limited oil and gas operating history. Our success is significantly dependent on a successful acquisition, drilling, completion and production program. Our operations will be subject to all the risks inherent in the establishment of a developing enterprise. We may be unable to locate recoverable reserves or operate on a profitable basis. We are in the exploration stage with production, and potential investors should be aware of the difficulties normally encountered by enterprises in the exploration stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.
Some of our properties are in the exploration stage, there can be no assurance that we will establish commercial discoveries on these properties.
Exploration for economic reserves of oil and gas is subject to a number of risk factors. Few properties that are explored are ultimately developed into producing oil or gas wells. Some of our properties are in the exploration stage only and are without proven reserves either of oil and gas. We may not establish commercial discoveries on some of our exploration properties.
Oil and gas exploration involves a high degree of risk and there is no assurance that expenditures for future exploration by us will result in new discoveries in commercial quantities.
Although we have a limited number of specific identified exploration prospects at the present time, we intend to continue to evaluate prospects on an ongoing basis in a manner consistent with industry standards. Our long-term commercial success depends on our ability to find, acquire, develop and commercially produce hydrocarbons. We cannot provide any assurance that we will be able to locate
satisfactory properties for acquisition or participation. Moreover, if we do identify such acquisitions or participations, we may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomic.
We are dependent on discovering new reserves.
Our future oil and natural gas reserves, production, and cash flows, if any, to be derived therefrom are highly dependent upon us successfully acquiring or discovering new reserves. Without the continual addition of new reserves, any existing reserves our company may have at any particular time and the production therefrom will decline over time as they are exploited. A future increase in our reserves will depend not only on our ability to develop any properties we may have from time to time, but also on our ability to select and acquire suitable producing properties or prospects. There can be no assurance that our future exploration and development efforts will result in the discovery and development of additional commercial accumulations of oil and natural gas.
We will require significant additional financing in order to continue our exploration activities and our assessment of the commercial viability of our oil and gas and oil sands properties.
We will require additional financing in order to carry out our acquisition and exploration activities. Failure to obtain such financing on a timely basis could cause us to forfeit our interest in certain properties, miss certain acquisition opportunities, or delay or indefinitely postpone further exploration of our projects. This could result in the possible loss of such properties or the reduction or termination of our operations.
Our operations require significant additional capital, which may not be available to us on acceptable terms, or at all.
Our cash flow from our reserves, if any, may not be sufficient to fund our ongoing activities at all times. From time to time, we may require additional financing in order to carry out our oil and gas acquisitions, exploration and development activities, if any. Failure to obtain such financing on a timely basis could cause us to forfeit our interest in certain properties, miss certain acquisition opportunities and reduce or terminate our operations. If our revenues from our reserves, if any, decrease as a result of lower oil and natural gas prices or otherwise, it will affect our ability to expend the necessary capital to replace our reserves, if any, or to maintain production. If our Company’s cash flow from operations is not sufficient to satisfy our capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements or available to us on favourable terms.
If we lose the services of our management and key consultants, then our plan of operations may be delayed or be more expensive to undertake than anticipated.
Our success depends to a significant extent upon the continued service of Mr. David Johnson, the Company’s President, CEO and Director. Losing the services of Mr. Johnson could have a material adverse effect on the Company’s growth, revenues, and prospective business. The Company does not maintain key-man insurance on the life of Mr. Johnson. In addition, in order to successfully implement and manage the Company’s business plan, the Company will be dependent upon, among other things, successfully recruiting qualified managerial and field personnel having experience in the oil and gas exploration business. Competition for qualified individuals is intense. There can be no assurance that the Company will be able to retain existing consultants or that the Company will be able to find, attract and retain qualified personnel on acceptable terms. The loss of the service of Mr. Johnson, through incapacity or otherwise, would be costly to the Company and would require the Company to seek and retain other qualified personnel.
Presently, the Company is not the operator of any of its oil and natural gas properties. To this extent the Company is dependent on such operators for the timing of activities related to such properties and will largely be unable to direct or control the activities of the operators.
In addition, the success of the Company will be largely dependent upon the performance of its management and key consultants. The Company does not have any key man insurance policies, and therefore there is a risk that the death or departure of any member of management or any key consultants could have a material adverse effect on the Company.
If we lose the services of the independent contractors that we engage to undertake our exploration, then our plan of operations may be delayed or be more expensive to undertake than anticipated.
Our success depends to a significant extent on the performance and continued service of certain independent contractors. We have contracted the services of professional drillers and other contractors for exploration, environmental, construction and engineering services. Poor performance by such contractors or the loss of such services could result in our planned exploration activities being delayed or being more expensive to undertake than anticipated.
You may be unable to enforce actions against us, certain of our directors and officers, or the expert named in this prospectus under U.S. federal securities laws.
Our wholly-owned operating subsidiary, which legally owns the bulk of our assets, is a corporation organized under the laws of the province of British Columbia, Canada. Our directors and officers reside principally in Canada. Because all or a substantial portion of our assets and the assets of these persons are located outside of the United States, it may not be possible for you to effect service of process within the United States upon us or those persons. Furthermore, it may not be possible for you to enforce against us or them in the United States, judgments obtained in U.S. courts based upon the civil liability provisions of the U.S. federal securities laws or other laws of the United States. There is doubt as to the enforceability, in original actions in Canadian courts, of liabilities based upon U.S. federal securities laws and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. federal securities laws. Therefore, it may not be possible to enforce those actions against us, our operating subsidiary, or our directors and officers.
The oil and gas industry is highly competitive and there is no assurance that we will be successful in our business.
The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration activities during periods of low oil and natural gas market prices. Our larger competitors may be able to absorb the burden of present and future federal, provincial, local and other laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to acquire additional properties in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our industry, we may be at a disadvantage in bidding for exploratory prospects.
Our interests are held in the form of farmout agreements, licenses and leases that may terminate.
Our properties are held in the form of farmout agreements, licenses and leases, and working interests in licenses and leases. If we or the holder of the farmout agreements fail to meet the specific requirements of each farmout agreement, license or lease, the license or lease may terminate or expire. There can be no assurance that any of the obligations required to maintain each farmout agreement, license or lease will be met. The termination or expiration of our farmout agreements, licenses or leases or the working interests relating to farmout agreements, licenses or leases may have a material adverse effect on our results of operation and business.
The operations of our Company may require licenses and permits from various governmental authorities. There can be no assurance that we will be able to obtain all necessary licenses and permits that may be required to carry out exploration and development on our projects.
The title to our properties may be defective.
It is our practice in acquiring oil and gas leases or interests in oil and gas leases not to undergo the expense of retaining lawyers to fully examine the title to the interest to be placed under lease or already placed under lease. Rather, we rely upon the judgment of oil and gas lease brokers or landmen who actually do the work in examining records before attempting to lease a specific interest.
Our acquisitions may not be successful.
As part of our growth strategy, we intend to acquire additional interests in oil and gas properties. Such acquisitions may pose substantial risks to our business, financial condition, and results of operations. In pursuing acquisitions, we will compete with other companies, many of which have greater financial and other resources to acquire attractive properties. There can be no assurance that we will be able to successfully integrate acquired properties, which could result in substantial costs and delays or other operational, technical, or financial problems. Further, acquisitions could disrupt ongoing business operations. If any of these events occur, it would have a material adverse effect upon our operations and results from operations.
We are subject to foreign currency risks.
Oil and gas operations in the United States generate revenues in United States dollars, while expenses are incurred in Canadian dollars. As a result, an upward adjustment of Canadian currencies against the United States dollar would result in a reduction of profits, if any, that our projects would generate if they commence production. Accordingly, the value of our projects is subject to risk based on changes to foreign currency rates.
Risks Relating to Our Industry
The oil and gas industry is subject to significant competition, which may increase costs or otherwise adversely affect our ability to compete.
Oil and gas exploration is intensely competitive and involves a high degree of risk. There can be no assurance that commercial production of oil and gas can be obtained from any of our properties, nor are there any assurances that production, if obtained, will be in sufficient quantities to be profitable. In our efforts to acquire properties, we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and gas, but also conduct refining and petroleum marketing operations on a worldwide basis.
Competition for producing properties will be affected by the amount of funds available to us, information available to us and any standards established by us for the minimum projected return on investment. Competition may also be presented by alternative fuel sources and technologies.
A substantial or extended decline in oil and natural gas prices could reduce our future revenue and earnings.
As with most other companies involved in resource exploration, we may be adversely affected by future increases in the costs of conducting exploration, development and resource extraction that may not be fully offset by increases in the price received on sale of the petroleum or natural gas.
Our future revenues, if any, profitability and growth and the carrying value of our oil and gas and oil sands properties will be substantially dependent on prevailing prices of oil and gas. Our ability to borrow and to obtain additional capital on attractive terms is also substantially dependent upon oil and gas prices. Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors beyond our control. These factors include economic conditions in the United States and Canada, the actions of the Organization of Petroleum Exporting Countries, governmental regulation, political stability in the Middle East and elsewhere, the foreign supply of oil and gas, the price of foreign imports and the availability of alternate fuel sources. Any substantial and extended decline in the price of oil and gas would have an adverse effect on the carrying value of our properties and borrowing capacity.
Industry activities are dependent on availability of drilling equipment and access restrictions.
Oil and natural gas exploration and development activities are dependent on the availability of drilling and related equipment in the particular areas where such activities will be conducted. Demand for such limited equipment or access restrictions may affect the availability of such equipment to our company and may delay exploration and development activities.
Prices, markets and marketing of crude oil and natural gas may result in a reduction in volume of our oil and gas reserves.
Oil and natural gas are commodities whose prices are determined based on world demand, supply and other factors, all of which are beyond the control of our company. World prices for oil and natural gas have fluctuated widely in recent years. Any material decline in prices could result in a reduction of net production revenue. Certain wells or other projects may become uneconomic as a result of a decline in world oil prices and natural gas prices, leading to a reduction in the volume of our company’s oil and gas reserves, if any. The Company might also elect not to produce from certain wells at lower prices. All of these factors could result in a material decrease in our future net production revenue, if any, causing a reduction in our oil and gas acquisition and development activities. In addition, bank borrowings available to our company are in part determined by the borrowing base of our company. A sustained material decline in prices from historical average prices could limit or reduce our borrowing base, therefore reducing the bank credit available to our company, and could require that a portion of any existing bank debt of our company be repaid.
In addition to establishing markets for our oil and natural gas, our company must also successfully market our oil and natural gas to prospective buyers. The marketability and price oil and natural gas which may be acquired or discovered by our company will be affected by numerous factors beyond our control. Our company will be affected by the differential between the price paid by the refiners for light quality oil and the grades of oil produced by our company. The ability of our Company to market our natural gas may depend upon our ability to acquire space on pipelines which deliver natural gas to commercial markets. Our company will also likely be affected by deliverability uncertainties related to the proximity of our
reserves to pipelines and processing facilities and related to operational problems with such pipelines and facilities and extensive government regulation relating to price, taxes, royalties, land tenure, allowable production, the export of oil and natural gas and many other aspects of the oil and natural gas business. Our Company has limited direct experience in the marketing of oil and natural gas.
Our insurance is subject to limitations on liability.
Our Company’s involvement in the exploration for and development of oil and gas properties may result in our company becoming subject to liability for pollution, blow-outs, property damage, personal injury or other hazards. Although our Company has obtained insurance in accordance with industry standards to address such risks, such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities. In addition, such risks may not, in all circumstances be insurable or, in certain circumstances, our company may elect not to obtain insurance to deal with specific risks due to the high premiums associated with such insurance or other reasons. The payment of such uninsured liabilities would reduce the funds available to our company. The occurrence of a significant event that our company is not fully insured against, or the insolvency of the insurer of such event, could have a material adverse effect on our company’s financial position, results of operations or prospects.
The marketability of natural resources will be affected by numerous factors beyond our control which may result in us not receiving an adequate return on invested capital to be profitable or viable.
The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable.
Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our Company.
Oil and gas operations are subject to federal, provincial, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, provincial, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages. To date we have not been required to spend any material amount on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations.
Exploration activities are subject to certain environmental regulations which may prevent or delay the commencement or continuance of our operations.
In general, our exploration activities are subject to certain federal, provincial and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation.
Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of provincial authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry. We believe that our operations comply, in all material respects, with all applicable environmental regulations.
Exploratory drilling involves many risks and we may become liable for pollution or other liabilities which may have an adverse effect on our financial position.
Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labor, and other risks are involved. We may become subject to liability for pollution or hazards against which we cannot adequately insure or which we may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations.
The potential profitability of oil and gas ventures depends upon factors beyond the control of our Company.
The potential profitability of oil and gas and oil sands properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. In addition, adverse weather conditions can also hinder drilling operations. Further, our operating costs will be dependent upon the availability of required services and personnel. These changes and events may materially affect our financial performance. These factors cannot be accurately predicted and the combination of these factors may result in our Company not receiving an adequate return on invested capital.
We are subject to complex laws that can affect the cost, manner and feasibility of doing business thereby increasing our costs and reducing our profitability.
Failure to comply with these laws may also result in the suspension or termination of operations and liabilities under administrative, civil and criminal penalties. Moreover, these laws could change in ways that substantially increase the costs of doing business. Any such liabilities, penalties, suspensions, terminations or regulatory changes could materially and adversely affect our financial condition and results of operations.
The nature of oil sands exploration involves many risks.
Oil sands exploration is very competitive and involves many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. As with any petroleum property, there can be no assurance that commercial deposits of bitumen will be produced from our oil sands property. Furthermore, the marketability of any discovered resource will be affected by numerous factors beyond our control. These factors include, but are not limited to, market fluctuations of prices, proximity and capacity of pipelines and processing equipment, fluctuating extraction and operating costs, equipment availability and government regulations (including, without limitation, regulations relating to prices, taxes, royalties, land tenure, allowable production, importing and exporting of oil and gas and
environmental protection). Additionally, our insurance will not provide reimbursement for all operational risks that we may face. The extent of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital.
The establishment of proved reserves is subjective and subject to numerous uncertainties.
We have established proved reserves on certain of our properties. There are numerous uncertainties inherent in estimating quantities of natural resources, including many factors beyond our control, and no assurance can be given that the recovery of bitumen will be realized. In general, estimates of recoverable natural resources are based upon a number of factors and assumptions made as of the date on which the resource estimates were determined, such as geological and engineering estimates which have inherent uncertainties and the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of resources are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the recoverable natural resources, the classification of such resources based on risk of recovery, prepared by different engineers or by the same engineers at different times, may vary substantially.
The impact of the Kyoto Protocol may affect our ability to operate.
In late 2002, the Government of Canada ratified the Kyoto Protocol, an international agreement designed to manage greenhouse gas emissions and on February 16, 2005 it became effective. Other than as described in the 2005 Kyoto Plan, relatively few details regarding its implementation in Canada have been made by the federal government. Numerous uncertainties regarding details of the Kyoto Protocol's implementation remain and there can be no assurance that future rules and regulations will not affect our ability to operate as planned.
We may incur substantial abandonment and reclamation costs.
We are responsible for compliance with terms and conditions of environmental and regulatory approvals and all laws and regulations regarding the abandonment of the project and reclamation of our lands at the end of its economic life, which abandonment and reclamation costs may be substantial. A breach of such legislation and/or regulations may result in the issuance of remedial orders, the suspension of approvals, or the imposition of fines and penalties, including an order for cessation of operations at the site until satisfactory remedies are made. It is not possible to estimate with certainty the abandonment and reclamation costs since they will be a function of regulatory requirements at the time.
Native land claims may impact our business.
Aboriginal peoples have claimed aboriginal title and rights to a substantial portion of western Canada. For example, certain aboriginal peoples have filed a claim against the Government of Canada, the Province of Alberta, certain governmental entities and the regional municipality of Wood Buffalo (which includes the City of Fort McMurray, Alberta) claiming, among other things, aboriginal title to large areas of lands surrounding Fort McMurray. If any such claim relating to lands on which we have rights was successful, it could have a significant adverse effect on our ability to conduct our business.
Environmental and regulatory compliance may impose substantial costs on us.
Our operations are or will be subject to stringent laws and regulations relating to improving or maintaining environmental quality. Environmental laws often require parties to pay for remedial action or
to pay damages regardless of fault. Environmental laws also often impose liability with respect to divested or terminated operations, even if the operations were terminated or divested many years ago.
Our exploration activities and drilling programs are or will be subject to extensive laws and regulations governing prospecting, development, production, exports, taxes, labour standards, occupational health, waste disposal, protection and remediation of the environment, protection of endangered and protected species, mine safety, toxic substances and other matters. Exploration and drilling is also subject to risks and liabilities associated with pollution of the environment and disposal of waste products. Compliance with these laws and regulations will impose substantial costs on us and will subject us to significant potential liabilities.
Costs associated with environmental liabilities and compliance have increased over time, and we expect these costs to continue to increase in the future. We will be required to book reserves for the costs of environmental obligations on our financial statements for such liabilities as our exploration operations proceed.
The current regulatory regime may change.
The current regulatory regime governing oil and gas exploration in Canada is subject to change. We cannot predict if, when or how any aspect of the regulatory regimes governing our activities may change. As a result, our business may be affected in ways that we cannot predict.
Risks Relating to Our Common Stock
Investment in our common stock is speculative due to the nature of our business.
An investment in our common stock is speculative due to the nature of our involvement in the acquisition and exploration of oil and gas and oil sands properties in Canada.
Our shareholders may experience dilution as a result of our issuance of additional common stock or the exercise of outstanding options and warrants.
We may enter into commitments in the future which would require the issuance of additional common stock. We may also grant additional share purchase warrants and stock options. The exercise of share purchase warrants or options and the subsequent resale of common stock in the public market could adversely affect the prevailing market price and our ability to raise equity capital in the future. Any share issuances from our treasury will result in immediate dilution to existing shareholders.
We have never declared or paid cash dividends on our common stock.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors considers relevant. Accordingly, investors may only see a return on their investment if the value of our securities appreciates.
Our stock price can be extremely volatile.
Our common stock is traded dually on the OTC Bulletin Board and the Frankfurt Stock Exchange. There can be no assurance that an active public market will continue for our common stock, or that the market price for our common stock will not decline below its current price. Such price may be influenced by
many factors, including, but not limited to, investor perception of us and our industry and general economic and market conditions. The trading price of our common stock could be subject to wide fluctuations in response to announcements of our business developments or those of our competitors, quarterly variations in operating results, technological innovations, additions or departures of key personnel, industry developments and other events or factors. In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance. Such broad market fluctuations may adversely affect the price of our common stock.
Our common stock will be subject to the “Penny Stock” Rules of the SEC, which will make transactions in our common stock cumbersome and may reduce the value of an investment in our common stock.
Our securities will be subject to the “penny stock rules” adopted pursuant to Section 15(g) of the Exchange Act. The penny stock rules apply generally to companies whose common stock trades at less than $5.00 per share, subject to certain limited exemptions. Such rules require, among other things, that brokers who trade “penny stock” to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade “penny stock” because of the requirements of the “penny stock rules” and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. In the event that we remain subject to the “penny stock rules” for any significant period, there may develop an adverse impact on the market, if any, for our securities. Because our securities are subject to the “penny stock rules”, investors will find it more difficult to dispose of our securities.
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Our Company’s financial statements include a statement that our financial statements are prepared on a going concern basis, and therefore that certain reported carrying values are subject to our Company receiving the future continued support of our shareholders, obtaining additional financing and generating revenues to cover our operating costs. The going concern assumption is only appropriate provided that additional financing continues to become available.
Our business is difficult to evaluate because we have a limited operating history.
In considering whether to invest in our common stock, you should consider that there is only limited historical financial and operating information available on which to base your evaluation of our performance. We entered the oil and gas exploration industry on July 30, 2007, and our operating subsidiary commenced operations on May 4, 2006, and as a result, we have a limited operating history. This makes our business difficult to evaluate and results in greater volatility in the price of our common stock. A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.
A decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise additional capital for our operations. Because our operations to date have been principally financed through the sale of equity securities, a decline in the price of our common stock could have an adverse effect upon our liquidity and our continued operations. A reduction in our ability to raise equity capital in the future would have a material adverse effect upon our business plan and operations, including our ability to continue our current operations. If our stock price declines,
we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.
We may issue debt to acquire assets.
From time to time our Company may enter into transactions to acquire assets or the shares of other corporations. These transactions may be financed partially or wholly with debt, which may increase our debt levels above industry standards. Our articles and by-laws do not limit the amount of indebtedness that our Company may incur. The level of our indebtedness from time to time could impair our ability to obtain additional financing in the future on a timely basis to take advantage of business opportunities that may arise.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 2.
ITEM 2. PROPERTIES
Our Properties
Eight Mile Property, British Columbia
We have a 40% participating interest in a Farmout Agreement with Terra Energy Corp. in northeast British Columbia, Canada covering a total of 21 sections of mineral leases (~5,376 hectares), (the “Farmout Acreage”). We have the right to pay 40% of the costs to drill, case and complete test wells on the Farmout Acreage by pre-selecting two sections for each test well drilled. To date we have drilled 3 test wells that have all been cased. We earn a 40% working interest in the test well spacing unit before payout, which is subject to a proportionate share of a 12% convertible gross overriding royalty and a 24 % working interest in the balance of the 2 section earning block as well as a 24% working interest in the test well spacing unit after payout of the test well. The well located in 7-8 Twp. 81 Rge. 17 W6 is currently tied and placed on production.
We have recently agreed to participate in the acquisition of a 3D seismic program over the Farmout Acreage at a cost of $333,300. Once the 3D data has been processed and interpreted a decision will be made as to whether or not to participate in the drilling of additional test wells on the Farmout Acreage. As of December 31, 2008 a total of $2,438,463 has been spent on the Eight Mile Property.
Morgan Highpoint Property, Tennessee, USA
On November 30, 2007, in exchange for the settlement of indebtedness of $370,337, the Company acquired from a third party a 5% participating interest in the Morgan Highpoint Project in Tennessee. The acquired interest included; a 5% participating interest in the John Bowen # 1 Well and the John Bowen # 2 Well; a 5% interest in the 110 gross acres comprising both the surface and mineral rights underlying the John Bowen lands, and a 5% interest in an additional 996 gross acres at Highpoint in Morgan County Tennessee. As of December 31, 2008, we have incurred $470,344 in costs by participating in the drilling and completing of the Morgan Highpoint # 3 and the Morgan Highpoint # 4 test wells. The Morgan Highpoint # 3 Discovery Well is currently being placed on production.
On April 15, 2008, the operator of the Morgan Highpoint Project, Montello Resources Ltd., commenced drilling the Morgan Highpoint #5 Test Well. The Morgan Highpoint #5 Test Well offsets the Morgan Highpoint #3 Discovery Well and the Morgan Highpoint #4 Well.
The interests in the Morgan Highpoint #5 Test Well are as follows:
Nordegg Formation, Alberta
The Company acquired 100% interest in approximately 1280 acres of land in the Alberta Landsales in July 2008. The two leases are 5 Year Northern Petroleum and Natural Gas Leases that commenced on July 24, 2008 and give us full right, title and interest in the lands, subject to the payment of a royalty to the Alberta government in the event any revenues are earned from the lands. The Company plans to obtain seismic data for these land sections, as well as assess the option of obtaining a joint venture partner to participate in the development of the leases. As of December 31, 2008, the Company has incurred costs of $188,703 associated with the purchase of the leases.
Normandville Oil Sands, Peace River, Alberta
We have a 100% working interest in 1,792 hectares of mineral leases in the Normandville Area of northwest Alberta which cover Sections 1 to 4, 9, 11, 14 in Twp 78, Rge 22 W5M that were acquired at an Alberta Crown land sale in August, 2006 for total consideration of $249,980. The leases comprise the oil sands rights from below the top of the lower Cretaceous Peace River Group to the base of the lower Cretaceous Bluesky - Bullhead Group. Each lease has a 15 year term and an expiry date of no earlier than August 10, 2021. As of December 31, 2008, the Company has incurred rental charges of $6,272 on maintaining the related leases. We are reviewing how to best advance this property.
Medicine Hat, Alberta
We have a 20% working interest in a cased well that is in the process of being completed for oil at Medicine Hat, Alberta. The Farmout Lands consist of a lease on the Alberta Crown mineral rights underlying the N/2 of Section 22 Twp 12 Rge 5 W4M. The Company has shot a 2D seismic program and drilled and cased a well on the Farmout Lands that is currently in the process of being completed. As of December 31, 2008 we have incurred oil and gas costs of $179,802 on this property.
Reserves Reported to Other Agencies
We have filed no estimates of total, proved net oil or gas reserves with any other federal authority or agency in the United States. We have filed a reserves assessment and evaluation with certain Canadian securities regulators pursuant to applicable rules in Canada.
Production
As of December 31, 2008, the only producing property that we own is the Eight Mile Property, described above. It has gas production for fiscal 2008. Oil production for the three fiscal years prior came from the Kerrobert property which we disposed of as described above. Production was as follows:
Productive Wells and Acreage
The following tables set forth our leasehold interest in productive oil wells, as of December 31, 2008:
(1)
A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned.
(2)
A net well is deemed to exist when the sum of fractional ownership working interest in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof.
(3)
At December 31, 2008, the Company had a 40% interest in a cased potential oil well in north-east British Columbia and a 5% interest in two cased potential oil wells in the United States.
The following tables set forth our leasehold interest in productive gas wells, as of December 31, 2008:
(1)
A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned.
(2)
A net well is deemed to exist when the sum of fractional ownership working interest in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof.
(3)
At December 31, 2008, the Company had a 40% interest in two cased potential gas wells in north- east British Columbia.
The following table sets forth the amounts of our net and gross productive wells and acreage(1) as of December 31, 2008:
(1)
Consists of acres spaced or assignable to productive wells.
(2)
A gross acre is an acre in which a working interest is owned. The number of gross acres is the total number of acres in which a working interest is owned.
(3)
A net acre is deemed to exist when the sum of fractional ownership working interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.
Undeveloped Acreage
The following table sets forth the amounts of our undeveloped acreage as of December 31, 2008:
(1)
Undeveloped acreage is considered to be those lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether or not such acreage contains proved reserves.
Drilling Activity
The following table sets forth the results of our oil and gas drilling and acquisition activities as of December 31, 2008:
(1) 5 of these wells were drilled and cased during 2007, 4 of these wells were drilled and cased in 2008.
Present Activities
With respect to the Company’s three wells drilled on its Eight Mile Project in British Columbia, all three wells tested positive for oil and/or gas, one well has been tied in and the other two are ready to be tied in. The Company is evaluating its plans to drill additional test wells on its Canadian and U.S. properties. In 2008, the Company participated in the drilling of five additional wells in Morgan County Tennessee as to a 5% working interest. All of these wells have been cased as potential oil wells.
Delivery Commitments
The Company’s 7-8-81-17 W6 Discovery Well located on the Eight Mile Property is producing at a stabilized rate. The Company had a delivery commitment to Terra Energy Corp. of 14 e3m3 per day of natural gas until November 1, 2008 which equated to an estimated obligation of approximately $767 per day. After November 1, 2008 the Company’s delivery commitment ended and the Company began marketing its gas production from the 7-8-81-17 W6 Discovery Well on an interruptible service basis to BP Canada.
Office Properties
The Company maintains an office at Suite 300, 840 6th Avenue S.W., Calgary, Alberta T2P 3E5. The telephone number in Calgary is (403) 260-5375 and the fax number is (403) 266-5657. The office space consists of is leased to the Company on a month to month basis at a rate of $250 month or $3,000 per year. We expect to continue to rent this office at the same rate on a month-to-month basis for the next twelve months.
We also maintain an office at Suite 1220, 666 Burrard Street, Vancouver, British Columbia, Canada, V6C 2X8. Our telephone number in Vancouver is (604) 685-0076 and our fax number is (604) 685-0078. This office space consists of three offices and a conference room comprising approximately 1,044 square feet. We entered into an assignment of lease with Patch Energy Inc. effective January 1, 2007, in which Patch agreed to assign the lease to us. The lease is for a term of 4 years commencing February 1, 2007 and expiring January 31, 2011. The monthly lease payments in the first two years were approximately $3,700, or $44,400 per year, and $3,900, or $46,800 per year, in years 3 and 4.
We believe that our current office space and facilities are sufficient to meet our present needs and do not anticipate any difficulty securing alternative or additional space, as needed, on terms acceptable to the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We currently are not a party to any material legal proceedings and, to our knowledge, no such proceedings are threatened or contemplated.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Shares of our common stock have been quoted on the OTCBB since June 20, 2006. From June 20, 2006 to July 25, 2007 shares of our common stock were quoted on the OTCBB under the symbol “STOI”, from July 26, 2007 to December 11, 2008 under the symbol “PRPL” and since December 12, 2008 have been quoted under the symbol “PKPL”. Shares of our common stock have also been listed on the Frankfurt Stock Exchange since August 13, 2007 under the symbol “3P2”. The range of high and low bid information for each quarter in the past two years is set forth below. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. This information has been adjusted to reflect forward stock splits of 8 for 1 and 1.5 for 1 completed in July 2007.
OTC Bulletin Board
Holders
The number of record holders of our common stock, $0.00001 par value, as of March 27, 2009 was approximately 1,200.
Dividends
We have not, since the date of our incorporation, declared or paid any dividends on our common shares. We anticipate that we will retain future earnings and other cash resources for the operation and development of our business for the foreseeable future. The payment of dividends in the future will depend on our earnings, if any, and our financial condition and such other factors as our board of directors considers appropriate.
Equity Compensation Plans
On October 11, 2007 we adopted our 2007 Stock Option Plan Our 2007 Stock Option Plan allows for the issuance of options to purchase up to 4,500,000 shares of our common stock. A copy of our 2007 Stock Option Plan was filed with our Annual Report on Form 10-KSB for the year ended December 31, 2007. The following table provides a summary of the number of stock options outstanding as at December 31, 2008 under our equity compensation plans:
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
Weighted
average exercise
price of
outstanding
options,
warrants and
rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
Equity compensation plans approved by security holders Nil Nil Nil
Equity compensation plans not approved by security holders
3,190,000(1) 0.12 1,560,000
(1) Options to acquire an aggregate of 2,940,000 shares were issued pursuant to our 2007 Stock Option Plan.
Recent Sales of Unregistered Securities
We have reported sales of securities without registration under the Securities Act of 1933 during our fiscal year ended December 31, 2008 on the following quarterly reports on Form 10-Q, as filed with the Securities and Exchange Commission.
Report Date of Filing with SEC
Annual Report on Form 10-KSB for the year ended December 31, 2007 April 15, 2008
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 May 15, 2008
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 August 14, 2008
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 November 14, 2008
During the year ended December 31, 2008, we did not issue any securities without registration under the Securities Act of 1933 which have not been reported in the Annual Report on Form 10-KSB and the Quarterly Reports on Form 10-Q described above.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our shares of common stock or other securities during the year ended December 31, 2008.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition, changes in financial condition and results of operations for the years ended December 31, 2008 and 2007 should be read in conjunction with our most recent audited consolidated financial statements for the years ended December 31, 2008 and 2007, which are included in this annual report, and the related notes to the financial statements, as well as “Item 1 - Business.” This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this annual report.
Overview of Our Business
We are currently an exploration stage company engaged in exploring for conventional oil and natural gas. In the projects in which we hold interests, another party typically acts as the operator of the project. With respect to the projects that we participate in, we provide to the operator timely funding for our proportionate share of costs as well as technical input on how best to develop the property. As a way to keep our overhead down, we engage the services of consultants who have technical expertise to best represent our interests. We currently have interests in oil and gas properties in the Canadian provinces of British Columbia and Alberta and in Morgan County, Tennessee. Our principal capital expenditures to date have been $4,583,877 to acquire the interests in the oil and gas properties. Revenues from our Eight Mile Gas Property in north-east British Columbia commenced in April 2008. We continue to work on developing our other properties as well identifying new properties for acquisition. See “Business” and “Properties” for more information about our interests.
Our Plan of Operations
Overview
Our Plan of Operations for the next 12 months is to concentrate on core projects: developing our Eight Mile Property in British Columbia, Canada for production, and to mature the 100 % interest in 2 sections of land in Alberta, Canada. Over the next 12 months, we plan to conduct the following: (i) on the Eight Mile Property in British Columbia, we expect to drill one more well at an estimated net expense of $450,000; (ii) on our Alberta land sections we plan to develop the land and perform seismic operations at an estimated expense of $450,000. Further, we expect to spend approximately $250,000 in the next 12 months in office and general expenses, as well as approximately $300,000 in professional, consulting and management fees.
Estimated Capital Costs
Based on our current plan of operations as set forth above, we estimate that we will require approximately $1,450,000 to pursue our plan of operations over the next 12 months. As at December 31, 2008, we had cash of $41,574 and a working capital deficit of $526,642. Consequently, we will require additional financing to pursue our plan of operations over the next 12 months. There can be no assurance that we will obtain any additional financing in the amounts required or on terms favorable to us. If we are unable to obtain additional financing, we may have to re-evaluate or abandon our business activities and revise our plan of operations.
We believe that debt financing will not be an alternative for funding as we do not have any significant tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. However, we cannot provide investors with any
assurance that we will be able to raise sufficient funding from the sale of our common stock to fund our plan of operations going forward. In the absence of such financing, our business plan will fail. Even if we are successful in obtaining equity financing, there is no assurance that we will obtain the funding necessary to pursue our business plan. If we do not continue to obtain additional financing going forward, we will be forced to re-evaluate or abandon our plan of operations.
Results of Operations - Years Ended December 31, 2008 and
Oil and Gas Revenue
Our oil and gas revenue for the year ended December 31, 2008 was $1,175,990, compared to $94,698 for 2007. This revenue is offset by direct costs of $795,417 in depletion and $871,402 in operating expenses for the year ended December 31, 2008, compared to $14,893 in depletion and $17,493 in operating expenses for 2007.
Office and General Expenses
Our office and general expenses increased to $257,322 for the year ended December 31, 2008 from $219,812 for 2007 primarily as a result of increased business activity.
Exploration Expenses
In the year ended December 31, 2008, we incurred exploration expenses of $308,354, compared to $nil in 2007, relating to our properties.
Professional Fees
Our professional fees decreased to $310,317 for the year ended December 31, 2008 from $319,807 for 2007.
Consulting Expenses
Our consulting expenses increased to $635,040 for the year ended December 31, 2008 from $486,025 for 2007 as a result of increased business activity.
Investor Relations Expenses
Our investor relations expense for the year ended December 31, 2008 increased to $434,359 compared to $414,109 for 2007, due to growth of our investor base.
Management Fees
Our management fees decreased to $224,771 for the year ended December 31, 2008 from $257,867 for 2007 as a result of a change of directors.
Travel Expenses
Our travel expenses decreased to $60,382 for the year ended December 31, 2008 from $103,202 for 2007.
Stock-Based Compensation Expenses
Our stock-based compensation expenses decreased to $310,444 for the year ended December 31, 2008 from $1,524,704 for 2007 as a result of decreased stock-based compensation to our consultants.
Net Loss
As a result of the above, our net loss before other items and taxes for the year ended December 31, 2008 was $2,549,944, compared to $3,419,194 for 2007. Our comprehensive loss for the year ended December
31, 2008 was $5,116,287, compared to $4,220,370 for 2007. The reason for this increase in our comprehensive loss is primarily due to a write-off of oil and gas costs of $1,849,284 during the year ended December, 2008, compared to $1,282,471 for 2007.
Liquidity and Capital Resources
We anticipate that we will require approximately $1,450,000 to pursue our plan of operations over the next 12 months. As at December 31, 2008, we had cash of $41,574 and a working capital deficit of $526,642. Consequently, we will require additional financing to pursue our plan of operations over the next 12 months. There can be no assurance that we will obtain any additional financing in the amounts required or on terms favorable to us. If we are unable to obtain additional financing, we may have to reevaluate or abandon our business activities and plan of operations.
Cash Used in Operating Activities
Net cash used in operating activities in the year ended December 31, 2008 decreased to $1,301,846 from $2,956,950 in 2007, primarily as a result of our recording of an impairment of oil and gas of $1,849,284 for the year ended December 31, 2008 as compared to $nil for 2007.
Cash Used In Investing Activities
Net cash used in investing activities in the year ended December 31, 2008 was $767,559, compared to $2,222,478 in 2007. These represent investments in our oil and gas properties and loans to another oil and gas exploration company.
Cash Provided By Financing Activities
We have funded our business to date primarily from sales of our common stock. In the year ended December 31, 2008, we received cash of $1,914,483 as a result of proceeds from the sale of our capital stock, compared to $4,576,593 in 2007.
Critical Accounting Policies And Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements. In general, management’s estimates are based on historical experience, on
information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
We believe that our critical accounting policies and estimates include the following:
Oil and gas properties
The Company follows the full cost method of accounting for oil and natural gas operations, whereby all costs of exploring for and developing oil and natural gas reserves are capitalized and accumulated in cost centres on a country-by-country basis. Costs include land acquisition costs, geological and geophysical charges, carrying charges on non-productive properties and costs of drilling both productive and non-productive wells. General and administrative costs are not capitalized other that to the extent of the Company’s working interest in operated capital expenditure programs on which operator’s fees have been charged equivalent to standard industry operating agreements. At December 31, 2008, the Company has not capitalized any interest, general or administrative costs.
The costs in each cost centre, including the costs of well equipment, are depleted and depreciated using the unit-of-production method based on the estimated proved reserves before royalties. Natural gas reserves and production are converted to equivalent barrels of crude oil based on relative energy content. The costs of acquiring and evaluating significant unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion.
The capitalized costs less accumulated depletion and depreciation in each cost centre are limited to an amount equal to the estimated future net revenue from proved reserves (bases on prices and costs at the balance sheet date) plus the cost (net of impairments) of unproved properties. The total capitalized costs less accumulated depletion and depreciation, site restoration provision and future income taxes of all cost centres is further limited to an amount equal to the future net revenue from proved reserves plus the cost (net of impairments) of unproved properties of all cost centres less estimated future site restoration costs, general and administrative expenses, financing costs and income taxes.
Proceeds from the sale of oil and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would significantly alter the rate of depletion and deprecation.
Asset retirement obligations
The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the long-lived assets. The Company also records a corresponding asset which is amortized over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time (accretion expense) and changes in the estimated future cash flows underlying the obligation (asset retirement cost).
Long-lived assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Capitalization of Long-Lived Assets”, the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes
impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.
Foreign currency translation
The Company’s functional and reporting currency is the Canadian dollar. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in US dollars. The Company has not, to the date of these financials statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
The Company follows the current rate method of translation with respect to its US subsidiary. Accordingly, assets and liabilities are translated into US dollars at the period-end exchange rated while revenue and expenses are translated at the average exchange rates during the period. Related exchange gains and losses are included in a separate component of stockholders’ equity as accumulated other comprehensive income.
Revenue recognition
The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”. The Company recognizes oil and gas revenue when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable.
Stock-based compensation
Effective May 4, 2006, the Company adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)") and related interpretations which superseded APB No. 25. SFAS 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award.
Recently Issued Accounting Guidance
FASB Staff Position 157-2 (“FSP FAS 157-2”) delayed the effective date of FAS 157 until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted FAS 157 on January 1, 2008, and unutilized the one year deferral for non-financial assets and non-financial liabilities that was granted by SFAS 157-2. The adoption of FAS 157 did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS 141(R), which replaces SFAS 141 and retains the fundamental requirements in SFAS 141, including that the purchase method be used for all business combinations and for an acquirer to be identified for each business combination. This standard defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. SFAS 141(R) requires an acquirer in a business combination, including business combinations achieved in stages (step acquisition), to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair
values as of that date, with limited exceptions. It also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. SFAS 141(R) becomes effective for the first annual reporting period beginning on or after December 15, 2008. Management has determined that the adoption of SFAS 141(R) will not have a material impact on the Financial Statements.
In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS 133, and how derivative instruments and related hedged items affect an entity’s operating results, financial position, and cash flows. The Company is currently reviewing the provision of FAS 161 and has not yet adopted the statement. FAS 161 is effective for fiscal years beginning on or after November 15, 2007. However, as the provision of FAS 161 are only related to disclosure of derivative and hedging activities, the Company does not believe the adoption of FAS 161 will have a material impact on its consolidated operating results, financial position or cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” (FSP FAS 142-3). FSP FAS 142-3 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,” (SFAS 142) in order to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Management has determined that the adoption of FSP FAS 142-3 will not have an impact on the Financial Statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” (FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. Management has determined that the adoption of FSP EITF 03-6-1 will not have an impact on the Financial Statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited consolidated financial statements as of December 31, 2008 and 2007 and for the each of the three years in the period ended December 31, 2008, and the related notes to the financial statements, are filed as part of this annual report beginning on page below, and are incorporated by reference in this Item 8.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by our company is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. David Johnson, our principal executive officer, and Tom Mayenknecht, our principal accounting officer, are responsible for establishing and maintaining disclosure controls and procedures for our company.
Our management has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2008 (under the supervision and with the participation of our principal executive officer and our principal financial officer), pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended. As part of such evaluation, management considered the matters discussed below relating to internal control over financial reporting. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our company’s disclosure controls and procedures were effective as of December 31, 2008.
Internal Control over Financial Reporting
The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant’s principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant’s assets that could have a material effect on the financial statements.
Management Report on Assessment of Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) Securities Exchange Act of 1934, as amended. Management (under the supervision and with the participation of our principal executive officer and principal financial officer), assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, management used the framework set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control was effective as of December 31, 2008.
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Our management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only the management’s report in this annual report.
Inherent Limitation of the Effectiveness of Internal Control
Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Changes in Internal Control Over Financial Reporting
During the year ended December 31, 2008, there was no change in our internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9A(T). CONTROLS AND PROCEDURES
Not applicable.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table and information that follows sets forth the names and positions of our directors and executive officers:
Notes
(1)
Mr. Johnson replaced Eric M. Leslie as our President and Chief Executive Officer effective June 13, 2008.
(2)
Mr. Leslie was appointed as Chief Executive Officer and President of our company effective December 1, 2007. Mr. Leslie had served as our company’s Corporate Secretary from August 1, 2007 to December 10, 2007.
The following is a description of the business background of the directors, director nominees and executive officers of our company.
David Johnson was appointed to our board on June 13, 2008. Prior to his appointment, in the past five years he was licensed with the British Columbia Securities Commission while employed with Odlum Brown Limited, a financial services firm (2005 - 2006). He also consulted to both private as well as public companies (2007 - 2008), namely Park Place Energy Corp., Great Northern Oil Sands, Riverside Resources and Vertical Towers Inc.
Tom Mayenknecht was appointed to our board on June 27, 2008. Prior to his appointment he has in the past five years served two marketing communications practices: M2 Strategies (2004-2005) and Emblematica Brand Builders (2006 to present). As a principal in Emblematica, Mayenknecht develops brand-based communications and business development strategies for clients in the private, public and not-for-profit sectors. He is also an established public speaker and media trainer, having trained more than 150 Canadian Olympians on media and presentation techniques.
Mr. Mayenknecht also hosts The Sport Market on TEAM 1040, a weekly sport business radio show on Western Canada's largest all-sports radio station.
Term of Office
All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.
Significant Employees
There are no significant employees other than our executive officers.
Family Relationships
There are currently no family relationships between any of the members of our board of directors or our executive officers.
Board Independence
None of our directors are considered independent directors under SEC rules as they are also officers of our company. We plan to add independent members to our board in the future, subject to our ability to locate and compensate such persons given our limited financial resources and the stage of our business.
Committees of the Board of Directors
Our company does not currently have any committees of our board of directors as we only have two directors, each of whom is also an officer.
Involvement in Certain Legal Proceedings
Except as disclosed in this annual report, during the past five years none of our directors or executive officers is, or has been, a general partner or executive officer of any business that filed a bankruptcy petition (or had a bankruptcy petition filed against it), either at the time of filing or within two years prior to such time.
None of our directors or executive officers has, within the past five years, been convicted in a criminal proceeding or been the subject of a pending criminal proceeding (excluding traffic violations and other minor offences).
None of our directors or executive officers has, within the past five years, been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
None of our directors or executive officers has, within the past five years, been found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
There are currently no legal proceedings to which any of our directors or officers is a party adverse to us or in which any of our directors or officers has a material interest adverse to us.
Compliance with Section 16 of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the executive officers and directors, and persons who beneficially own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. We have received copies of such forms from our executive officers and directors. During the fiscal year ended December 31, 2008, except as disclosed below, these filings were made on a timely basis:
Reporting Person No. of Late Reports During the Fiscal
Year Ended December 31, 2008 No. of Late Reports During the Fiscal
Year Ended December 31, 2007
David Johnson One
None
Tom Mayenknecht
One
None
Code of Ethics
We have adopted a corporate code of ethics. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code.
We will provide a copy of the Code of Ethics to any person without charge, upon request. Requests can be sent to: Park Place Energy Corp., at 300-840 6th Avenue SW, Calgary, Alberta T2P 3E5.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
Particulars of compensation awarded to, earned by or paid during the last two fiscal years to:
(a)
the person(s) serving as our company’s principal executive officer during the year ended December 31, 2008;
(b)
each of our company’s two most highly compensated executive officers, other than the principal executive officer, who were serving as executive officers at the end of the year ended December 31, 2008, and whose total compensation exceeds $100,000 per; and
(c)
up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as an executive officer of our Company at the end of the year ended December 31, 2008;
(individually a “Named Executive Officer” and collectively the “Named Executive Officers”) are set out in the summary compensation table below.
Name and
Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards ($) (1) Non-
Equity
Incentive
Plan
Compen-
sation
($) Non-
qualified
Deferred
Compen-
sation
Earnings
($)
All Other
Compen-
sation
Compen-
sation
($)
Total
($)
Eric M.
Leslie(2)
Former
President &
CEO
89,250
36,750
-
-
-
-
-
343,993
-
-
-
-
-
-
89,250
380,743
David
Standnyk(3)
Former
Chairman
150,000
240,000
-
-
-
-
-
50,222
-
-
-
-
-
150,000
290,222
David
Johnson
President &
CEO(4)
71,440
N/A
-
N/A
-
N/A
12,820
N/A
-
N/A
-
N/A
-
N/A
84,260
N/A
Tom
Mayenknecht
Secretary &
Treasurer(5)
11,000
N/A
-
N/A
-
N/A
12,820
N/A
-
N/A
-
N/A
-
N/A
23,820
N/A
Notes
(1)
This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2008 and 2007 financial years for the fair value of stock options granted to each Named Executive Officer, in accordance with SFAS 123R.
(2)
Mr. Leslie resigned as our President and Chief Executive Officer on June 12, 2008.
(3)
Mr. Stadnyk resigned as our Chairman on May 13, 2008.
(4)
Mr. Johnson was appointed President and CEO on June 12, 2008.
(5)
Mr. Mayenknech was appointed Secretary and Treasurer on June 27, 2008.
Outstanding Equity Awards as of December 31, 2008
The following table summarizes the outstanding equity awards as of December 31, 2008 for each of our named executive officers:
Equity Compensation Plans
As disclosed in more detail under the heading “Market For Common Equity And Related Shareholder Matters - Equity Compensation Plans”, we have granted options under 2007 Stock Option Plan.
There are 3,190,000 stock options outstanding at December 31, 2008. The outstanding options expire at various dates from September 2009 to June 2010.
Compensation of Directors
All compensation of our directors is disclosed under “Executive Compensation”, above.
Employment Contracts and Termination of Employment and Change-In-Control Arrangements
There are no employment contracts or related arrangements with our executive officers.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information as of March 27, 2009 regarding the beneficial ownership of our common stock by:
each person who is known by us to beneficially own more than 5% of our shares of common stock; and
each named executive officer, each director and all of our directors and executive officers as a group.
The number of shares beneficially owned and the percentage of shares beneficially owned are based on 64,165,335 shares of common stock outstanding as of March 27, 2009.
For the purposes of the information provided below, shares that may be issued upon the exercise or conversion of options, warrants and other rights to acquire shares of our common stock that are exercisable or convertible within 60 days following March 27, 2009, are deemed to be outstanding and beneficially owned by the holder for the purpose of computing the number of shares and percentage ownership of that holder, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
* Less than 1%.
Notes
(1)
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of common shares actually outstanding on March 27, 2009.
(2)
The address of the executive officers and directors is c/o Park Place Energy Corp., 300-840 6th Avenue SW, Calgary, Alberta, T2P 3E5.
(3)
Includes options to acquire up to 115,000 shares of common stock exercisable within 60 days.
(4)
Represents shares of common stock that may be acquired pursuant to options exercisable within 60 days.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except for the transactions described below, since the beginning of our last fiscal year, none of our directors, officers or principal stockholders, nor any associate or affiliate of the foregoing, have any material interest, direct or indirect, in any transaction, or in any proposed transaction, in which our
company was or is to be a participant and in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last three completed fiscal years.
During the year ended December 31, 2008 the Company entered into the following transactions with related parties:
The Company paid or accrued management fees of $150,000 (December 31, 2007 - $240,000) to the former Chairman and to the former President & CEO of the Company. Also included in due to related parties as of December 31, 2008 is $41,088 (December 31, 2007 - $110,684) that is owing to the former Chairman of the Company and a company related to the former Chairman for payment of expenses on behalf of the Company. The amount is unsecured, non-interest bearing, and has no specific terms of repayment.
The Company paid or accrued management fees of $89,250 (2007 - $36,750) to a company controlled by the former President & CEO of the Company.
The Company paid or accrued consulting fees of $82,440 (2007 - $Nil) to two directors of the Company. Also included in due to related parties is $4,938 (2007 - $Nil) that is owing to a director of the Company. The amount is unsecured, non-interest bearing and has no specific terms of repayment.
Included in due to related parties is $6,400 (2007 - $Nil) payable to a company with common directors. The amount is unsecured, non-interest bearing, and has no specific terms of repayment.
Related party transactions are in the normal course of operations, occurring on terms and conditions that are similar to those of transactions with unrelated parties and, therefore, are measured at the exchange amount.
Compensatory Arrangements
Other than compensatory arrangements described under “Executive Compensation,” we have no other transactions, directly or indirectly, with our promoters, directors, senior officers or principal stockholders, which have materially affected or will materially affect us.
Where You Can Find More Information
Statements contained in this annual report as to the contents of any contract, agreement or other document referred to include those terms of such documents that we believe are material. Whenever a reference is made in this annual report to any contract or other document of ours, you should refer to the exhibits that are a part of the annual report for a copy of the contract or document.
You may read and copy all or any portion of the annual report or any other information that Nord Resources Corporation files at the SEC’s public reference room at One Station Place, 100 F Street, NE, Washington, DC 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC filings, including the annual report, are also available to you on the SEC’s website at www.sec.gov.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
We appointed Davidson & Company LLP to serve as our independent auditors for the years ended December 31, 2008 and December 31, 2007. We have not retained the services of any other independent auditors. Davidson & Company LLP performed the services listed below and was paid the fees listed below for the fiscal years ended December 31, 2008 and December 31, 2007:
Audit Fees
Audit Related Fees
Audit Fees consist of fees billed for professional services rendered for the audits of our financial statements, reviews of interim financial statements included in quarterly reports, services performed in connection with filings with the Securities and Exchange Commission and related comfort letters and other services that are normally provided by Davidson & Company LLP in connection with statutory and regulatory filings or engagements.
Tax Fees
Tax Fees consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
All Other Fees
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before an independent registered public accounting firm is engaged by us to render any auditing or permitted non-audit related service, the engagement be:
approved by our audit committee; or
entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.
Our entire board of directors acts as our audit committee, and has assumed responsibility for the pre-approval of audit and permitted non-audit services to be performed by our company’s independent auditor. The audit committee will, on an annual basis, consider and, if appropriate, approve the provision of audit and non-audit services by Davidson & Company LLP. Thereafter, the audit committee will, as necessary, consider and, if appropriate, approve the provision of additional audit and non-audit services by Davidson & Company LLP. which are not encompassed by the audit committee’s annual pre-approval and are not prohibited by law. The audit committee has delegated to the chair of the audit committee the authority to pre-approve, on a case-by-case basis, non-audit services to be performed by Davidson & Company LLP.
PART IV
ITEM 15.
ITEM 15. EXHIBITS
Notes
(1)
Incorporated by reference from our Current Report on Form 8-K/A, filed with the SEC on August 8, 2007.
(2)
Incorporated by reference from our registration statement on Form SB-2, filed with the SEC on December 9, 2004.
(3)
Filed with our Current Report on Form 8-K, filed with the SEC on March 6, 2008.
(4)
Incorporated by reference from our Annual Report of Form 10-KSB, filed with the SEC on October 11, 2006.
(5)
Incorporated by reference from our Annual Report on Form 10-KSB, filed with the SEC on April 15, 2008.
(6)
Filed herewith
PARK PLACE ENERGY CORP.
(An Exploration Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Park Place Energy Corp.
(an Exploration Stage Company)
We have audited the accompanying consolidated balance sheets of Park Place Energy Corp. (an Exploration Stage Company) as at December 31, 2008 and 2007 and the related consolidated statements of operations and deficit and comprehensive loss, stockholders' equity (deficiency) and cash flows for the years then ended, and for the cumulative amounts from inception on May 2, 2006 to December 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended, and for the cumulative amounts from inception on May 2, 2006 to December 31, 2008, in conformity with generally accepted accounting principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are discussed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
"DAVIDSON & COMPANY LLP"
Vancouver, Canada
Chartered Accountants
March 24, 2009
1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver, BC, Canada, V7Y 1G6
Telephone (604) 687-0947 Fax (604) 687-6172
PARK PLACE ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
AS AT DECEMBER 31
The accompanying notes are in integral part of these consolidated financial statements.
PARK PLACE ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT AND COMPREHENSIVE LOSS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
The accompanying notes are in integral part of these consolidated financial statements.
PARK PLACE ENERGY CORP.
(An Exploration Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
(Expressed in Canadian Dollars)
The accompanying notes are in integral part of these consolidated financial statements.
PARK PLACE ENERGY CORP.
(An Exploration Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOW
(Expressed in Canadian Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
1.
NATURE AND CONTINUANCE OF OPERATIONS
Park Place Energy Corp., formerly ST Online Corp. (the “Company”), was incorporated under the laws of the State of Nevada on August 27, 2004. On June 22, 2007, the Company entered into a Business Combination Agreement with Park Place Energy Inc., a private company incorporated under the laws of the Province of Alberta, Canada, and 0794403 B.C. Ltd., a British Columbia corporation and wholly-owned subsidiary of the Company.
On July 6, 2007, the Company affected a forward split of its shares of common stock on the basis of eight new shares of common stock for each one share of common stock outstanding on that date and increased the authorized share capital from 100,000,000 shares of common stock to 800,000,000 shares of common stock. At the same time, the Company merged with a wholly-owned subsidiary, Park Place Energy Corp. which incorporated under the laws of the State of Nevada in contemplation of the acquisition of all of the issued and outstanding shares of Park Place Energy Inc. and the name of the Company was then changed to Park Place Energy Corp. On July 23, 2007, the Company effected a forward split of its shares of common stock on the basis of one and one-half new shares of common stock for each one share of common stock outstanding on that date and increased authorized share capital from 800,000,000 shares of common stock to 1,200,000,000 shares of common stock. Pursuant to the terms of the Business Combination Agreement, the Company issued to each shareholder of record of Park Place Energy Inc. at the time of the acquisition one share of our common stock for every two shares they held of Park Place Energy Inc. As a result, the Company issued 8,995,662 shares of common stock to the former shareholders of Park Place Energy Inc.
On July 30, 2007, the Company acquired Park Place Energy Inc. which was renamed to Park Place Energy (Canada) Inc. (“Park Place Canada”) on September 14, 2007. The business of the Company is now the acquisition and exploration of oil and gas. Park Place Energy Corp. holds exploration interests in a property in Tennessee, USA. Park Place Canada holds the exploration interests in three properties in the provinces of British Columbia and Alberta, in Canada. The Company has completed test drilling at certain of the properties in which it holds interests. The Company has developed certain properties for production. For accounting purposes, the merger was treated as a recapitalization with Park Place Energy Inc. being the accounting acquirer and the go-forward financial statements reflect the history of Park Place Energy Inc. from its inception on May 4, 2006. The fiscal year-end of Park Place Energy Corp. was changed to December 31 from September 30.
On November 22, 2007 a new private company, Park Place Energy (International) Inc. (“Park Place International”) was incorporated under the laws of British Columbia, Canada. This company is a wholly owned subsidiary of Park Place Energy Corp.
On July 24, 2008, the Company acquired the interest in certain 5 Year Northern Petroleum and Natural Gas Leases located in Alberta, Canada.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
1.
NATURE AND CONTINUANCE OF OPERATIONS (cont’d)
These consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. The Company has had a history of negative cash flows from operating activities. In addition, the Company has an accumulated deficit of $9,790,090 as of December 31, 2008. These considerations raise substantial doubt about the Company’s ability to continue as a going concern. Accordingly, the Company will require continued financial support from its shareholders and creditors until it is able to generate sufficient cash flow from operations on a sustained basis. Although there is doubt that the Company will be successful at achieving these results, during the period ended December 31, 2008 the Company raised a total of $1,983,948 in new equity. Failure to obtain the ongoing support of its stockholders and creditors may make the going concern basis of accounting inappropriate, in which case the Company’s assets and liabilities would need to be recognized at their liquidation values. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might arise from this uncertainty.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These consolidated financials statements and related notes are presented in accordance with accounting principles generally accepted in the United States (“US GAAP”), and are expressed in Canadian dollars. The Company has not produced significant revenue from its principal business and is an Exploration stage company as defined by Statement of Financial Accounting Standard (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises”. The Company’s fiscal year end is December 31.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of consolidation
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Park Place Canada (from July 30, 2007) which is incorporated under the laws of British Columbia, Canada; Park Place International (from November 22, 2007) which is incorporated under the laws of British Columbia, Canada and 0794403 B.C. Ltd., a Company incorporated under the laws of British Columbia, Canada.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Oil and gas properties
The Company follows the full cost method of accounting for oil and natural gas operations, whereby all costs of exploring for and developing oil and natural gas reserves are capitalized and accumulated in cost centres on a country-by-country basis. Costs include land acquisition costs, geological and geophysical charges, carrying charges on non-productive properties and costs of drilling both productive and non- productive wells. General and administrative costs are not capitalized other that to the extent of the Company’s working interest in operated capital expenditure programs on which operator’s fees have been charged equivalent to standard industry operating agreements. At December 31, 2008, the Company has not capitalized any interest, general or administrative costs.
The costs in each cost centre, including the costs of well equipment, are depleted and depreciated using the unit-of-production method based on the estimated proved reserves before royalties. Natural gas reserves and production are converted to equivalent barrels of crude oil based on relative energy content. The costs of acquiring and evaluating significant unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion.
The capitalized costs less accumulated depletion and depreciation in each cost centre are limited to an amount equal to the estimated future net revenue from proved reserves (bases on prices and costs at the balance sheet date) plus the cost (net of impairments) of unproved properties. The total capitalized costs less accumulated depletion and depreciation, site restoration provision and future income taxes of all cost centres is further limited to an amount equal to the future net revenue from proved reserves plus the cost (net of impairments) of unproved properties of all cost centres less estimated future site restoration costs, general and administrative expenses, financing costs and income taxes.
Proceeds from the sale of oil and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would significantly alter the rate of depletion and deprecation.
Asset retirement obligations
The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the long-lived assets. The Company also records a corresponding asset which is amortized over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time (accretion expense) and changes in the estimated future cash flows underlying the obligation (asset retirement cost).
Accumulated other comprehensive income (loss)
Accumulated other comprehensive loss consists of net income or loss and other related gains and losses affecting stockholders’ equity that, under generally accepted accounting principles, are excluded from net income or loss. At December 31, 2008, accumulated other comprehensive loss consists of cumulative translation adjustments for changes in foreign currency exchange rates during the period.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Basic and diluted net loss per share
The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share”. SFAS No. 128 requires presentation of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive.
Long-lived assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Capitalization of Long-Lived Assets”, the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.
Foreign currency translation
The Company’s functional and reporting currency is the Canadian dollar. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in US dollars. The Company has not, to the date of these financials statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
The Company follows the current rate method of translation with respect to its US subsidiary. Accordingly, assets and liabilities are translated into US dollars at the period-end exchange rated while revenue and expenses are translated at the average exchange rates during the period. Related exchange gains and losses are included in a separate component of stockholders’ equity as accumulated other comprehensive income.
Revenue recognition
The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”. The Company recognizes oil and gas revenue when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Income taxes
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted SFAS No. 109 “Accounting for Income Taxes” as of its inception. Pursuant to SFAS No. 109 the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
Stock-based compensation
Effective May 4, 2006, the Company adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)") and related interpretations which superseded APB No. 25. SFAS 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award.
Reclassifications
Certain reclassifications have been made to the prior period’s financial statements to conform to the current period’s presentation.
Recent accounting pronouncements
FASB Staff Position 157-2 (“FSP FAS 157-2”) delayed the effective date of FAS 157 until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted FAS 157 on January 1, 2008, and unutilized the one year deferral for non-financial assets and non-financial liabilities that was granted by SFAS 157-2. The adoption of FAS 157 did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS 141(R), which replaces SFAS 141 and retains the fundamental requirements in SFAS 141, including that the purchase method be used for all business combinations and for an acquirer to be identified for each business combination. This standard defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. SFAS 141(R) requires an acquirer in a business combination, including business combinations achieved in stages (step acquisition), to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. It also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. SFAS 141(R) becomes effective for the first annual reporting period beginning on or after December 15, 2008. Management has determined that the adoption of SFAS 141(R) will not have a material impact on the Financial Statements.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Recent accounting pronouncements (cont’d)
In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS 133, and how derivative instruments and related hedged items affect an entity’s operating results, financial position, and cash flows. The Company is currently reviewing the provision of FAS 161 and has not yet adopted the statement. FAS 161 is effective for fiscal years beginning on or after November 15, 2007. However, as the provision of FAS 161 are only related to disclosure of derivative and hedging activities, the Company does not believe the adoption of FAS 161 will have a material impact on its consolidated operating results, financial position or cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” (FSP FAS 142-3). FSP FAS 142-3 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,” (SFAS 142) in order to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Management has determined that the adoption of FSP FAS 142-3 will not have an impact on the Financial Statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” (FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. Management has determined that the adoption of FSP EITF 03-6-1 will not have an impact on the Financial Statements.
3.
RECAPITALIZATION
Effective July 30, 2007 Park Place Energy Inc. acquired 100% common shares of Park Place Energy Corp. (formerly ST Online Corp.) in exchange for an aggregate of 8,995,662 shares of the Company’s common stock. Completion of the acquisition resulted in the former shareholders of Park Place Energy Corp. acquiring control of the Company. As a result, the transaction was accounted for as a recapitalization of Park Place Energy Inc.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
3.
RECAPITALIZATION (cont’d)
The financial statements of operations and cash flows of the Company prior to September 30, 2007, are those of Park Place Energy Inc. The Company’s date of incorporation is considered to be May 4, 2006, the date of inception of Park Place Energy Inc. The carrying value of the Company as of the date of acquisition was as follows:
The carrying value of the Company has been recorded as a reduction to stockholders’ equity of $26,121 by a charge to deficit.
4.
OIL AND GAS PROPERTIES
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
4.
OIL AND GAS PROPERTIES (cont’d)
The full cost ceiling test results as of December 31, 2008 resulted in no impairment of evaluated oil and gas properties. The future prices used in the December 31, 2008 ceiling test area as follows:
In June 2008, the Company sold its 12.5% interest in its Kerrobert property in consideration for $205,000. At the time of sale, the Company had net capital costs of $111,656.
5.
MINERAL PROPERTIES
In February, 2008, the Company entered into a purchase and sale agreement with a third party pursuant to which the Company acquired a 51% interest in five diamond concessions in the state of Goias, Brazil for US$250,000. An additional US$12,184 has been spent on acquisition of a 51% interest in a sixth diamond concession offsetting the other concessions and spent additional operating expenses of approximately US$115,509.
In June, 2008, the Company sold its 51% interest in the six diamond concessions in consideration for a US$385,000 promissory note. The note is non-interest bearing, unsecured and due on June 26, 2013. The issuer is to repay the promissory note with 20% of the net proceeds from any diamonds sold from the property or 20% of the proceeds from the sale of the interest in the properties. The Company recognized a discount of US$145,945 at an effective interest rate of 10%.
On December 31, 2008, the Company wrote down the promissory note to $Nil as it does not expect repayment.
6.
LOAN PAYABLE
The Company entered into a loan agreement with an arms length third party in the amount of $225,000 on December 28, 2007. The associated Demand Promissory Note does not contain any interest and the holder has the option to convert the loan in to common shares of the Company.
The Company converted $150,000 out of a total $225,000 to 2,142,857 units at a price of $0.07 per unit on March 3, 2008. Each unit consisted of one common stock of the Company and one share purchase warrant. Each warrant entitles the holder to purchase one share at an exercise price of $0.10 per share in the first year and at an exercise price of $0.15 per share in the second year. During the year ended December 31, 2008, the Company repaid $40,000 reducing the amount outstanding to $35,000.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
7.
EXPLORATION ADVANCE
Included in Exploration advances are amounts paid related to the a Canadian property for prepayment of expenses relating to the oil and gas property.
8.
COMMON STOCK
The Company’s Articles Of Incorporation provide for the issuance of up to 1,200,000,000 shares of common stock, par value $0.00001. Effective July 6, 2007 the Company implemented a stock split of its common stock by issuing eight new shares for every one old share. Effective July 23, 2007 the Company implemented a further a stock split of its common stock by issuing one and a half new shares for every old share. Except as otherwise stated to the contrary in these financial statements, all references to shares and prices per shares have been adjusted to give retroactive effect to the stock splits.
On February 14, 2008, the Company issued 4,435,714 units at a price of US$0.07 for gross proceeds of US$310,500. Each unit contained one share of common stock and one warrant exercisable at US $0.10 the first year and US$0.15 in the second year.
On February 26, 2008, the Company issued 750,000 shares of common stock for consulting services at a value of US$0.10 per share.
On March 3, 2008, the Company issued 8,536,428 units at a price of US$0.07 for gross proceeds of US$597,550. Each unit contained one share of common stock and one warrant exercisable at US$0.10 the first year and US$0.20 the second year.
On March 6, 2008, the Company issued 2,142,857 units at a price of $0.07 to the holder’s of the loan payable as outlined in Note 5. Each unit contained one share of common stock and one warrant exercisable at $0.10 the first year and $0.15 the second year.
In April, 2008, the Company issued 9,000,000 units at a price of US$0.10 per unit for gross proceeds of US$900,000. Each unit consisted of one common share and one share purchase warrant entitling the holder to purchase a common share up to one year at a price of US$0.20. The Company paid a Finder’s Fee of $45,000 and issued Finder’s Warrants with a fair value of $27,986 to acquire 450,000 common shares of the Company at $0.10 for one year.
On June 20, 2008, the Company issued 2,400,000 shares of common stock for consulting services at a value of US$0.09 per share.
On July 3, 2008, the Company issued 1,475,000 shares of common stock at a price of US$0.10 for gross proceeds of US$147,500 and 75,000 shares of common stock at a price of US$0.15 for gross proceeds of US$11,250.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
8.
COMMON STOCK (cont’d)
On September 8, 2008, the Company issued 600,000 shares of common stock for consulting services at a value of US$0.125 per share.
On September 8, 2008, the Company issued 1,750,000 shares of common stock for consulting services at a value of US$0.10 per share.
Stock options
The Company adopted an official incentive stock option plan as at October 11, 2007 whereby the total number of authorized options to be granted is up to total of 6,000,000 Common Shares. Under the plan the exercise price of each option shall not be less that the market price of the Company’s stock as calculated immediately preceding the day of the grant. The vesting schedule for each option shall be specified by the Company at the time of grant.
As at December 31, 2008, the Company had outstanding stock options, enabling the holders to acquire further common shares as follows:
During the year ended December 31, 2008, various consultants, directors and officers ceased to work for the Company and pursuant to their stock option agreements, their stock options subsequently expired.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
8.
COMMON STOCK (cont’d)
Stock options (cont’d)
Stock option transactions are summarized as follows:
The aggregate intrinsic value for the options vested as of December 31, 2008 is approximately $Nil (2007 - $1,854,400) and for total options outstanding is approximately $Nil (2007 - $1,959,200).
Options - Stock-Based Compensation
As of December 31, 2008, the Company granted incentive stock options in accordance with its share option plan to directors and officers with an estimated fair value of $175,156. An additional $135,288 was recorded due to the re-pricing of the options.
The following weighted-average assumptions were used for the Black-Scholes valuation of stock options granted during the noted period:
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
8.
COMMON STOCK (cont’d)
Options - Stock-Based Compensation (cont’d)
The weighted fair value of options granted was $0.11 (2007 - $0.89)
Warrants
9.
SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
Significant non-cash transactions during the year ended December 31, 2008 included:
a)
During the year ended December 31, 2008, the Company issued 2,142,857 shares of common stock at a price of $0.07 per share for payment of an outstanding payable in the amount of $150,000.
b)
During the year ended December 31, 2008, the Company issued 5,500,000 shares of common stock for consulting services of US$541,000.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
9.
SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (cont’d)
c)
Reclassified $213,361 of exploration advances to oil and gas properties.
Significant non-cash transactions during the year ended December 31, 2007 included:
a)
Included in accounts payable and accrued liabilities is $12,795 related to oil and gas expenditures.
b)
During the year the Company, issued 754,716 common shares at a price of US$0.50 per share for settlement of an outstanding debt in the amount of US$377,358.
c)
During the year, the Company settled $530,000 in loan receivable for the acquisition of oil & gas properties.
d)
During the year, the Company issued 200,000 shares pursuant to consulting agreements with a total value of $142,000.
e)
During the year, the Company surrendered for cancellation 45,000,000 common shares with a total value of $15,042.
f)
During the year, the Company renunciated flow-through shares and recorded a change to capital stock of $291,060 with a corresponding increase to future tax liability for the same amount.
10. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2008 the Company entered into the following transactions with related parties:
The Company paid or accrued management fees of $150,000 (December 31, 2007 - $240,000) to the former Chairman and to the former President & CEO of the Company. Also included in due to related parties as of December 31, 2008 is $41,088 (December 31, 2007 - $110,684) that is owing to the former Chairman of the Company and a company related to the former Chairman for payment of expenses on behalf of the Company. The amount is unsecured, non-interest bearing, and has no specific terms of repayment.
The Company paid or accrued management fees of $89,250 (2007 - $36,750) to a company controlled by the former President & CEO of the Company.
The Company paid or accrued consulting fees of $82,440 (2007 - $Nil) to two directors of the Company. Also included in due to related parties is $4,938 (2007 - $Nil) that is owing to a director of the Company. The amount is unsecured, non-interest bearing and has no specific terms of repayment.
Included in due to related parties is $6,400 (2007 - $Nil) payable to a Company with common directors. The amount is unsecured, non-interest bearing, and has no specific terms of repayment.
Related party transactions are in the normal course of operations, occurring on terms and conditions that are similar to those of transactions with unrelated parties and, therefore, are measured at the exchange amount.
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
11.
SEGMENTED INFORMATION
The Company's operations are in the resource industry in Canada and the United States. Geographical information is as follows:
All of the Company’s oil and gas revenues are in Canada.
12.
INCOME TAXES
A reconciliation of current income taxes at statutory rates with the reported taxes is as follows:
PARK PLACE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(An Exploration Stage Company)
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
12.
INCOME TAXES (cont’d)
The significant components of the Company’s future tax assets are as follows:
The Company has available for deduction against future taxable income non-capital losses of approximately $6,215,000. These losses, if not utilized, will expire commencing in 2028. Subject to certain restrictions, the Company also has resource expenditures available to reduce taxable income in future years. Future tax benefits which may arise as a result of these non-capital losses and resource deductions have not been recognized in these financial statements and have been offset by a valuation allowance.
13.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivable, accounts payable and accrued liabilities, loan payable and due to related parties. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying value, unless otherwise noted.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARK PLACE ENERGY CORP.
By: /s/ David Johnson
David Johnson
President, Chief Executive Officer and a Director
Date: March 31, 2009
In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ David Johnson
David Johnson
President, Chief Executive Officer and a Director
Date: March 31, 2009
By: /s/ Tom Mayenknecht
Tom Mayenknecht
Secretary, Treasurer and a Director
Date: March 31, 2009