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MOGUL ENERGY INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		98-0461623
State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
2500 Wilcrest Drive, Suite 405, Houston, Texas		77042
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code:		(713) 784-2446

Large accelerated filer £		Accelerated filer o
Non-accelerated filer £		Smaller reporting company x
(Do not check if a smaller reporting Company)

PART I

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  These statements relate to future events and/or our future financial performance.  Generally, you can identify forward-looking statements by terminology such as “intends,” "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", or "potential" or the negative of these terms or other comparable terminology.  To the extent that such statements are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties.  These statements reflect only our current expectations and involve known and unknown risks, uncertainties and other factors, many of which are unforeseen, including the risks in Item 1A entitled "Risk Factors," that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on these forward-looking statements.  These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbors created thereby.  Except as required by applicable law, including, but not limited to, the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

In this Annual Report, unless otherwise specified, all references to "common shares" refer to common shares in the capital of Mogul Energy International, Inc., and the terms “Company,” Registrant,” "we" "us" and "our" mean Mogul Energy International, Inc.

ITEM 1.

BUSINESS.

The Company

We are a Delaware corporation formed on July 25, 2005.  Our principal place of business is located at 2500 Wilcrest Drive, Suite 405, Houston, Texas.  We also maintain offices in Vancouver, British Columbia and Toronto, Ontario, Canada.

We are an independent oil and gas exploration Company established to take advantage of low cost acquisition opportunities near other producing and proven oil fields. Since our formation, we have engaged in activities related to financing of our operations, the acquisition of our property rights and the drilling of both development and exploratory wells.  The address of our website is www.mogulenergy.com . Information on our website is not part of this report.

Our current focus is to acquiring leases and operating joint venture projects in the United States, specifically in the state of Texas.

Description of Business

Our business strategy is to acquire interest in, and/or to operate oil and gas properties that have existing or the high potential of oil and or natural gas reserves.  Existing well bores with proven oil and gas reserves can usually be purchased for a fraction of the original cost to drill and complete a new well. Property purchased with proven reserves reduce the risk of not finding hydrocarbons and are economically viable to develop due to the elimination of the associated cost of finding the hydrocarbons. After the property has been purchased, the primary cost for establishing new production is the re-completion cost.

We currently use third-party providers to engage in most if not all of any oil and gas producing activities in which we may engage if our properties reveal the potential for such activity in the future.

 

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Core Properties

Texas, United States

Stafford Prospect, Jackson County, Texas

On November 26, 2010, we entered into a Joint Operating Agreement and a Participation Agreement with C. H. Squyres Family, LLC, Fossil Oil Company LLC and certain other individuals who are signatories thereto to develop an extension to the La Ward NE Field in Jackson County (Stafford Prospect).  The agreement provided for the shared costs in the acquisition of oil and gas leases in the Stafford Prospect.  As operator, we participate in the drilling of the initial well with an 8.89% working interest and will acquire a 6.11% promoted interest resulting in our having a 15.00% working  interest upon the successful completion of the initial well drilled on the property.  Each participant would also pay the same percentage costs for the next well as was paid on the first well.

North Pasture Prospect – San Patricio County, Texas

On December 8, 2010 we entered into a Joint Operating Agreement and a Participation Agreement with Global Oil and Gas Resources Inc., Dolimiti Partners LLC, Indian Lane Assoc., LLC, Plastiform Packaging, Inc. and certain other individuals who are signatories thereto for the first prospect known as the North Pasture Prospect in San Patricio County, Texas.  Subject to the continued acquisition of the mineral leases in the area, we, as operator, would pay no proportionate cost for the drilling of the well and would earn a 25% net working interest upon the successful completion of the initial well.

Mud Flats – Aransas County, Texas

On December 22, 2011 we commenced drilling operations of our third well, Werland Heirs #1 in the Mud Flats Field, Aransas County Texas in which we have a 25% carried interest.

See also “ITEM 8B. OTHER INFORMATION” below.

We presently continue to seek out property acquisitions in the United States and to dispose of property interests in which we no longer have any exploratory or development interest.

Employees

As of December 31, 2011, we had 4 full time employees.  We hire part-time employees and/or independent consultants as required.  We will continue to rely on independent contractors as needed.  If we are successful in any future drilling programs, we may retain additional employees or consultants or convert existing consultants into full time employees as may be required.

ITEM 1A.

RISK FACTORS.

You should carefully consider the risks described below, and the other information contained in this Annual Report, before purchasing shares of our common stock. Some of the risks and uncertainties we face are described below; however, the risks and uncertainties described below are not the only risks and uncertainties we face, and risks and uncertainties not listed herein may materially adversely affect our business.  If any of the following risks actually occur, our business, financial condition, or results or operations could be materially adversely affected, the price of our common stock could decline, and you may lose all or part of your investment therein.  You should acquire shares of our common stock only if you can afford to lose your entire investment.

Risks Associated With Our Business

We have incurred losses in recent periods for start-up efforts and may incur losses in the future.

 

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We were organized on July 25, 2005; since inception we have a history of operating losses, and a $8,686,186 accumulated deficit through December 31, 2011.   We expect to incur substantial operating losses for the foreseeable future, as well.

We may not be able to continue without additional capital to fund our operations.

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have a history of operating losses that are likely to continue in the future.

If we are unable to become profitable and cannot generate cash flow from our operating activities, we may be required to raise additional capital or debt to fund our operations. Such financing may be unavailable when needed or may not be available on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our current stockholders will be reduced, and these securities may have rights superior to those of our common stock.

We have a limited operating history which makes your evaluation of our business difficult.

We are in the exploration and development stage of our business. We have engaged in preliminary exploratory activities, review of data pertaining to our properties, the establishment of initial exploration plans, and the drilling of five (5) wells. Our preliminary exploratory activities have, to date, resulted in one “dry-hole” drilled on the Fairlight Prospect, and two dry holes in our Freehold properties and one non-commercial hole drilled on the EWA Concession, Egypt. We have discontinued our efforts in Saskatchewan, Canada and Egypt.  Our current focus has been on the Upper Gulf Coast of Texas and initial activities have met with the successful drilling and preliminary testing of the first three of our four wells drilled in the program and we anticipate we will continue to be successful.  We have a very limited operating history upon which you can evaluate our business and prospects .   Accordingly, you should consider and evaluate our business prospects by considering the risks associated with our early stage status and lack of   operational experience.

We will require additional financing to sustain our operations and without it we will not be able to continue operations.  Our ability to obtain such additional funding will determine our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

There is substantial doubt about our ability to continue as a going concern due to the losses incurred since inception, our accumulated deficit, and lack of revenues.   Our Company has a limited operating history and is considered in the development stage. The success of our company is significantly dependent on a successful drilling, completion and production program. Our Company’s operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. No assurance can be given that we may be able to operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. There can be no assurance that our business plan will prove successful, and no assurance that we may be able to operate profitably, if at all.

There is no assurance that actual cash requirements will not exceed our estimates, in which case we will require additional financing to further explore and if warranted bring our properties into commercial operation, finance working capital, and pay for operating expenses and capital requirements until we achieve a positive cash flow.  There can be no assurance that, if required, any such financing will be available upon terms and conditions acceptable to us, if at all. If we are unable to obtain additional financing in a sufficient amount when needed, and upon terms and conditions acceptable to us our operations and activities will be materially adversely affected. We will need funds sufficient to meet our immediate needs and will require further funds to finance the development of our company. There can be no assurance that such funds will be available or available on terms satisfactory to us. If additional funds are raised by issuing equity securities, further dilution to existing or future shareholders is likely to result. If adequate funds are not available on acceptable terms when needed, we may be required to delay, scale back or eliminate the development of our Company.  All or a portion of our interest in our properties may be lost if we are unable to obtain significant additional financing, as we are required to make significant expenditures on the exploration and development of our properties.  Inadequate funding could also impair our ability to compete in the marketplace, which may result in the dissolution of our company.

 

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The oil and gas exploration business involves many operating risks that can cause substantial losses.

Numerous risks affect our drilling activities, including the risk of drilling non-productive wells or dry holes.  The cost of drilling, completing and operating wells, and of installing production facilities and pipelines is often uncertain.  Also, our drilling operations could diminish or cease due to a number of factors, including any of the following:

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title problems;

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weather conditions;

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fires;

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explosions;

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blow-outs and surface cratering;

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uncontrollable flows of underground natural gas, oil and formation water;

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natural disasters;

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pipe or cement failures;

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casing collapses;

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embedded oilfield drilling and service tools;

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abnormally pressured formations;

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environmental hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases;

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noncompliance with governmental requirements; and/or new unanticipated governmental requirements

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shortages or delays in the delivery or availability of material, equipment or fabrication yards.

As a result, we could incur substantial liabilities that could reduce or eliminate the funds available for exploration, development or leasehold acquisitions, or result in loss of equipment and properties.   Given our limited financial resources, the occurrence of any one or more of the foregoing events would have a material adverse affect on our operations and the market price of our common stock.

We may not be able to obtain sufficient drilling equipment and experienced personnel to conduct our operations.

In periods of increased drilling activity resulting from high commodity prices, demand exceeds availability for drilling rigs, and personnel experienced in the oil and gas industry in general.  This may lead to difficulty and delays, especially in light of our limited resources and operations, in consistently obtaining services and equipment from vendors, obtaining drilling rigs and other equipment at favorable rates, and scheduling equipment fabrication at factories and fabrication yards. This, in turn, may lead to projects being delayed or experiencing increased costs.

Third party operators of the properties in which we have an interest may act in ways that are not in our best interests.

 

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Other companies may operate all or a portion of the oil and natural gas properties in which we have an interest. As a result, we have limited influence over operations on some of those properties or their associated costs. Our limited influence on non-operated properties could result in the following:

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the operator may initiate exploration or development projects on a different schedule than we prefer;

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the operator may propose to drill more wells or build more facilities on a project than we have funds for, which may mean that we cannot participate in those projects or share in a substantial share of the revenues from those projects; and

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if the operator refuses to initiate an exploration or development project, we may not be able to pursue the project.

Any of these events could significantly affect our anticipated exploration and development activities and the economic value of those properties to us as well as the market price, if any, of our common stock.

The success of our business depends upon our ability to find, develop and acquire oil and gas reserves.

While we have reserves from which we are currently producing to date we have not formally established reserves on any of our properties. We endevour to find, acquire and develop oil and gas reserves in Texas.  We have drilled four wells, three of which were were proven economical. However, t here is no guarantee that such activities will lead to the identification of additional drill sites or, if identified and wells are drilled, that we will find reserves that we can economically produce. Future drilling activities will subject us to many risks, including the risk that we will not find commercially productive reservoirs. Drilling for oil and natural gas can be unprofitable, not only as a result of dry holes, which we have experienced, but also from productive wells that do not produce sufficient oil to return a profit. Also, title problems, weather conditions, governmental requirements and shortages or delays in the delivery of equipment and services can delay our drilling operations or result in their cancellation. The cost of drilling, completing and operating wells is often uncertain, and not all wells produce oil and gas. As a result, we may not recover all or any portion of our investment.

If we do not establish reserves and or obtain additional financing, we may not be able to satisfy our substantial capital requirements and may be required to cease or curtail our operations.

If we identify additional drilling targets, we will require substantial capital to continue our exploration efforts and to acquire oil and gas interests; we currently need to fund our 2012 capital and exploration budget;

If we cannot generate sufficient cash flow from operations or raise funds externally in the amounts and at the times needed, we may not be able to discover reserves or meet our financial obligations.  If we are unable to obtain such financing when needed, on commercially reasonable terms, we may be required to cease or curtail our operations, which could have a materially adverse impact on the market price of our stock.

The potential profitability of oil and gas ventures depends upon factors beyond the control of our Company.  A decline in oil and gas prices will adversely affect our ability to obtain additional financing we will require in order to undertake our future drilling activities.

To date we have funded our capital requirements primarily from the offer and sale of our equity securities through the offer and sale of our common stock.  We will need to raise additional capital to fund any future drilling activities.  Our ability to do so may be adversely affected by any decrease of prices of, and demand for, natural gas and oil. Historically, the markets for natural gas and oil have been volatile and this volatility is likely to continue in the future. The potential profitability of oil and gas properties is dependent upon many factors beyond our control.  Prices for natural gas and oil may fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas and oil, market uncertainty and a variety of additional factors that are beyond our control, such as:

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the price of foreign imports;

 

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overall domestic and global economic conditions;

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political and economic conditions or hostilities in oil producing regions

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the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

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weather conditions;

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domestic and foreign governmental regulations;

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development of alternate technologies; and

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the price and availability of alternative fuels.

If we are unable to obtain such financing when needed, on commercially reasonable terms, we may be required to cease or curtail our operations, which could have a materially adverse impact on the market price of our stock.   Additionally, due to world-wide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance.  Moreover, the marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. The extent of these factors cannot be accurately predicted but the combination of these factors may result in our company not receiving an adequate return on invested capital.

We will continue to pursue acquisitions and dispositions which if consummated could adversely affect our cash flow and liquidity.

We will continue to seek opportunities to generate value through the purchase and sale of properties. We examine potential transactions on a regular basis, depending on market conditions, available opportunities and other factors. Dispositions of portions of our existing business or properties would be intended to result in the realization of immediate value but would consequently result in lower cash flows over the longer term unless the proceeds are reinvested in more productive assets.

We face competition from a large number of companies many of which have resources far in excess of ours.

The oil and gas industry is highly competitive. We compete with major and independent oil and natural gas companies as well as smaller companies who are better financed than we are, for property acquisitions. We also compete for equipment and labor required for us to develop and exploit our properties. Many of our competitors have substantially greater financial and other resources than we do. As a result, those competitors may be better able to withstand sustained periods of unsuccessful drilling. In addition, larger competitors may be able to absorb the burden of any changes in applicable laws and regulations more easily than we can, which would adversely affect our competitive position. These competitors may be able to pay more for exploratory prospects and productive oil and natural gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to explore for oil and natural gas prospects and to acquire additional properties in the future will depend on our ability to conduct operations and to evaluate and select suitable properties and transactions in this highly competitive environment. Moreover, the oil and natural gas industry itself competes with other industries in supplying the energy and fuel needs of industrial, commercial and other consumers. Increased competition causing oversupply or depressed prices could greatly affect our operational revenues.

Oil and gas operations, including our contemplated drilling activities, 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.

 

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Our oil and gas operations in United States, Canada (and previously Egypt) are subject to 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 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 local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend 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.

If we do not adequately manage the risks associated with conducting business in foreign countries our business operations will suffer.

A smaller part of our business strategy is to seek to acquire and develop leases and operations in foreign countries if such opportunities provide a significant return on investment. If we are able to implement such strategy, we may experience difficulty in managing international operations as a result of technical problems, distance, language and cultural differences. There are significant risks inherent in doing business on an international level, such as, political and economic instability, civil unrest, crime, unexpected changes in regulatory requirements, trade barriers, difficulties in staffing and managing foreign operations, fluctuations in foreign currency exchange rates, longer payment cycles, problems in collecting amounts due, difficulty in enforcing contracts, seasonal fluctuation in business activity and potential adverse tax consequences. If any of such risks materialize we may have little or no ability to manage them or avert any consequences there from and our business may suffer as a result.

We have not established any reserves on any of our properties.  As our properties are in the exploration stage there can be no assurance that we will establish commercial discoveries on our properties.

Although we have drilled three successful wells in which we have interests, we have not yet established official reserve estimates.  Exploration for economic reserves of oil and gas is subject to a number of risk factors. Few of the properties that are explored are ultimately developed into producing oil and/or gas wells.

Although we currently maintain insurance against potential losses and unexpected liabilities, the amount of such insurance coverage may not be sufficient to cover all such losses and liabilities.

Our operations are subject to inherent casualty risks such as blowouts, fires and explosions.. If any such event occurred, we could be subject to substantial financial losses due to personal injury, property damage, environmental discharge, or suspension of operations. The impact on us of one of these events could be significant. Although we currently maintain insurance against potential losses and unexpected liabilities, there is no assurance that the amount of such coverage will be adequate to protect us against all operational risks.

For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, it could adversely affect our operations and financial condition.

We are dependent on retaining our senior management and key personnel and the loss of any of our key management personnel would have an adverse impact on future development and could impair our ability to succeed.

To a large extent, we depend on the services of the founders of the Company, and other senior management, advisors, joint partners and personnel. These individuals have critical and unique knowledge of our operations that facilitate the evaluation and acquisitions of existing and potential properties in Canada and the United States.  We face competition for qualified personnel from numerous industry sources, and there can be no assurance that we will be able to attract and retain qualified personnel on acceptable terms.  We do not have key man insurance on any of our employees.  The loss of these experienced personnel could have a material adverse impact on our financial condition or operations.

 

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We will be required to rely upon services provided to us by third parties.

We expect to be totally dependent upon third-party providers to enable us to engage in all of our business activities. Such parties may include, but may not be limited to, consultants engaged to provide reserve calculations, seismic interpretation and, to the extent required, third party drilling contractors. Accordingly, we will be required to establish and maintain strategic relationships with a wide array of third party providers in order to engage in any meaningful business activity. If we are unable to establish and maintain relationships with such third party providers our business prospects will be impaired.

Our write-downs of the carrying values of oil and natural gas properties may adversely affect our earnings.

We have adopted the “full cost method” of accounting for acquisition, exploration and assessment of exploration properties. Early exploration and the costs including rights to explore, geological and geophysical studies, exploratory drilling and activities in relation to evaluating the technical and feasibility and commercial viability of extracting the oil and gas from the target properties are reasonably viewed necessary to evaluate and determine probable and proven reserves on the properties.

We currently have one full-cost pool in the United States. Depletion and amortization of the full-cost pools will be computed using the units of production method based on proven reserves, if any, as determined by the aforementioned activities.

In accordance with the full cost method of accounting, all costs associated with oil and gas property development and investment are capitalized on a project-by-project basis pending determination of the feasibility of the project. Costs incurred include appropriate technical and administrative expenses but not general overheads. Investments in unproven properties and major development projects are not amortized until proven reserves associated with the projects can be determined. If an oil and gas property development project is successful, the related expenditures will be transferred to tangible assets and amortized over the estimated life of the reserves on a unit of production method. Where a project is abandoned or considered to be of no further commercial value to the Company, the related costs will be written off.

Unevaluated oil and gas costs are assessed at each period end and where there are indications of impairment the related costs will be written off. The recoverability of unevaluated oil and gas costs is dependent upon the discovery of economically recoverable reserves, our ability to obtain necessary financing to complete the development of reserves and future profitable production or proceeds from the disposition of recoverable reserves.

Terrorist attacks and threats or actual war may negatively affect our business, financial condition and results of operations.

Our business is affected by general economic conditions and fluctuations in consumer confidence and spending, which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war. Recent terrorist attacks in the United States of America, as well as events occurring in response to or in connection with them, including future terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States of America or its allies, or military or trade disruptions impacting our suppliers or our customers, may adversely impact our operations. Strategic targets such as energy-related assets may be at greater risk of future terrorist attacks than other targets in the United States of America. These occurrences could have an adverse impact on energy prices, including prices for our natural gas and crude oil production. In addition, disruption or significant increases in energy prices could result in government-imposed price controls. It is possible that any or a combination of these occurrences could have a material adverse effect on our business, financial condition and results of operations.

Because of the early stage of development and the nature of our business, our securities are considered highly speculative.

 

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Our securities must be considered highly speculative, generally because of the nature of our business and the early stage of our development. We are engaged in the business of exploring and, if warranted, developing commercial reserves of oil and gas. Our properties are in the exploration stage only and are without known reserves of oil and gas, and there can be no assurance that we will establish commercial discoveries on our properties.  We have not generated any revenues nor have we realized a profit from our operations to date and there is little likelihood that we will generate any revenues or realize any profits in the short term. Any profitability in the future from our business will be dependent upon locating and developing economic reserves of oil and gas, which itself is subject to numerous risk factors as set forth herein. Since we have not generated any revenues, we will have to raise additional monies through the sale of our equity securities or debt in order to continue our business operations.

Our management team does not have extensive experience in public company matters, which could impair our ability to comply with legal and regulatory requirements.

Our management team (consisting of our officers and directors) has had limited U.S. public Company management experience or responsibilities, which could impair our ability to comply with legal and regulatory requirements, such as the Sarbanes-Oxley Act of 2002 and applicable federal securities laws including filing on a timely basis required reports and other required information. Our management may not be able to implement and affect programs and policies in an effective and timely manner that adequately respond to increased legal or regulatory compliance and reporting requirements imposed by such laws and regulations. Our failure to comply with such laws and regulations could lead to the imposition of fines and penalties and further result in the deterioration of our business.

Our compliance with changing laws and rules regarding corporate governance and public disclosure may result in additional expenses to us, which, in turn, may adversely affect our ability to continue our operations.

Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event we are ever approved for listing on either NASDAQ or a registered exchange, NASDAQ and stock exchange rules, will require an increased amount of management attention and external resources. We intend to continue to invest all reasonably necessary resources to comply with evolving standards, which may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. This could have an adverse impact on our ongoing operations.

Our proposed business raises potential conflicts of interests between certain of our officers and directors and us.

Certain of our directors are or may become directors of other oil and gas companies and, to the extent that such other companies may participate in ventures in which we may participate, our directors may have a conflict of interest in negotiating and concluding terms regarding the extent of such participation by us and such other companies. In addition, directors may present potential prospects to such other companies rather than presenting the opportunities to us. We have not established any mechanisms regarding the resolution of any such conflict if it were to arise; accordingly, there is no assurance that any such conflict will be resolved in a manner that would not be adverse to our interest.

Moreover, since our inception, we have acquired our property interests from entities controlled by or in which certain of our shareholders and directors have or may have an interest. We did not seek to obtain an independent evaluation of the fairness of the terms and conditions related to our acquisition of these properties. Such terms and conditions may prove to be financially more onerous than if we had acquired such properties from unrelated third parties; and, ultimately may result in the loss of our interests in such properties.

We have agreements in respect of our properties, but our properties may be subject to prior unregistered agreements, or transfers which have not been recorded or detected through title searches, and are subject to a governmental right of participation, resulting in a possible claim against any future revenues generated by such properties.

 

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We have agreements with respect to our oil and gas properties and we believe our interests are valid and enforceable, although we have not obtained an opinion of counsel or any similar form of title opinion to that effect.  These agreements do not guarantee title against all possible claims. The properties may be subject to prior unregistered agreements, or transfers that have not been recorded or detected through title research.  If the interests in our properties are challenged, we may have to expend funds defending any such claims and may ultimately lose some or all of any revenues generated from the properties if we lose our interest in such properties.

One of our directors is located outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers.

A minority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under United States federal securities laws against our directors or officers.

Risks Related to our Common Stock

Our stock price historically has been volatile and may continue to be volatile.

The market price of our common stock has been and is expected to continue to be highly volatile. Factors, many of which are beyond our control, include, in addition to other risk factors described in this section, the announcements of technological innovations by us or other companies, regulatory matters, new or existing products or procedures, concerns about our financial position, operating results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights, and general economic, industry and market conditions may have a significant impact on the market price of our stock. In addition, the future sales of shares of our common stock by our shareholders, the holders of our outstanding warrants and options, could have an adverse dilutive effect on our outstanding shares and the market price of such shares.

The trading price of our common stock has, from time to time, fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth herein, as well as our operating results, financial condition, general economic conditions, market demand for our common stock, and various other events or factors both in and out of our control. In recent years, broad stock market indices, in general, and smaller capitalization companies, in particular, have experienced substantial price fluctuations. In a volatile market, we may experience wide fluctuations in the market price of our common stock. These fluctuations may have a negative effect on the market price of our common stock. To the extent our stock price fluctuates and/or remains low, it could cause you to lose some or all of your investment and impair our ability to raise capital through the offering of additional equity securities.

We do not intend to pay dividends for the foreseeable future.

We currently intend to retain future earnings, if any, to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize their investment. Investors seeking cash dividends should not purchase the Company’s shares.

We may conduct further offerings in the future in which case your shareholdings will be diluted.

Our certificate of incorporation authorizes the issuance of 100,000,000 shares of common stock, each with a par value of $0.01. Since our inception, we have relied on such equity sales of our common stock to fund our operations. We may conduct further equity offerings in the future to finance our current projects or to finance subsequent projects that we decide to undertake. If common stock is issued in return for additional funds, the price per share could be lower than that paid by our current stockholders. We anticipate continuing to rely on equity sales of our common stock in order to fund our business operations. If we issue additional stock, your percentage interest in us will be diluted. The result of this could reduce the value of your stock.

 

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We may issue preferred stock, which may have greater rights than our common stock.

Our certificate of incorporation authorizes us to issue up to 10,000,000 shares of preferred stock. Currently no preferred shares are issued and outstanding; however, we can issue shares of our preferred stock in one or more series and can set the terms of the preferred stock without seeking any further approval from our common shareholders. Any preferred stock that we issue may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock. In addition, such preferred stock may contain provisions allowing them to be converted into shares of common stock, which could dilute the value of common stock to current shareholders and could adversely affect the market price, if any, of our common stock.

Our common stock is a "penny stock," and because "penny stock” rules will apply, you may find it difficult to sell the shares of our common stock you acquired in this offering.

Our common stock is a “penny stock,” as that term is defined under Rule 3a51-1 of the Securities Exchange Act of 1934. Generally, a "penny stock" is a common stock that is not listed on a securities exchange and trades on the OTCBB for less than $5.00 a share. Prices in our stock often are not available to buyers and sellers and the market may be very limited. Penny stocks in start-up companies are among the riskiest equity investments. Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the U.S. Securities & Exchange Commission. The document provides information about penny stocks and the nature and level of risks involved in investing in the penny stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain the purchaser's written agreement to the purchase. Many brokers choose not to participate in penny stock transactions. Because of the penny stock rules, there is less trading activity in penny stocks and you are likely to have difficulty selling your shares.

Our Common Stock is quoted on the Over-The-Counter Bulletin Board and, accordingly, it may be difficult for you to sell your shares or you may not be able to sell your shares for an optimum trading price.

Our common stock is quoted on the Financial Industry Regulatory Authority’s Over-The-Counter Bulletin Board (the “OTCBB”) under the symbol “<MGUY.PK>.” The OTCBB is a regulated quotation service that displays real-time quotes, last sale prices and trade volumes in over-the-counter securities. Because trades and quotations on the OTCBB involve a manual process, the market information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available. The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price. Execution of trades, execution reporting and the delivery of legal trade confirmations may be delayed significantly. Consequently, one may not be able to sell shares of our Common Stock at the optimum trading prices.

When fewer shares of a security are being traded on the OTCBB, volatility of prices may increase and price movement may outpace the ability to deliver accurate quote information. Lower trading volumes in a security may result in a lower likelihood of an individual’s orders being executed, and current prices may differ significantly from the price quoted by the OTCBB at the time of the order entry.

Orders for OTCBB securities may not be canceled or edited like orders for other securities. All requests to change or cancel an order must be submitted to, received and processed by the OTCBB. Due to the manual order processing involved in handling OTCBB trades, order processing and reporting may be delayed, and an individual may not be able to cancel or edit his order. Consequently, one may not be able to sell shares of common stock at the optimum trading prices.

The dealer’s spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of securities on the OTCBB if the common stock must be sold immediately. Further, purchasers of securities on the OTCBB may not have an ask price for securities sold through the OTCBB. Due to the foregoing, demand for securities that are traded through the OTCBB may be decreased or eliminated.

 

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Sales practice requirements of the Financial Industry Regulatory Authority (“FINRA”) may also limit a shareholder’s ability to buy and sell our stock.

In addition to the penny stock rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.

PROPERTIES.

Our Offices

Our principal office is located at 2500 Wilcrest Drive, Suite 405, Houston, Texas, 77042 .  This is an 18 month sub lease agreement, at a cost of $1,497.08 per month, until June 30, 2012.

We also have administrative offices located at 207 West Hastings Street, Suite 1111, Vancouver, British Columbia, Canada V6B 1H7.  We sublet office space from a related party for $1,313 per month, renewable annually.

Additionally, we have an office at Suite 201, 47 Colborne St., Toronto, Ontario, Canada M5E 1P8.  This is a five year lease at a monthly cost of $9,500.

Our premises are adequate for our current operations, and we do not anticipate that we will acquire or lease additional premises in the foreseeable future. See Note 11 to Financial Statements.

Our Oil and Gas Properties

Texas, United States

Stafford Prospect, Jackson County, Texas

On November 26, 2010, we entered into a Joint Operating Agreement and a Participation Agreement with C. H. Squyres Family, LLC, Fossil Oil Company LLC and certain other individuals who are signatories thereto to develop an extension to the La Ward NE Field in Jackson County (Stafford Prospect).  The agreement provided for the shared costs in the acquisition of oil and gas leases in the Stafford Prospect.  As operator, we participate in the drilling of the initial well with an 8.89% working interest and will acquire a 6.11% promoted interest resulting in our having a 15.00% working interest upon the successful completion of the initial well drilled on the property.  Each participant would also pay the same percentage costs for the next well as was paid on the first well.

On March 6 th , 2011, we completed the drilling of the Stafford Well #1 at the La Ward NE Field area in Jackson County, Texas.  The well was drilled to a total depth of 7,400 feet.  Initial open-hole logging indicates multiple productive zones from the Frio formation with both oil and gas shows.  The deepest prospective oil zone shows a structural sand 10 feet higher to an offsetting productive well with a sand thickness of 5 ½ feet with a 33% porosity and 20% water saturation.

 

 

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On November 28, 2011 we completed the Stafford #2 an offset well 600 feet west of Stafford #1,  The well initially flowed at a rate of 50 to 70 barrels of oil per day and 40,000 to 60,000 cubic feet of gas on a 8/64” at approximately 650 psi.  The well subsequently lost pressure and artificial lift equipment was installed in February of 2012 and production flow levels are being optimized at the present time..  .

North Pasture Prospect – San Patricio County, Texas

On December 8, 2010 we entered into a Joint Operating Agreement and a Participation Agreement with Global Oil and Gas Resources Inc., Dolimiti Partners LLC, Indian Lane Assoc., LLC, Plastiform Packaging, Inc. and certain other individuals who are signatories thereto for the first prospect known as the North Pasture Prospect in San Patricio County, Texas.  Subject to the continued acquisition of the mineral leases in the area, we, as operator, would pay no proportionate cost for the drilling of the well and would earn a 25% net working interest upon the successful completion of the initial well.

Drilling of the Kunitz #1 Well on our North Pasture property was commenced on January 31, 2012.  Drilling was successfully completed on February 17, 2012.  The open-hole log indicated potentially productive zones.  Casing has been run and we are currently analyzing all prospective zones as additional cased hole logs are run and surface completion efforts are coordinated.

Mud Flats – Aransas County, Texas

On December 22, 2011 we commenced drilling operations of our third well, Werland Heirs #1 in the Mud Flats Field, Aransas County Texas in which we had a 25% carried interest.  While the well proved structurally accurate, hydrocarbon volumes in the prospective zones were calculated too low, thus making the well uneconomical to complete.  The adjoining acreage within the Mud Flats Prospect is still considered prospective and is currently being studied by us for alternative drilling locations based on the information gained from the Werland Heirs #1well.

Saskatchewan Exploration Program

We do not plan on any further exploration in Saskatchewan due to the expiration of our mineral leases.  Our Ryerson 16-17-009-31W1M well, previously suspended after encountering a heavily oil stained, marginal reservoir within the Bakken interval, was determined by management to be uneconomical and it has been plugged and abandoned.  On December 31, 2010 an impairment charge $523,558 has been made against previously capitalized costs.

Material Asset Purchases and Sale s

On February 12, 2009, we had acquired a 40% interest (the “Excelaron Interest”) in Excelaron LLP, a privately held Company based in California (“Excelaron”). The acquisition was contingent upon our making a capital contribution of $2,300,000 in installments over a specified period.  After making payments of $425,000 we engaged in assigning our interest to other parties better positioned to capitalize on this asset in exchange for either shares or cash.

On March 26, 2010, an Amended Qualifying Transaction Agreement was executed  pursuant to which we agreed to accept, an aggregate of $1,000,000 Canadian Dollars (less $150,000 in debt financing repaid and $87,900 in legal and consulting fees) and the reimbursement of approximately, $425,000 of advances made by us to Excelaron, in exchange for the Excelaron Interest.  The agreement was consummated on April 30 of 2010.

ITEM 3.

LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

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ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None during the period of this report.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

On February 27, 2012, pursuant to approval granted by a majority of the shares voted at a special meeting held on February 15, 2012, we filed a Restated Certificate of Incorporation with the Secretary of the State of Delaware to effect a one-for-five reverse stock split, with the fractional shares being rounded up to the nearest whole share.  The effect reduced the number of shares from 57,565,987 common shares outstanding to 11,513,198 common shares outstanding.

Our common stock currently trades on the Over-the-Counter Bulletin Board (OTCBB) under the symbol “MGUY,” and on the Frankfort Stock Exchange under the symbol BKX.  As of March 24, 2012, there were 11,513,198 common shares issued and outstanding.

Our stock began trading on the OTCBB on July 11, 2007.  The following table sets forth the range of high and low bid information for our Common Stock for the periods indicated below. The price information available reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions

OTC Bulletin Board Sales Prices for MGUY
Quarter Ended		High				Low
March 31, 2010			0.08				0.03
June 30, 2010			0.04				0.02
September 30, 2010			0.04				0.02
December 30, 2010			0.05				0.02
March 31, 2011			0.08				0.02
June 30, 2011			0.05				0.02
September 30, 2011			0.04				0.03
December 30, 2011			0.05				0.01

The closing price of our stock on March 24, 2012 was $0.10.

Holders

December 31, 2011
		Options				Weighted Average Exercise Price				Weighted Average Remaining Life (years)
Options outstanding at beginning of period			570,000			$	0.250				3.81
Options issued during the period			-				-				-
Exercised			-				-				-
Forfeited			-				-				-
Expired			-				-				-
Outstanding at the end of period			570,000				0.25				3.81

 

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As of December 31, 2011, there were at least 36 shareholders of record of the Company’s common stock.  The number of shareholders of record was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.  The transfer agent and registrar for our common stock is Holladay Stock Transfer, Inc., located at 2939 North 67 th Place, Scottsdale, Arizona 85251 [Tel: (480) 481-3940, Fax: (480) 481-3941].

Dividends

To date the Company has not declared or paid cash dividends on our capital stock and does not anticipate paying any cash dividends in the foreseeable future, but intends to retain its capital resources for reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors as the Board of Directors deems relevant. Our Board of Directors has the right to authorize the issuance of preferred stock, without further stockholder approval, the holders of which may have preferences over the holders of the common stock as to payment of dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company’s Board of Directors approved a 2007 Stock Incentive Plan on or about August 8, 2007, which authorized the issuance to management and employees of up to 4,000,000 shares of the Company’s common stock.  To date, the Board has approved the issuance of options to purchase 2,250,000 of the Company’s common stock at a price of $0.30 per share, expiring August 7, 2012.  The options vest sequentially over a one-year period that commenced on August 8, 2007.

On October 22, 2010, the 2,250,000 previously granted options were cancelled, and 2,850,000 fully vested stock options were granted to directors, officers, employees and contractors of the Company.  These options will expire on October 22, 2015.  The fair value of the options is $0.04 calculated using the Black-Scholes method:  risk free rate 1.1%, share price $0.04, strike price $0.05, volatility 215%, and dividend yield 0.00.

On February 27, 2012 in accordance with the one-for-five reverse stock split the number of options outstanding was reduced to 570,000 and the exercise price increased to $0.25.

   Recent Sales of Unregistered Securities

There have been no recent sales of unregistered securities since the Company’s last report of such sales in the Current Report on Form 8-K filed on June 16, 2008.

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 our fiscal year ended December 31, 2011.

ITEM 6.

SELECTED FINANCIAL DATA.

The Company is a “smaller reporting Company,” as defined by Rule 229.10(f)(1) (Regulation S-K), and is not required to provide information under this item.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

Our strategy is to acquire interest in, and/or to operate oil and gas properties that have existing or the high potential of oil and or natural gas reserves.  Existing well bores with proven oil and gas reserves can usually be purchased for a fraction of the original cost to drill and complete a new well. Property purchased with proven reserves reduce the risk of not finding hydrocarbons and are economically viable to develop due to the elimination of the associated cost of finding the hydrocarbons. After the property has been purchased, the primary cost for establishing new production is the re-completion cost.

 

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Cash Requirements

Further cash requirements may be necessary should we wish to participate in further development of our prospects in Texas.  These funds may be raised through equity financing, debt financing, the sale of assets, or other sources, which may result in further dilution in the equity ownership of our shares. There is no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on their investment in our common stock. Further, we may continue to be unprofitable.

Selected Annual Financial Information

		2011		2010		2009
Cash		31,005		65,085		7,481
Securities available for sale		12,576		102,052		625,961
Working capital		(1,100,421)		270,582		263,269
Total assets		1,039,371		376,567		1,622,400
Shareholders' equity		(1,036,834)		6,924		1,216,502
Share capital		7,647,585		7,643,985		7,218,747
Weighted average common shares outstanding		11,519,197		11,498,198		57,,445,987
Accumulated deficit		(8,680,252)		(7,650,718)		(6,721,905)
Cash flow from operations		(976,998)		(1,158,444)		(1,102,986)
Net loss		(1,023,534)		(928,812)		(596,299)
Loss per share		(0.09)		(0.08)		(0.01)

As at December 31, 2011 we had total assets increase from $376,567 in 2010 to $1,033,438.  This increase is due to restricted partner funds included in gross assets.  With the $711,731 in restricted funds excluded assets amount to $321,707.  Oil and gas properties have increased to $161,703 at the year ended December 31, 2011 as compared to $36,342 as at December 31, 2010.  This increase is due to the development of our 15% working interest in the Stafford field.  Working capital at December 31, 2011 was negative $1,100,421 due to liabilities owed to a related party of the Company. (working capital at December 31, 2010 ­ $270,582).

As of year-end December 31, 2011, we had current liabilities of $1,959,491 and a contingency fund of $116,744 relative to current liabilities of $69,643 at December 31, 2010.  Our total liabilities increased due to advances made to the Company by a related parties totaling $1,014,973. Of this amount $921,755 has been converted to a promissory note repayable on demand in cash or in common stock of the Company, and an additional $90,352 is due to a shareholder of the Company. It is more likely than not that the $921,755 will be repaid in common stock of the Company and have a dilutive effect.  The contingency fund has been reduced from $300,000 at December 31, 2010 to $116,744.  The Company has paid approximately 67% of the  potential claims due to  reassessments denying personal tax deductions to the investors in connection with funds raised in 2008 on a flow-though basis (see Financial Statements Note 11).

 

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		Year ended December 31, 2011				Year ended December 31, 2010
Revenue
Oil and gas sales		$	36,728				-
Management fees			14,745				-
Total revenue		$	51,473				-
-Expenses
General & Administration:
Depreciation, depletion & amortization		$	6,560				-
Communications			18,048				14,067
Insurance			44,326				-
Production tax			1,693				-
Professional fees			142,309				111,460
Rent			64,671				59,590
Employee stock options			-				114,000
Flow-through financing tax			83,357				18,722
Travel & Promotion			63,427				127,856
Realized foreign exchange loss			17,520				23,419
Land reclamations			25,962				-
Wages			527,704				345,920
Other			99,751				94,257
Impairment oil and gas properties		$	-				(523,558	)
Deferred indemnity (contingency)		$	-				(300,000	)
Total General and administration expenses		$	(1,095,326	)			(1,732,850	)
Gain on disposition of exploration property			-				487,106
Gain on sale of securities available for sale			20,319				310,931
Net loss		$	(1,023,534	)			(934,812	)

For the first time in the history of the Company we generated revenue from our principle operations of the production of oil from both of the wells that we drilled and operated in 2011.  Our total revenue derived from oil production and management fees was $51,473.  While this was a modest amount of production we expect this to increase in 2012 as pumps have been installed on both wells as of the beginning of March 2012.

For the year-ended, 2011 total general and administrative costs were $1,095,326 compared to $1,732,850 in the prior year.

Wages have increased 56% from $345,920 at December 31, 2010 to $539,364 in 2011 as we have added technical staff to assist in our operations.

Other areas that have seen increases are professional fees which consist of predominately legal and accounting fees.

We have recorded an Flow-through tax charge of $88,091 at December 31, 2011 assessed under the Canadian Tax Code.  We paid $18,722 that was outstanding at December 31, 2010.

Insurance costs have increased 100% in 2011 compared to nil in 2010.

 

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Land reclamations work properties that we related to our drilling program completed in 2008 but due to poor conditions the reclamation work was unable to be fulfilled until 2011.  We anticipate having to spend an additional $7,000 to have these areas completely restored.

Most other areas pertaining to our general and administrative expenses have remained steady or have decreased.  Travel and promotions cost have decreased 50% at December 31, 2011 compared to these expenses in 2010.

We also had a gain on the sale of common shares of Sea Dragon Energy, a Canadian company.  At December 31, 2011 we still held 135,000 shares with a fair market value of $12,576.  Subsequent to year end this position was sold.

The Statement of Cash Flows shows that cash outflows from operations in 2011 was $976,998 compared to $1,050,445 in the prior year.  We had a cash inflow on the sale of investments held for sale of $20,319 in 2011 compared to $310,931in 2010.  This difference was largely influenced by the decline in the per share market price of the securities held for sale. Depreciation in 2011 was $12,494 compared to nil in 2010.  In addition,, during 2011 funds related to the contingency were used to repay investors resulting in a cash outflow in 2011 of $183,256.

Investing activities on the Statement of Cash Flow shows a cash outflow of $105,314 in 2011 compared to cash inflow of $1,256,099 in 2010.  This difference was due the disposition of exploration property in 2010.  We acquire property and equipment using $25,160 with no comparable amount in 2010. We had a cash outflow of $125,361 to acquire and develop our interests in oil and gas properties in the period ending December 31, 2011 compared with  a cash inflow of $5,389 in the prior year related to the disposition of oil and gas property.

Financing activities in 2011 included an inflow of $1,014,973 of loans largely from related parties  There were also inflows of funds for drilling advances from our partners  and corresponding outflows for restricted cash of $704,225 and $711,731, respectively.  These cash flows related to our partners funding their working interests in the wells operated by us.

Material Asset Purchases and Sale s

See Item I, under Core Properties.

Purchase of Significant Equipment

We do not intend to purchase any significant equipment (excluding oil and gas activities) over the next twelve months ending December 31, 2012.

Liquidity and Capital Resources

We have no current arrangements with any party to supplement our operations or provide us with financing.  In the future, we may be required to seek additional capital by selling debt or equity securities, selling assets, or otherwise be required to bring cash flows in balance when we approach a condition of cash insufficiency. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that financing will be available in amounts or on terms acceptable to us, or at all.

Going Concern

We have suffered recurring losses from operations. The continuation of our Company as a going concern is dependent upon our Company attaining and maintaining profitable operations and raising additional capital. The financial statements do not include any adjustment relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should our Company discontinue operations.

Due to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted above, in their report on the annual financial statements for the period ended December 31, 2011, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements for the period ended December 31, 2011 contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

 

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The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

There are no assurances that we will be able to obtain further funds required for our continued operations. As noted herein, we are pursuing various financing alternatives to meet our immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.

Recently Issued Accounting Standards

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective January 1, 2009.  SFAS 161 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows.  Among other things, SFAS 161 requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular format.

In May 8, 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, the Hierarchy of Generally Accepted Accounting Principles, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities.  With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature.  In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162," and approved—the FASB Accounting Standards Codification (Codification) as the single source of authoritative nongovernmental US GAAP. The Codification does not change current US GAAP, but is intended to simplify user access to all authoritative US GAAP by providing all the authoritative literature related to a particular topic in one place.

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No. 03-6-1, determining whether instruments granted in share-based payment transactions are participating securities (“FSP EITF No. 03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years.

We do not expect that any of these recently issued accounting standards have a material effect on our Company’s financial statements.

Application of Critical Accounting Policies

Our audited financial statements and accompanying notes are prepared in accordance with Generally Accepted Accounting Principles (GAAP) used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financials. See Note 2 to the Financial Statements under ITEM 8.

 

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Oil and Gas Properties

We follow the full cost method of accounting for our oil and gas operations. Under this method, all cost incurred in the acquisition, exploration and development of oil and gas properties are capitalized in one cost center, including certain internal costs directly associated with such activities. Proceeds from sales of oil and gas properties are credited to the cost center with no gain or loss recognized unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and gas reverses.

If capitalized costs, less related accumulated amortization and deferred income taxes, exceed the “full cost ceiling”, the excess is expensed in the period such excess occurs. The “full cost ceiling” is determined based on the present value of estimated future net revenues attributable to proved reserves, using current product prices and operating costs at the balance sheet date plus the lower of cost and fair value of unproved properties within the cost center.

Costs of oil and gas properties are amortized using the unit-of-production method based upon estimated proven oil and gas reserves upon the commencement of production. The significant unproven properties are excluded from the costs subject to depletion.

As at December 31, 2011 we have not calculated any proved reserves.

Stock Based Compensation

We implemented the following new critical accounting policy related to our stock-based compensation.  Beginning August 8, 2007, we began accounting for Stock options under the provisions of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123(R)), which requires the recognition of the fair value of stock-based compensation. Under the fair value recognition provisions for FAS 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. We were already using the fair value method under SFAS 123 and the main difference is the estimation of forfeitures in order to estimate the awards not expected to vest. We have used the Black-Scholes valuation model to estimate fair value of our stock-based awards which requires various judgmental assumptions including estimating stock price volatility and expected life. Our computation of expected volatility is based upon historical volatility. In addition, we consider many factors when estimating expected life, including types of awards and historical experience.

Off-balance Sheet Arrangements

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

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is a “smaller reporting Company,” as defined by Rule 229.10(f)(1) (Regulation S-K), and is not required to provide information under this item.

 

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Mogul Energy International, Inc.

Financial Statement Index

Index

Balance Sheets		F- 1
Statements of Operations		F- 2
Statements of Shareholder’s Deficit		F-3
Statement of Cash Flows		F-4
Notes to the Financial Statements		F- 5 to F-15

 

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Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Mogul Energy International, Inc.

2500 Wilcrest Drive, Suite 405

Houston, Texas 77042

We have audited the accompanying balance sheets of Mogul Energy International, Inc., a Delaware corporation, as of December 31, 2011 and December 31, 2010, and the related statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mogul Energy International, Inc. as of December 31, 2011 and December 31, 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements referred to above have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has not yet achieved profitable operations and is dependent on its ability to raise capital from stockholders or other sources to sustain operations. These factors, along with other matters set forth in Note 2, raise substantial doubt that the Company will be able to continue as a going concern.  Management’s plan to address these matters is disclosed in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Jorgensen & Co.

(a registered pubic accounting firm)

April 11, 2012

Lehi, Utah

 

 

 

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Mogul Energy International, Inc.

Balance Sheet

For the Year Ended December 31, 2011 and 2010

(expressed in U.S. dollars)

Audited

 

		December 31, 2011 (audited)				December 31, 2010
Assets:
Current
Cash		$	31,005			$	65,085
Investments held for sale			12,576				102,052
Prepaid and deposits			50,888				100,477
Other receivables			52,870				72,611
Restricted funds			711,731				-
Total current assets			859,070				340,225
Non-current
Oil and gas properties			161,703				36,342
Other property and equipment – net			18,599				-
Total Assets		$	1,039,371			$	376,567
Current Liabilities:
Accounts payable		$	153,032			$	31,537
Accrued expenses and other payables			83,851				38,106
Drilling advances			704,225				-
Due to related parties			1,014,973				-
Total current liabilities			1,956,080
Asset retirement obligation			3,381				-
Contingencies and commitments			116,744				300,000
Total Liabilities			2,076,206				369,643
Shareholders’ Equity:
Accumulated deficit		$	(8,680,252	)		$	(7,656,718	)
Common stock ( Authorized: 100,000,000 shares, $0.0001 par value. Outstanding: , 11,513,198 shares at 12/31/11 and 11,489,198  at 12/31/10)			5,864				5,744
Additional paid-in capital			7,641,721				7,638,241
Warrants & Options:			114,000				114,000
Preferred: 10,000,000 shares authorized, none issued			-				-
Foreign exchange adjustment			(110,423	)			(151,187	)
Other comprehensive income (loss)			(7,744	)			56,844
Total Shareholders’ Equity (Deficit)			(1,036,834	)			6,924
Total Shareholders’ Equity  (Deficit) and Liabilities			1,039,371			$	376,567

 

F-1

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Mogul Energy International, Inc.

Statement of Operations

For the Year Ended December 31, 2011 and 2010

(expressed in U.S. dollars)

Audited

		Year Ended December 31, 2011				Year Ended December 31, 2010
Revenue:
Oil and gas sales			36,728				-
Management fees			14,745				-
Total revenue			51,473
Expenses:
Lease operating expense			647				-
Deferred indemnity (contingency)			-				300,000
Production tax			1,693				-
Depreciation, depletion and amortization			6,560				-
General and administrative			475,365				580,427
Impairment of oil and gas property			-				523,558
Salaries and wages			527,704				328,865
Taxes, other			83,357				-
Total expenses			(1,095,326	)			(1,732,850	)
Other income and expenses
Gain on sale of oil and gas properties			-				487,106
Gain on sale of investment held for sale			20,319				310,931
Net income (loss) for the periods		$	(1,023,534	)		$	(934,813	)
Other comprehensive income:
Net unrealized gain (loss) on investments held for sale for periods		$	(64,589	)		$	(386,035	)
Foreign exchange adjustment			40,764				(2,729	)
Total other comprehensive gain (loss) for the periods		$	(23,825	)		$	(388,764	)
Total comprehensive net gain (loss) for the periods		$	(1,047,359	)		$	(1,323,577	)
Basic earnings (loss) per share		$	(0.09	)		$	(0.08	)
Weighted average common shares outstanding			11,495,198				11,489,198

 

F-2

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Mogul Energy International, Inc.

Statement of Shareholders’ Deficit

(expressed in U.S. dollars)

Audited

 

		Number of Common shares				Par Value				Additional Paid in Capital				Warrants & Options				Other. Income				Accumulated deficit				Totals
12/31/2009 Balances			11,489,197				5,744				7,213,003				425,238				294,422				(6,721,906	)			1,216,501
Translation adjustment			-				-				-				-				(2,729	)			-				(2,729	)
Unrealized gain on securities available for sale			-				-				-				-				(386,034	)			-				(386,034	)
Warrants  –  expired			-				-				425,238				(425,238	)			-				-				-
Stock Options – cancelled			-				-				-				-				-				-				-
Stock options – issued			-				-				-				114 ,000				-				-				114 ,000
Net (loss) for the period			-				-				-				-				-				(934,813	)			(934,813	)
12/31/2010 Balances			11,489,197				5,744				7,638,241				114,000				(94,343	)			(7,656,718	)			6,924
Unrealized loss on investment held for sale																			(64,588	)							(64,588	)
Foreign exchange adjustment																			40,764								40,764
Compensatory share granted			24,000				120				3,480																3,600
Stock Options – cancelled
Stock options – issued
Net (loss) for the period																							(1,023,534	)			(1,023,534	)
			11,513,198				5,864				7,641,721				114,000				(118,167	)			(8,680,252	)			(1,036,834	)

 

F-3

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Mogul Energy International, Inc.

Statements of Cash Flows

For the Year Ended December 31, 2011 and 2010

(Expressed in U.S. dollars)

		Year Ended December 31, 2011				Year Ended December 31, 2010
Operating Activities
Net income (loss) for periods		$	(1,023,534	)		$	(934,813	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion, amortization			6,560				-
Gain on disposition of exploration Property			-				(487,104	)
Gain on investment held for sale			(20,319	)			(310,931	)
Impairment of oil and gas properties			523,558
Options for services			-				114,000
Stock based compensation			3,600				-
Changes in non-cash working capital			-
Accounts payables (decrease) increase			121,494				(185,898	)
Accrued expenses and other payables (decrease) increase			45,745				38,10
Other receivables (decrease) increase			19,741				(54,402	))
Prepaid and deposits (decrease) increase			49,589				(52,402	)
Contingency increase (decrease)			(183,256	)			300.000
Asset retirement obligation increase			3,381				-
Cash used in operating activities		$	(976,998	)		$	(1,050,445	))
Investing Activities
Purchases of other property and equipment			(25,160	)			--
Proceeds - sale of investments held for sale			45,207				448,804
Proceeds from the disposition of exploration property			-				912,104
Oil and gas properties acquisitions			(125,361	)			(61,666	)
Cash used for investing activities		$	(105,314	)		$	1,299,242
Financing Activities
Bank overdraft			-				(43,143	)
Due to related parties			1,014,973				(145,320	)
Drilling advances increase (decrease)			704,225				-
Restricted cash (increase) decrease			(711,731	)			-
Cash from financing activities		$	1,007,468			$	(188,463	)
Foreign exchange adjustment			40,764				(2,729	)
Increase (decrease) in cash during periods			(34,080	)			57,605
Cash beginning of periods			65,085				7,481
To this number    Cash at end of periods		$	31,005			$	65,085
Interest paid during period			-				32,972
Schedule of Non-cash Transactions
Expiration of shareholder warrants			-				132,738

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

NOTE 1 - Organization and Nature of Business

Mogul Energy International, Inc. (Company) was formed in the state of Delaware on July 25, 2005 and is focused on acquiring, developing and operating oil and gas properties in proven producing regions.  The Company’s current business strategy is to conduct exploration, exploitation and development operations on our currently leased inventory of oil and gas prospects while expanding our business through development of select prospects with joint interest partners.  The Company has been building a large portfolio of prospective oil and gas properties in close proximity to areas containing known oil and gas production and or known reserves.  By securing industry partners on a promoted basis where practical, the Company is also able to minimize the exploration risk contained within its oil and gas prospect portfolio.  The Company has opted to be the operator of record for all of these properties at the present time so it can control the operations, timing, scope and financial obligations with respect to its oil and gas exploration, development and production operations.

NOTE 2 – Accounting Policies

Financial Statement Presentation and Going Concern

The Company has a history of operating losses, including an accumulated deficit of $8,680,252 through December 31, 2011.  This and other factors raise substantial doubt about the ability of the Company to continue as a going concern.  Management plans to address these matters through the sale of additional shares of its common stock , additional borrowings, the sale in whole or part of property interests or oil and gas reserves or a combination thereof to finance the Company’s future operations .

Although there is no assurance that the Company will be successful in these actions, management believes that it will be able to secure the necessary financing to continue operations for the foreseeable future.  Accordingly, these financial statements do not reflect adjustments to the carrying value of assets and liabilities, the reported expenses and balance sheet classifications used that would be necessary if the going concern assumption were not appropriate.  Such adjustments would be material and would have an adverse effect on the ability of the Company to continue as a going concern.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires use of estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because of various factors affecting future costs and operations, actual results could differ from estimates. Critical accounting policies and estimates used in the preparation of the financial statements relate to the accounting for impairments and carrying amounts of exploration properties including the realizable value of capitalized resource properties for exploration and evaluation costs. Future operations will be affected to the extent there are material differences between the estimated and actual amounts.

 

F-5

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

 

Oil and Gas Properties

The Company utilizes the full-cost method of accounting for the exploration of its oil and gas properties. Under this method, the Company capitalizes all costs associated with acquisition, exploration and development of oil reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties, directly related overhead costs and related asset retirement costs and costs of drilling exploratory productive and non-productive wells into full cost pools on a country-by-country basis. At December 31, 2011 the Company currently has one full-cost pool located in the United States.

Once commercial production is achieved the Company will apply a ceiling test quarterly to the capitalized costs in its full cost pools. Amounts in excess of the ceiling test limits are charged to operations as impairment expense in the period of the test until proven reserves are available. The ceiling test limits such cost to the estimated present value, using a ten percent discount rate, of the future net revenue from any proved reserves, based on the existing economic and operating conditions. Specifically, the ceiling test is calculated so that capitalized cost, less accumulated depletion and related deferred income tax, do not exceed an amount (the ceiling) equal to the sum of: (A) The present value of estimated future net revenue computed by applying current prices of any oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current cost) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus (B) the cost of property not being amortized; plus (C) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the property.

For unproven properties, the Company excludes from capitalized costs subject to depletion, all costs directly associated with the acquisition and evaluation of the unproved property until it is determined whether or not proved reserves can be assigned to the property. Until such a determination is made, the Company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment the Company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. The Company adds the amount of impairment assessed to the cost to be amortized subject to the ceiling test

Oil and gas property costs are considered tangible assets consistent with the views set forth in Emerging Issues Task Force Issue 04-02.

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

Cost centers in the exploration stage are assessed at each reporting date to determine whether it is likely that the net costs, in aggregate, may be recoverable in the future.  Costs considered unlikely to be recovered are charged to earnings during the period .

 

Asset Retirement Obligations

The Company has adopted Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations”, which requires that asset retirement obligations (“ARO”) associated with the retirement of a tangible long-lived asset, including natural gas and oil properties, be recognized as liabilities in the period in which it is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated assets. The cost of tangible long-lived assets, including the initially recognized ARO, is depleted, such that the cost of the ARO is recognized over the useful life of the assets. The ARO is recorded at fair value, and accretion expense is recognized over time as the discounted cash flows are accreted to the expected settlement value. The fair value of the ARO is measured using expected future cash flow, discounted at the Company’s credit-adjusted risk-free interest rate.

Revenue Recognition

The Company will recognize petroleum and natural gas revenues from its interests in producing wells as petroleum and natural gas is produced and sold from these wells and ultimate collection is reasonably assured.

Cash

Cash consists of cash on deposit with high quality major financial institutions.  The carrying amounts approximate fair market value due to the liquidity of the deposits.  For the purposes of the balance sheet and statements of cash flows, the Company considers all highly liquid instruments with maturities of less than 60 days at the time of issuance to be cash equivalents.

Net Loss Per Share Calculation

Basic net loss per common share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period.   Diluted earnings per shares is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive.  The weighted average number of common shares outstanding at December 31, 2011 was 11,495,198

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable.  The Company maintains cash at two financial institutions.  The Company periodically evaluates the credit worthiness of financial institutions, and maintains cash accounts only in large high quality financial institutions; The Company believes credit risk financing was from on related party.

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

financing was from on related party.

 

Environmental Protection and Reclamation Costs

The operations of the Company have been, and may in the future be affected from time to time in varying degrees by changes in environmental regulations, including those for future removal and site restorations costs.  Both the likelihood of new regulations and their overall effect upon the Company may vary from region to region and are not predictable.

Environmental expenditures that relate to ongoing environmental and reclamation programs will be charged against statements of operations as incurred or capitalized and amortized depending upon their future economic benefits.

Securities available for sale

At December 31, 2011 the Company held 135,000 common shares of Sea Dragon Energy Inc., a Canadian company trading on the TSX Venture exchange under the symbol SDX. This investment is accounted for as held for sale. Any changes in the market value of these shares are reflected in other comprehensive income on the balance sheet, statement of operations and the Statement of Shareholders’ Equity.  After December 31, 2011, the balance of these shares were sold for cash.

Other Receivables

The Company’s Goods and Services Tax receivable was $26,807 at December 31, 2011 and $28,939 at December 31, 2010.  This receivable relates to the Goods and Services Tax (Canada). The Company anticipates the full amount to be refunded within 12 months of the balance sheet date. Due to the nature of this receivable management does not consider an allowance for doubtful accounts to be necessary. The balance due for Texas projects was $14,321 and $52,870 at December 31, 2011 and 2010, respectively.

Abandonment Costs

Liabilities for costs to abandon exploration properties are estimated and reflected in the financial statements in the period that exploratory drilling activities commence with a corresponding amount added to exploration costs. The amount recognized is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. Change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the capitalized exploration costs. A provision for abandonment costs is recognized at the commencement of production, or in the period the decision is made to abandon unsuccessful properties.

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

Foreign Exchange Rate

The Company’s functional and reporting currency is the United States Dollar.  Transactions denominated in foreign currencies are translated into US dollars at the rate of exchange in effect at the date of the transaction.  Monetary assets and liabilities denominated in foreign currencies have been translated into US dollars at the rate of exchange in effect at the balance sheet.  Non-monetary assets and liabilities are translated at the historical rate of exchange.

 

Flow-through shares

The Company financed a portion of its exploration and development activities through the issuance of its common shares subject to certain flow-through provisions under the Canadian Income Tax Act.  Under the terms of the flow-through share agreements, the resource expenditure deductions for income tax purposes were renounced to investors in accordance with the appropriate income tax legislation (Canadian Income Tax Act).

Stock-based Compensation

The Company follows the fair value method of valuing stock option grants and other stock based compensation.  Under this method, the compensation cost attributable to stock options and other stock-based compensation issued to employees, contractors, officers and directors of the Company is measured at fair value at the date of grant and expensed over the vesting period of the options or when the services are provided, with a corresponding increase to warrants and options.  The Company calculates the fair value of stock options using an option pricing model.  Upon the exercise of the stock options or other stock based compensation the consideration paid together with the amount previously recognized in warrants and options is recorded as an increase in share capital.

Income Taxes

The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards No. 109, which requires, among other things, that the Company can provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss carry-forward. Because of the uncertainties surrounding the realization of any economic benefit related to the deferred net loss carry-forward, no allowance account has been established so that no future benefit is reflected as an asset at December 31, 2011.

Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, prepaid and deposits, accounts payable and accrued liabilities

It is management’s opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.  The fair value of these financial instruments is approximated to their carrying values.

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

Comprehensive Loss

SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. The Company is disclosing this information on its Statements of Shareholders’ Equity and Statement of Operations

Share Issue Costs

Finder’s fees and commissions paid to agents and underwriters incurred on the issuance of shares are charged directly to additional paid-in capital.

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No. 03-6-1, determining whether instruments granted in share-based payment transactions are participating securities (“FSP EITF No. 03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on our financial statements.

Recently Issued Accounting Pronouncements

As of and for the year ended December 31, 2011, the Company does not expect any of the recently issued accounting pronouncements to have a material impact on its consolidated financial condition or consolidated results of operations.

Reclassifications

These consolidated financial statements include reclassification adjustments as of December 31, 2011.  These reclassifications did not have any effect on the reported net loss for the year ended December 31, 2010.

Preferred Stock

 

As of December 31, 2011 and 2010, the Company has no preferred shares outstanding.  The Company's articles of incorporation authorize the Company to issue up to 10,000,000 shares of $0.001 par, preferred shares having preferences to be determined by the board of directors for dividends, and liquidation of the Company's assets.

NOTE 3 - Securities available for sale

At December 3, 2011 the Company held 135,000 common shares of Sea Dragon Energy Inc., a Canadian company trading on the TSX Venture exchange under the symbol SDX. This investment is accounted for as held for sale.  The fair market value of these shares was estimated to be $12,576 at December 31, 2011.  The Company sold 165,000 common shares for net proceeds of $45,133 during the preceding nine months.

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

NOTE 4- Other Receivables

Other receivables consist of $26,053 of receivables due from partners for property acquisition, drilling and operating costs.

The Company’s Harmonized Sales Tax receivable was $26,807 at September 30, 2011 compared to $28,939 during the same period in 2010.  This receivable relates to the Goods and Services Tax (Canada). The Company anticipates the full amount to be refunded within 12 months of the balance sheet date. Due to the nature of this receivable management does not consider an allowance for doubtful accounts to be necessary.

NOTE 5 – Property, Plant and Equipment

Oil and Gas Properties

Capitalized costs relating to the oil and gas acquisitions and exploration activity – United States

Net book value at December 31, 2009		$	425,000
Reduction: repayment by Vesta to acquire interest in Excelaron			(425,000	)
Additions: related to California leases			1,396
Additions: acquisition costs related to leases for oil and gas rights in Texas			33,613
Additions: Acquisition of 15% working interest for Stafford lease			1,333
Net book value at December 31, 2010		$	36,342
Reduction: Billed to joint interest partners			(33,799	)
Additions: Lease acquisition costs			14,758
Additions: Geological and geophysical			2,862
Additions: Intangible drilling costs			80,516
Additions: Intangible completion costs			31,808
Additions: Well equipment			29,216
Net book value at December 31, 2011		$	161,703

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

Other Property and Equipment

Other property and equipment is recorded at original cost and depreciated using the straight line method.  A summary of the property and equipment for the quarter ended December 31, 2011 is as follows:

		December 31, 2011
Furniture and fixtures		$	12,947
Computer equipment			1,933
Pump equipment			2,250
Software			14,239
Total other property and equipment			31,369
Less: accumulated depreciation			(12,770	)
Other property and equipment – net		$	18,599

The Company did not have any capitalized Other Property and Equipment at December 31, 2010.

NOTE 6 – Asset Retirement Obligation

No wells were abandoned during the year ended December 31, 2011 or 2010.

		December 31,  2011
Asset retirement obligations, beginning of year			-
Liabilities recorded during the period			3,381
Accretion expense			-
Asset retirement obligations, end of period			3,318

No asset retirement obligations were recorded and capitalized at December 31, 2010.

NOTE 7 - Foreign Exchange Rate

The impact of the cumulative effect of the unrealized monetary adjustment is accounted for in the equity section of the balance sheet. This adjustment for the year ended December 31, 2011 was a gain of $40,764 compared to a loss of $151,187 for the year ended December 31, 2010.  A realized foreign exchange loss of $17,520 was recognized in 2011 and was accounted for as an increase of general and administrative expenses.

NOTE 8 – Restricted Cash

As of December 31, 2011 the Company held $711,731 in restricted cash which was received from our joint venture partners.  This cash is restricted solely for the use by the Company as the operator for the various joint venture partner wells under management.

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

NOTE 9 – Drilling Advances

At December 31, 2011 the Company held $704,225 in drilling advances from Joint venture partners.  These advances will be applied towards the payment of drilling costs incurred in 2012 .

NOTE 10 - Capital Stock

Common Stock

On February 27, 2012 in accordance with the one-for-five reverse stock split the number of shares outstanding was reduced from 57,565,987 to 11,513,198.  The share and per share information in the financial statements have been retroactively adjusted to reflect this change as if it had occurred at the beginning of the periods, including the number of options outstanding, which has been adjusted to 570,000 with an exercise price of $0.25 to reflect the effect of the reverse split.

At December 31, 2011, 11,513,198 shares of the Company`s common stock was outstanding

Employee Stock Option Plan

The following table summarizes the continuity of the Company’s stock options:

December 31, 2011
		Options				Weighted Average Exercise Price				Weighted Average Remaining Life (years)
Options outstanding at beginning of period			570,000			$	0.25				3.81
Options issued during the period			-				-				-
Exercised			-				-				-
Forfeited			-				-				-
Expired			-				-				-
Outstanding at the end of period			570,000			$	0.25				3.81

On October 22, 2010 the Company granted 2,850,000 fully vested stock options to directors, officers, employees and contractors.  These options will expire on October 22, 2015.  The fair value of the options is $0.04 calculated using the Black-Scholes method:  risk free rate 1.1%, share price $0.04, strike price $0.05, volatility 215%, and dividend yield 0.00 .

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

Preferred Stock

The Company’s Articles of Incorporation authorize its Board of Directors, without approval from the common shareholders, to issue 10,000,000 shares of preferred stock in any series, rights and preferences as determined by the Board. Preferred shares may be issued that: have greater voting rights than the common stock, diluting the value of any outstanding shares of common stock.

NOTE 11 – Related Party Transactions

At December 31, 2011 the Company has received $886,747 from Aura Oil Holdings Ltd. (Aura), a corporation organized under the laws of Bermuda. Mr. Naeem Tyab is the Company’s Chairman of the Board the sole shareholder of Aura. This amount has been converted to a non-interest bearing promissory note payable on demand from a Aura.  In addition, we received $35,008 for out of pocket expenses incurred by Mr. Tyab on behalf of the Company.  This amount has been converted to a non-interest bearing promissory note payable on demand or convertible into common shares of the Company.  If converted to common shares the average price calculated over the prior 30 days will be used as the price at which shares are exchanged for debt.

On January 26, 2011, the Company entered into a Stafford Area Participation Agreement with Aura. Pursuant to the terms of the Agreement, Aura purchased an 8.3333% interest in the Company’s oil and gas leases, leasehold rights, and rights to participate in the development of oil, gas and other related substances in the Stafford Prospect for $75,521 and its proportionate monthly operating costs .

The Company sub leases office space is in its Toronto location to a related party with directors in common for $9,500 per month .

During the year the Company issued 24,000 shares to an officer and director of the Company for compensation.

The Company also receivcied an advance for a shareholder of $120,935 from a shareholder.  This amount is non-interest bearing and payable upon demand.

NOTE 12 – Contingencies and Commitments

Office Leases

Our principal office is located at 2500 Wilcrest Drive, Suite 405, Houston, Texas, 77042, USA.  This is a sub-lease agreement that expires on June 30, 2012 at a revised cost of $1,497 per month.  The Company recently increased the sub-leased space with a similar expiration date.

We also have administrative offices located at 615 – 700 West Pender Street, Vancouver, British Columbia, Canada V6C1G8. The Company sublets office space from a related party for $950 per month, on a month to month basis.

The Company sublets office space at Suite 201, 47 Colborne St., Toronto, Ontario, Canada M5E 1P8. on a monthly basis under an unwritten rental agreement .   The monthly rent under this agreement is approximately $9,500.

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

Environmental Uncertainties

The Company may be exposed to financial risks in the oil and gas exploration business for pollution or hazards against which it cannot adequately insure or which it may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations.

Flow-through Financing

The Company raised a total of CAD$950,000 in 2008 on a flow-through basis.  The gross proceeds of the financing were renounced to investors at December 31, 2008 and were to be used by the Company to incur qualified Canadian exploration expenses by June 30, 2010.  The company spent CAD$154,850 on qualified capital exploration expenditures leaving a commitment of approximately CAD$795,150 that was not spent on qualified capital exploration expenditures by July of 2010.  The Company has paid $55,000 in taxes and penalties assessed by the Canadian Customs and Revenue Agency(“CRA”..  An additional $83,357 tax was assessed as of June 30, 2011 that is as yet unpaid, at he date of writing the CRA has yet to demand payment ,  This tax is stated under the caption “Tax, other” on the Company’s Income Statement.  The Company has paid out $171,894 to shareholders as an indemnity for tax losses they incurred.  The Company estimates that a possible $116,744, still remains to be paid to investors.  Management has not yet determined when this contingency will be extinguished.

Governmental Regulations and Licensing

In order to drill for, recover, transport or sell any gas or oil from the properties subject to the Company’s drilling rights, the Company will generally be required to obtain additional licenses and permits and enter into agreements with various landowners and/or government authorities. The issuance of these permits and licenses generally will be contingent upon the consent of the governmental authority having jurisdiction over the property, which entities have broad discretion in determining whether or not to grant such authority. These licenses, permits, and agreements will generally contain numerous restrictions and require payment of development and exploration fees and royalties typically based on the recoverable reserves or expenditures. The amount of any such fee and royalties and other terms will determine in part, the commercial viability of any extraction prospect.

NOTE 13 - Loss Per Share

Loss per share is calculated using the weighted average number of shares issued during the relevant period. The weighted average number of common shares was 11,423,198 and the loss per share was $0.09 for the period ended December 31, 2011 compared to a loss of $0.08 for the year ended in 2010.

 

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Mogul Energy International, Inc.

Notes to the Year Ended 2011 and 2010 Financial Statements

NOTE 14 - Net Operating Loss Carry-forward

At December 31, 2011, the Company had a net operating loss (NOL) carry-forward estimated at about $8,000,000 available to reduce any future taxable income (after adjusting for amounts related to Canadian investor flow-through capital and share based compensation).   The NOL carry-forward begins to expire in 2025 and will fully expire in 2030. Because management is unable to determine that it is more likely than not that the Company will realize the tax benefit related to the NOL carry-forward, by having taxable income, a valuation allowance has been established at the balance sheet date to reduce the tax benefit asset value to zero.

Deferred Tax Assets:		2011				2010
Adjusted loss before income taxes		$	(1,023,539	)		$	(909,893	)
Income tax rate			39	%			39	%
Net operating loss carry-forwards			(399,178	)			(354,858	)
Deferred tax assets (estimated)			(4,145,988	)			(3,500,000	)
Recovery of future taxes related to the flow through under spending			-				(310,050	)
Less: Part XII.6 taxes and penalties			-				18,920
Total deferred tax assets			(4,545,166	)			(4,145,988	)
Valuation allowance for deferred tax assets			4,545,166				4,145,988
		$	-			$	-

NOTE 15 - Subsequent Events

On February 27, 2012 the Company filed a Restated Certificate of Incorporation with the State of Delaware to affect a one-for-five reverse stock split.  Subsequently, the Company received approval for the reverse stock split which took effect March 2, 2012.  These financial statements and those for 2010 have been restated to reflect the number of shares and options on the bases of the one-for-five share split.

 

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ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None

ITEM 9A.

CONTROLS AND PROCEDURES.

Management’s evaluation of disclosure controls and procedures

As required under the Exchange Act , we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the period covered by this report, being December 31, 2011. We are responsible for establishing and maintaining adequate internal controls and procedures for the financial reporting of our Company. Disclosure control and procedures are the controls and other procedures that are designed to ensure that we record, process, summarize and report in a timely manner the information that we must disclose in reports that we file with or submit to the SEC.  Our management has concluded, based on their evaluation, that as of December 31, 2011, as the result of the material weaknesses described below, our disclosure controls and procedures were ineffective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.

Management’s report on internal control over financial reporting

Company management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP.  Management has concluded that there are material weaknesses in both the design and operation of the Company’s internal controls and procedures for financial reporting.  A material weakness, as defined by SEC rules, is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.  The material weaknesses in internal control over financial reporting that were identified include:

i.

Lack of adequate segregation of duties in our accounting and financial reporting functions;

ii.

Lack of entity-wide controls, including no audit committee, and a failure to maintain formalized accounting policies and procedures;

iii.

Senior management has not established and maintained a “proper tone” as to internal control over financial reporting;

iv.

Lack of sufficient controls relating to user access security levels in our accounting software to restrict access to certain financial applications only to employees requiring access to complete their job functions.

As a result of the existence of these material weaknesses as of December 31, 2010, management has concluded that we did not maintain effective internal control with the limited staffing on hand over our financial reporting as of December 31, 2011,.

While we believe our financial statements included in this Annual Report present fairly, in all material respects, our financial condition, results of operations and cash flows for the periods presented, as a result of the material weaknesses in our internal control over financial reporting, there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented or detected on a timely basis.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  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 management’s report in this annual report.

Remediation

We will engage an independent accounting firm to advise us in respect of our internal controls over financial reporting, and to provide accounting counsel on various matters relating thereto.  We will continue to implement further improvements to our internal controls as they are identified.  We will use the criteria and framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the publication Internal Control-Integrated Framework , an integrated framework for the evaluation of internal controls, for the evaluation of our internal controls in the future. Senior management will continue to consult with external experts to assist with the accounting for complex and non-routine accounting transactions.

 

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Changes to Internal Controls and Procedures Over Financial Reporting

There have been no changes in our internal control over financial reporting during our fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as discussed herein.

ITEM 9B .

OTHER INFORMATION.

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Directors, Executive Officers, Promoters and Control Persons

The following table set forth the names and ages of all of our current Directors and Executive Officers.

Directors and Officers as at December 31, 2010 :

Name		Age	Position	Held Position Since
Naeem Tyab	(1)	43	Chairman of the Board	September 29, 2005
Gary Countryman	(2)	72	Director	April 14, 2010
Henry Kloepper	(3)	60	Director	February 22, 2010
Timothy J. Turner	(4)	54	CEO and President	April 27, 2010

(1)	Subsequent to the year end, on February 11, 2011, Mr. Tyab resigned as President and was appointed Chairman of the Board.

(2)	Mr. Countryman was appointed as a director on April 14, 2010.

(3)	Mr. Kloepper was appointed as a director on February 22, 2010. Subsequent to the year ended December 31, 2011 Mr. Kloepper formally resigned as a Director on February 15, 2012.

(4)	Mr. Turner was appointed Executive vice President on April 14, 2010.  Subsequent to the year end, on February 11, 2011, Mr. Turner was appointed President and Chief Executive of Operations.

 

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Former Directors and Officers

Name		Age	Position	Date Assumed the Position to Date of Resignation
John Masters	(1)	83	Chairman of the Advisory Committee	October 18, 2010
Ernie Pratt	(2)	59	Director	October 2, 2006 – October 5, 2009
William Smith	(3)	61	Director and CFO	June 19, 2008 – March 10, 2009

(1)	Mr. Masters was appointed Chairman of the Board on October 18, 2010.  Subsequent to the year end, on February 11, 2011, Mr. Masters resigned as Chairman of the Board and became Chairman of our advisory committee.

(2)	Mr. Pratt resigned as a Director on October 5, 2009.

(3)	Mr. Smith reigned as the Chief Financial Officer on March 10, 2009

Business Experience and Educational Background

The following represents a summary of the five year business history of each of the above-named individuals for the last five years:

Mr. Naeem Tyab – Chairman of the Board

Mr. Tyab has been the president and a director of the Company since September 29, 2005. Between April 2002 and prior to his appointment as president of our Company Mr. Tyab acted as an independent consultant to a number of public and private oil and gas companies in relation to their financing and acquisition activities. Prior thereto and from December 1997 to March 2002, Mr. Tyab was involved in the venture capital and investment banking industry in his capacity as a registered representative for a Canadian based securities dealer.

Mr. Tyab’s extensive experience financing companies coupled with his experience in the oil and gas industry uniquely qualifies him to be a member of our Board of Directors.

Mr. Gary Countryman – Director

Mr. Countryman was appointed to the Board as a director on April 14, 2010.  Mr. Countryman has thirty years of experience in the oil and gas industry including Vice President of Dubai Petroleum from 1977-79, Manager of Middle East Operations from 1980-84 for Conoco, Inc. and General Manager and Managing Director for Geisum Oil Company from 1984 -86.  He served as Vice President – Operations of Greenhill Petroleum from 1987-89.  From 1990 he has owned his own company and been involved in oil and gas property acquisitions and the operation of oil and gas properties.

Mr. Countryman earned his B.S. and M.S. in Petroleum Engineering from the University of California and his M.S. in Management from the Massachusetts Institute of Technology.

Mr. Countryman’s operations and management experience in the oil and gas industry assists us as we move forward in our next phase as operator on our interests in Texas and qualifies him to be a member of our Board of Directors.

Mr. Henry Kloepper – Director

Mr. Kloepper was appointed to the Board of Directors on February 22, 2010.  Mr. Kloepper has been involved in investment banking and structured finance over a thirty year career. He brings a well-rounded knowledge of the financial markets in strategic growth and investments. In the past Mr. Kloepper has worked in senior executive positions with J.P Morgan, Citibank Canada, North American Trust (now Laurentian Bank) and Security Pacific Bank (now Bank of America) in Canada, the US and in Europe.

Mr. Kloepper’s experience and contacts within the investment industry uniquely qualify him to serve on Our Board of Directors.

Mr. Timothy J. Turner – CEO and President

Mr. Turner received his undergraduate degree in Petroleum Land Management from the University of Texas at Austin in 1980. Prior, to his appointment with Mogul Energy, Timothy J. Turner was Principal of Tim. Turner & Associates, LLC, an oil and gas exploration and production business development and land services company. Mr. Turner has more than thirty years of varied experience in the oil and gas industry establishing and maintaining productive business relationships with partners; negotiating complex joint venture agreements; overseeing all business partner operations, negotiating legal agreements (involving acquisitions, title conflicts, eminent domain issues and the disposition of assets, and preparing long-range and short-term business plans, revenue forecasts, cost projections. Mr. Turner began his career with Exxon Company.  Subsequently, Mr. Turner went to work for Phillips Petroleum Company, in Houston, where his responsibilities included various Texas gulf coast exploration and production land activities.

 

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Legal Proceedings

During the past ten years none of our directors, executive officers, promoters or control persons has been:

·

The subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

·

Convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

·

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;

·

Found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law;

·

The subject of any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

(i) Any Federal or State securities or commodities law or regulation; or

(ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

(iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity;

·

Subject to any federal or state judicial or administrative proceedings based on violations of federal or state securities, commodities, banking or insurance laws and regulations, or any settlement to such actions (excluding settlements between private parties); or

·

Subject to any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization.

Code of Ethics

The Company has adopted a Code of Ethics designed to deter wrongdoing and to promote honest and ethical conduct, full, fair, accurate, timely and understandable disclosure in its reports to the U.S. Securities and Exchange Commission, and other public communications.  The Code of Ethics promotes compliance with applicable governmental laws, rules and regulations.  The Code of Ethics applies to our officers, directors, persons performing similar functions, and employees.  Upon request, the Company will provide without charge any person with a copy of the Code of Ethics.  Requests may be made in writing to the Company by mail sent to any of its offices.  A copy of our Code of Ethics is attached hereto as Exhibit 14.1.

 

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Directors

Currently, our Board of Directors consists of three members. Directors stand for election at our annual meeting of shareholders. Pursuant to our Bylaws, any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, may be filled by the shareholders or by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. A director elected to fill a vacancy shall hold office only until the next election of directors by the shareholders. If there are no remaining directors, the vacancy shall be filled by the shareholders.

At a meeting of shareholders, any director or the entire Board of Directors may be removed, with or without cause, provided the notice of the meeting states that one of the purposes of the meeting is the removal of the director. A director may be removed only if the number of votes cast to remove him exceeds the number of votes cast against removal.

We look to our directors to guide us through our next phase as a public company and continue and manage our growth. Our directors bring their leadership experience from a variety of pharmaceutical companies and professional backgrounds which we require to continue to grow and to add stockholder value. Our directors also have worked with start-up through public companies and bring depth of knowledge in building stockholder value, growing a company from inception, developing pharmaceutical products, and navigating mergers and acquisitions and the public company process.

Compensation of Directors

Compensation of Directors and Officers

We reimburse our directors for expenses incurred in connection with attending board meetings.

Except as set forth above, we have no formal or written plan for compensating our directors for their service in their capacity as directors.  Directors may receive stock options to purchase common shares from time-to-time as awarded by our Board of Directors based on proposals by the compensation committee. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our Board of Directors. Our Board of Directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.

In establishing director compensation, the Board is guided by the following goals:



Compensation should consist of a combination of cash and equity awards that are designed to fairly pay the directors for work required for a company of our size and scope;



Compensation should align the directors’ interests with the long-term interests of stockholders; and



Compensation should assist with attracting and retaining qualified directors.

The following table provides information regarding all compensation paid to the Company’s non-employee directors during the fiscal year ended December 31, 2011.

		Director Compensation
Name		Fees Earned or Paid in Cash ($)				Stock awards ($)				Total ($)
Gary Countryman		$	6,000			$	-			$	6,000
Henry Kloepper			10,176				-				10,176
Total director compensation		$	16,176			$	-			$	16,176

 

 

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There have been no changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.

Director Independence

We are not listed on a U.S. securities exchange and, therefore, are not subject to the corporate governance requirements of any such exchange, including those related to the independence of directors. However, at this time, after considering all of the relevant facts and circumstances, our Board of Directors has determined that  Mr. Henry Kloepper is independent from our management and qualifies as “independent director(s)” under the standards of independence of the FINRA listing standards.  We do not currently have a majority of independent directors as required by the FINRA listing standards. Upon our listing on any national securities exchange or any inter-dealer quotation system, we will elect such independent directors as is necessary under the rules of any such securities exchange

 

Board Leadership Structure

We currently have only one executive officer and three directors. Our Board of Directors has reviewed the Company’s current Board leadership structure — which consists of a Chief Executive Officer and a Chairman of the Board— in light of the composition of the Board, the Company’s size, the nature of the Company’s business, the regulatory framework under which the Company operates, the Company’s stockholder base, the Company’s peer group and other relevant factors, and has determined that this structure is currently the most appropriate Board leadership structure for our company. Nevertheless, the Board intends to carefully evaluate from time to time whether our Chief Executive Officer and Chairman positions should be combined based on what the Board believes is best for us and our stockholders.

Board Role in Risk Oversight

Risk is inherent in every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including strategic risks, enterprise risks, financial risks, and regulatory risks. While our management is responsible for day to day management of various risks we face, the Board of Directors, as a whole, is responsible for evaluating our exposure to risk and to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. The Board reviews and discusses policies with respect to risk assessment and risk management. The Board also has oversight responsibility with respect to the integrity of the Company’s financial reporting process and systems of internal control regarding finance and accounting, as well as its financial statements.

Board of Directors Meetings, Committees of the Board of Directors, and Annual Meeting Attendance

All proceedings of the Board of Directors for the year ended December 31, 2011 were conducted by resolutions consented to in writing by the Board of Directors and filed with the minutes of the proceedings of the directors.  We do not maintain a policy regarding director attendance at annual meetings and we did not have an annual meeting during the fiscal year ended December 31, 2011.

Committees

Exception for a Compensation Committee, we do not currently have any standing committees of the Board of Directors.  The full Board is responsible for performing the functions of:  (i) the Audit Committee, and (ii) the Nominating Committee.

The Compensation Committee currently comprised of two persons, including Naeem Tyab and Timothy J. Turner.  The Compensation Committee does not currently have a charter.

 

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Board Nominees

The Board does not currently have a standing Nominating Committee.  We do not maintain a policy for considering nominees.  Our Bylaws provides that the number of Directors shall be fixed from time to time by the Board, but in no event shall be less than the minimum required by law.  The Board shall be large enough to maintain our required expertise but not too large to function efficiently.  Director nominees are recommended, reviewed and approved by the entire Board.  The Board believes that this process is appropriate due to the relatively small number of directors on the Board and the opportunity to benefit from a variety of opinions and perspectives in determining director nominees by involving the full Board.

While the Board is solely responsible for the selection and nomination of directors, the Board may consider nominees recommended by stockholders as it deems appropriate. The Board evaluates each potential nominee in the same manner regardless of the source of the potential nominee’s recommendation.  Although we do not have a policy regarding diversity, the Board does take into consideration the value of diversity among Board members in background, experience, education and perspective in considering potential nominees for recommendation to the Board for selection. Stockholders who wish to recommend a nominee should send nominations to our Chief Executive Officer, <>, that include all information relating to such person that is required to be disclosed in solicitations of proxies for the election of directors. The recommendation must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected.

Audit Committee Financial Expert

Our Board of Directors has determined that we do not have a board member that qualifies as an "audit committee financial expert" as defined in Item 407(d)(5) of Regulation S-K, nor do we have a board member that qualifies as "independent" as the term is used in Item 7(d)(3)(iv)(B) of Schedule 14A under the Securities Exchange Act of 1934, as amended, and as defined by Rule 4200(a)(14) of the NASD Rules.

We believe that our Board of Directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The Board of Directors of our company does not believe that it is necessary to have an audit committee because management believes that the functions of an audit committee can be adequately performed by the Board of Directors. In addition, we believe that retaining an independent director who would qualify as an "audit committee financial expert" would be overly costly and burdensome and is not warranted given the stage of our development and the fact that we have not generated any positive cash flows from operations to date.

Communications with the Board

We have no formal procedures to follow for shareholders to communicate with the Board. Should you wish to submit a written communication to the Board or an individual director, you may mail or deliver such communication to: Mogul Energy International, Inc, 2500 Wilcrest Drive, Suite 405, Houston, Texas,  Board of Directors, Attention: Naeem Tyab, Chairman. All appropriate communications received from shareholders will be forwarded to the Board or any committee thereof, if any, as appropriate.

 

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ITEM 11.

EXECUTIVE COMPENSATION.

           The following table and descriptive materials set forth information concerning compensation earned for services rendered to us by: the Chief Executive Officer (the “ CEO ”); the Chief Financial Officer (the “ CFO ”); and the three other most highly-compensated executive officers other than the CEO and CFO who were serving as our executive officers at the end of the 2011 and 2010 fiscal years (the “ Named Executive Officers ”). We had no other executive officers at the period ending December 2011 or 2010.

The responsibility for establishing, administering and interpreting our policies governing the compensation and benefits for our executive officers lies with our Board of Directors. In this connection the Board has not retained the services of any compensation consultants.

The goals of our executive compensation program are to attract, motivate and retain individuals with the skills and qualities necessary to support and develop our business within the framework of our small size and available resources. In 2009, we designed our executive compensation program to achieve the following objectives:

•

attract and retain executives experienced in developing and delivering products such as our own;

•

motivate and reward executives whose experience and skills are critical to our success;

•

reward performance; and

•

align the interests of our executive officers and stockholders by motivating executive officers to increase stockholder value.

The following table summarizes the compensation earned by the Named Executive Officers during the fiscal years ended December 31, 2011 and 2010.

SUMMARY COMPENSATION TABLE
Name and		Year				Salary				Stock awards				Total
principal position		(12/31)				($)				($)				($)
Naeem Tyab, Chairman of  the Board			2010				124,216				-				134,216
			2011				148,600								148,600
Timothy J. Turner,  CEO and President			2010				52,500				-				52,500
			2011				145,000				3,600				148,600

 

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OUTSTANDING EQUITY AWARDS AT FISCAL-YEAR END

The following table sets forth information regarding equity awards that have been previously awarded to each of the Named Executives and which remained outstanding as of December 31, 2011.

Option Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Option Exercise Price ($)	Option Expiration Date
Naeem Tyab	50,000(1)		0.25	October 22, 2015
Tim0thy J.  Turner	100,000(1)		0.25	October 22, 2015

 

(1) retroactively reported due to one-for-five reverse stock split

Employment Agreements

We do not have any employment agreements with any of our officers.

Payments Upon Termination Or Change In Control

There are no understandings or agreements known by management at this time which would result in a change in control.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information as of March 24, 2011 by (i) all persons who are known by us to beneficially own more than 5% of our outstanding shares of common stock, and (ii) by each director, director nominee, and Named Executive Officer and (iii) by all executive officers and directors as a group:

Security Ownership of Certain Beneficial Owners

Name and Address of Beneficial Owner	Positions and Offices Held		Shares Beneficially Owned (1)				Percent of Class (1)
Naeem Tyab	Chairman of  the Board			747,778	(2)			6.6	%
Gary Countryman	Director			0	(3)
Henry Kloepper	Director			0	(4)
Timothy J. Turner	CEO &  President			24,000	(5)
Parvez Tyab 1112 – 207 West Hasting Street Vancouver, B.C., Canada V6B 1H7	Shareholder			2,000,000	(8)			17.4	%
All Officers and Directors as a group (6 persons)				771,778				6.6	%

 

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(1)

Calculated pursuant to rule 13d-3(d) of the Exchange Act.  Beneficial ownership is calculated based on 11,513,198 ( On February 27, 2012 in accordance with the one-for-five reverse stock split the number of shares outstanding was reduced from 57,565,987 to 11,513,198) sh ares of Common Stock issued and outstanding on a fully diluted basis as of March 24, 2011.  Unless otherwise stated below, each such person has sole voting and investment power with respect to all such shares.  Under Rule 13d-3(d) of the Exchange Act, shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but are not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. On February 27, 2012 , in accordance with the five-for-one reverse stock split the number of options has been adjusted to 570,000 with an exercise price of $0.25 to reflect the effect of the reverse split.

(2)

Naeem Tyab has the right to acquire 50,000 shares pursuant to an option grant on October 22, 2010.  Prior rights to acquire 1,000,000 shares pursuant to an option grant on August 8, 2008 have been cancelled.  Subsequent to the year ended December 31, 2010 Mr. Tyab resigned as President and was appointed Chairman of the Board.

(3)	Gary Countryman has the right to acquire 80,000 shares pursuant to an option grant on October 22, 2010.

(4)	Henry Kloepper has the right to acquire 60,000 shares pursuant to an option grant on October 22, 2010.

(5)	Timothy J. Turner has the right to acquire 100,000 shares pursuant to an option grant on October 22, 2010.  Subsequent to the year ended December 31, 2010 Mr. Turner was appointed President and Chief Executive of Operations.

(6)

John Masters has the right to acquire 100,000 shares pursuant to an option grant on October 22, 2010.  Subsequent to December 31, 2010 Mr. Masters resigned as Chairman of the Board and became Chairman of our advisory committee.  Mr. Master has since resigned this position, effective December 31, 2011.

(7)	Ernie Pratt rights to acquire 50,000 shares pursuant to an option grant on August 8, 2008 have been cancelled.

(8)	Includes 1,8000,000 shares held in the name of Parvez Tyab and 200,000 held by Mogul Energy Ltd., which shares Mr. P. Tyab is deemed to beneficially own.

Securities Authorized for Issuance Under Equity Compensation Plans

We adopted a 2007 Stock Incentive Plan (the “Plan”) which has not previously been approved by our shareholders.  The Plan provides for the issuance of options to purchase 4,000,000 shares of our common stock at an exercise price of $0.30.  As of December 31, 2008, we issued options to purchase 2,250,000 shares under the Plan, and options to purchase 1,750,000 shares of common stock remain available for future issuance under the Plan.  Options awarded under the Plan vest over one-year.  The options awarded by us to date were all made on August 8, 2007, and expire on August 7, 2012.

On October 22, 2010, 2,250,000 the previously granted options were cancelled, and 2,850,000 fully vested stock options were granted to directors, officers, employees and contractors of the Company.  These options will expire on October 22, 2015.  The  number of options has been reduced to 570,000 and the exercise price of the options under the Plan have been revised to $0.in accordance to the reverse split..

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Transactions with Related Persons, Promoters, and Certain Control Persons

The following “Certain Relationships and Related Transactions” represent material transactions in which any related person had or will have a direct or indirect material interest, which are known to the our current management team.  There may however be various other material transactions regarding the Company which our current management is not aware of.  We have no policy regarding entering into transactions with affiliated parties, except as described in our Code of Ethics.

 

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On January 26, 2011, we entered into a Stafford Area Participation Agreement (the “Agreement”) between the Company and Aura Oil Holdings Ltd. (“Aura”), a corporation organized under the laws of Bermuda. Pursuant to the terms of the Agreement, Aura purchased an 8.3333% interest in the Company’s oil and gas leases, leasehold rights, and rights to participate in the development of oil, gas and other related substances in certain of the lands leased by the Company in Jackson County, Texas for a sum of $75,521.  Mr. Naeem Tyab, the Company’s President as of the date of the Agreement, is the sole shareholder of Aura. The Company believes that the terms of the Agreement are comparable to the terms that have been agreed to in an arm’s length transaction.

We have received $886,747 the form of a non-interest bearing promissory note payable on demand from a Aura  In addition, we received  $35,008for out of pocket expenses incurred by Mr. Tyab on behalf of the Company.  This amount has been converted to a non-interest bearing promissory note payable on demand.  Both notes are have the option of repayment in common stock of the Company based on the average trading price for the prior 30 days prior to conversion.

We sub leases office space in our Toronto location to a related party with directors in common.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES.

Audit Fees

Our independent registered public accounting firm billed us $53,000 and $52,900 for the fiscal years ended December 31, 2011, and 2010, respectively, for audit related professional services.  These services included audit of our annual financial statements, review of our quarterly interim financial statements on Form 10-Q, and services in connection with statutory and regulatory filings.  This category also includes the review of interim financial statements and services in connection with registration statements and other filings with the Securities and Exchange Commission.

Tax Fees

The aggregate fees billed by our independent registered public accounting firm for professional services rendered for tax compliance, tax advice, and tax planning services were $1,500 and $1,500  for the fiscal year ended December 31, 2011 and 2010, respectively.

All Other Fees

Our independent registered public accounting firm did not bill us for other services during fiscal years ended December 31, 2011 and 2010.

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)	Financial Statements and Schedules

The financial statements are set forth under Item 8 of this Annual Report on Form 10-K.  Financial statement schedules have been omitted because they are either not required, not applicable, or the information is otherwise included.

 

(b)

Exhibits

 

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Exhibit Number		Description
(3)		(i) Articles of Incorporation; and (ii) Bylaws
3.5		Restated Certificate of Incorporation (incorporated by reference to our Form 8-K filed February 27, 2012)
(4)		Instruments Defining the Rights of Security Holders
4.1		2007 Stock Incentive Plan (incorporated by reference from our Form 8-K filed on August 10, 2007)
(10)		Material Contracts
10.2		Form of Stock Option Agreement (incorporated by reference from our Form 8-K filed on August 10, 2007)
10.3		Stafford Area Participation Agreement – Aura Oil Holdings Ltd. (incorporated by reference from our Current Report on Form 8-K filed on March 21, 2011)
(31)		Certifications
31.1		Certification of Principal Executive Officer pursuant to Section 302
31.2		Certification of Principal Financial and Accounting Officer pursuant to Section 302
32.1		Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 1350
(101)		XBRL Instance Documents
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MOGUL ENERGY INTERNATIONAL, INC.

/s/ Timothy J. Turner

By: Timothy J. Turner, President

(Chief Executive Officer)

Dated:  April 11, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Timothy J. Turner

By: Timothy J. Turner, Director and President

(Chief Executive Officer)

/s/ Naeem Tyab

By: Naeem Tyab, Chairman of the Board

/s/ Gary Countryman

By: Gary Countryman, Director

Dated:  April 11, 2012

 

 

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