UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 (Mark
One)
 
 [X]           ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
fiscal year ended June
30, 2008
 or
 
 [  ]         TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 Commission
file number 333-137293
 
 PHOENIX
ENERGY RESOURCES, INC.
 (Exact
name of registrant as specified in its charter)
 
 Nevada
              
              20-5408832(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 1001
      Bayhill Drive, 2nd
      Floor – Suite 200San
      Bruno,
      California                                                                                                                                                                                                       
      94066(Address
      of principal executive
      offices)                                                                                                                                                                           (Zip
      Code)
 
 Registrant’s
telephone number, including area code (650)
616-4123
 
 Securities
registered pursuant to Section 12(b) of the Exchange Act: None
  Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par
value
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 [  ]Yes                      [X]No
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
 [  ] Yes                                [X]No
 
 Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X]Yes   [  ]No
 
 Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer [  ]                                                                                                                          Accelerated
filer [  ]
 
 Non-accelerated
filer [  ]  (Do
not check if a smaller reporting company) Smaller
reporting company [X]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes  [  ]      No
[X]
 
 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed fiscal year:
$10,000,000.
  Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 62,500,000 shares of common
stock, $0.001 par value, outstanding on November 6, 2008.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
 
 NONE.
  
  1
  PHOENIX
ENERGY RESOURCE CORPORATION
 FORM
10-K
 TABLE OF CONTENTS
 
 PagePART
      I
              
              3Items
      1 and 2 Business and Properties
              
              7Item
      1A. Risk Factors
              
              12Item
      1B.Unresolved
      Staff Comments
              
              12Item
      3. Legal Proceedings
              
              12Item
      4. Submission of Matters to a Vote of Security
Holders
              
              12PART
      II
              
              13Item
      5.Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of
                Equity
      Securitie
              
              13Item
      6.Selected
      Financial Data
              
              13Item
      7.Plan of Operations
              
              13Item
      7A.Quantitative and Qualitative Disclosures about Market
    Risk
              
              16Item
      8. Financial Statements and Supplementary Data
              
              16Item
      9.Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
              
              16Item
      9A(T).Controls and Procedures
              
              16Item
      9B. Other Information
              
              16Part
      III
              
              17Item
      10. Directors, Executive Officers and Corporate
      Governance
              
              18Item
      11. Executive Compensation
              
              18Item
      12.Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
              
              18Item
      13.Certain Relationships and Related Transactions, and Director
      Independence
              
              18Item
      14. Principal Accountant Fees and Services
              
              18Part
      IV
              
              19Item
      15. Exhibits, Financial Statement Schedules
              
              19
 
 2
 Table
of Contents
 
 FORWARD-LOOKING
STATEMENTS
 
 This
report contains forward-looking statements. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond our
control. All statements, other than statements of historical fact, contained in
this report, including statements regarding future events, our future financial
performance, business strategy and plans and objectives of management for future
operations, are forward-looking statements. We have attempted to identify
forward-looking statements by terminology including “anticipates,” “believes,”
“can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,”
“potential,” “predicts,” “should” or “will” or the negative of these terms or
other comparable terminology. Although we do not make forward-looking statements
unless we believe we have a reasonable basis for doing so, we cannot guarantee
their accuracy. These statements are only predictions and involve known and
unknown risks, uncertainties and other factors, including the risks outlined
under “Risk Factors” or elsewhere in this report, which may cause our or our
industry’s actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. Moreover,
we operate in a very competitive and rapidly changing environment. New risks
emerge from time to time and it is not possible for us to predict all risk
factors, nor can we address the impact of all factors on our business or the
extent to which any factor, or combination of factors, may cause our actual
results to differ materially from those contained in any forward-looking
statements. The factors impacting these risks and uncertainties include,
but are not limited to:
 
 ·
              estimated
      quantities and quality of oil and natural gas
  reserves;
 ·
              fluctuations
      in the price of oil and natural
gas;
 ·
              inability
      to efficiently manage our
operations;
 ·
              the
      inability of management to effectively implement our strategies and
      business plans;
 ·
              potential
      default under our secured obligations or material debt
      agreements;
 ·
              approval
      of certain parts of our operations by state
  regulators;
 ·
              inability
      to hire or retain sufficient qualified operating field
      personnel;
 ·
              inability
      to attract and obtain additional development
  capital;
 ·
              increases
      in interest rates or our cost of
borrowing;
 ·
              deterioration
      in general or regional (especially Southern Kentucky) economic
      conditions;
 ·
              adverse
      state or federal legislation or regulation that increases the costs of
      compliance, or adverse findings by a regulator with respect to existing
      operations;
 ·
              the
      occurrence of natural disasters, unforeseen weather conditions, or other
      events or circumstances that could impact our operations or could impact
      the operations of companies or contractors we depend upon in our
      operations;
 ·
              inability
      to acquire mineral leases at a favorable economic value that will allow us
      to expand our development efforts;
 ·
              inability
      to achieve future sales levels or other operating
  results;
 ·
              adverse
      state or federal legislation or regulation that increases the costs of
      compliance, or adverse findings by a regulator with respect to existing
      operations; and
 ·
              changes
      in U.S. GAAP or in the legal, regulatory and legislative environments in
      the markets in which we operate.
 
 You
should not place undue reliance on any forward-looking statement, each of which
applies only as of the date of this report. Except as required by law, we
undertake no obligation to update or revise publicly any of the forward-looking
statements after the date of this report to conform our statements to actual
results or changed expectations.
 
 All
references in this report to “we,” “us,” “our,” “company” and “Phoenix Energy”
refer to Phoenix Energy Resource Corporation, unless the context requires
otherwise. We report our financial information on the basis of a June 30, fiscal
year end. We have provided definitions for the oil and natural gas industry
terms used in this report in the “Glossary” beginning on page 22 of this
report.
 
 AVAILABLE
INFORMATION
 
 We file
annual, quarterly and other reports and other information with the
SEC.  You can read these SEC filings and reports over the Internet at
the SEC’s website at www.sec.gov.  You can also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 100 F Street, NE, Washington, DC 20549 on official business days between
the hours of 10:00 am and 3:00 pm.  Please call the SEC at (800)
SEC-0330 for further information on the operations of the public reference
facilities. We will provide a copy of our annual report to security holders,
including audited financial statements, at no charge upon receipt to of a
written request to us at Phoenix Energy Resource Corporation, 1001 Bayhill
Drive, 2nd Floor – Suite 200, San Bruno, California 94066.
 
 INDUSTRY
AND MARKET DATA
 
 The
market data and certain other statistical information used throughout this
report are based on independent industry publications, government publications,
reports by market research firms or other published independent sources. In
addition, some data are based on our good faith estimates.
 
 PART
I
  Items
1 and 2. Business and Properties.
  Our Business
 
 Phoenix
Energy, formerly known as Exotacar, Inc., is an energy acquisition, exploration
and development company. In February of 2008, Exotacar, Inc., changed the focus
of its business plan from the development of online exotic car sales and entered
into the oil and natural gas industry. In conjunction with the change, the
company was renamed Phoenix Energy Resource Corporation.
 
 Our
principal strategy is to focus on the acquisition of oil and natural gas mineral
leases that ideally have existing production and cash flow. Once acquired,
we will implement an accelerated development program utilizing capital
resources, a regional operating focus, an experienced management and technical
team, and enhanced recovery technologies to attempt to increase production and
increase returns for our stockholders. Our oil and natural gas acquisition and
development activities are currently focused in Southern Kentucky.
 
 The
Opportunity in Kentucky
 
 According
to the Kentucky Geological Survey, the Southern region of Kentucky is
historically one of the domestic oil producing regions in the United States. In
addition to historical oil and natural gas production levels in the region, we
believe that a confluence of the following factors in Southern Kentucky and the
surrounding region make it an attractive area for oil and natural gas
development activities:
 
 ·
              Traditional Roll-Up
      Strategy.  We are seeking to employ a traditional roll-up
      strategy utilizing a combination of capital resources, operational and
      management expertise, technology, and strategic partnerships which have
      experience operating in the region.
 
 ·
              Numerous Acquisition
      Opportunities.  There are many small producers and owners
      of mineral rights in the region, which afford us opportunities to pursue
      negotiated lease transactions verses having to competitively bid on
      fundamentally sound assets.
 
 ·
              Fragmented Ownership
      Structure.  There are opportunities to acquire producing
      properties at attractive prices due to the current inefficient and
      fragmented ownership structure.
 
 Our Properties
 
 The table
below summarizes our acreage by lease as of September 30 2008.
 
 Lease
      Name
              
              Undeveloped
      AcreageGross
              
              
              Net(1)Cornell
              
              
              225
              
              
              
              202Cornell/Robbins
              
              
              258
              
              
              
              232Total
              
              
              483
              
              
              
              434
 (1)
              Net
      acreage is based on our net working interest as of September 30
      2008.
 
 Our Business
Strategy
 
 Our goal
is to increase stockholder value by finding and developing oil and natural gas
reserves at costs that provide an attractive rate of return on our investments.
The principal elements of our business strategy are:
 
 ·
              Develop Our Existing
      Properties. We intend to identify further drilling
      locations on our properties by utilizing digital spectral satellite maps
      among other accepted technologies.   We have located a
      company in West Virginia providing such service.  The structure
      and the continuous oil accumulation in Southern Kentucky, and the expected
      long-life production and reserves of our properties, are anticipated to
      enhance our opportunities for long-term
  profitability.
 
 ·
              Maximize Operational
      Control.  We seek to operate our properties and maintain a
      substantial working interest. We believe the ability to control our
      drilling inventory will provide us with the opportunity to more
      efficiently allocate capital, manage resources, control operating and
      development costs, and utilize our experience and knowledge of oilfield
      technologies.
 
 ·
              Pursue Selective Acquisitions
      and Joint Ventures.  Due to our local presence in
      Southern Kentucky, we believe we are well-positioned to pursue selected
      acquisitions from the fragmented and capital-constrained owners of mineral
      rights throughout Southern
Kentucky.
 
 ·
              Reduce Unit Costs Through
      Economies of Scale and Efficient Operations.  As we
      continue to increase our oil production and develop our existing
      properties, we expect that our unit cost structure will benefit from
      economies of scale. In particular, we anticipate reducing unit costs by
      greater utilization of our existing infrastructure over a larger number of
      wells.
 
 3
 Table
of Contents
  Our Competitive
Strengths
 
 We have a
number of strengths that we believe will help us successfully execute our
strategy:
 
 ·
              Acquisition and Development
      Strategy.  We have what we believe to be a relatively
      low-risk acquisition and development strategy compared to some of our
      competitors. We will preferably acquire properties that have
      proven current production, with a projected pay-back within a relatively
      short period of time, and with potential growth and upside in terms of
      development, enhancement and efficiency. We also plan to minimize the risk
      of natural gas and oil price volatility by developing a sales portfolio of
      pricing for our production as we continue to expand and as market
      conditions permit.
 
 ·
              Significant Production Growth
      Opportunities.  We have acquired an attractive acreage
      position with favorable lease terms in a region with historical
      hydrocarbon production. Based on drilling success within our acreage
      position, we expect to increase our reserves, production and cash
      flow.
 
 ·
              ExperiencedManagement Team and Strategic
      Partner with Strong Technical
      Capability.  Our CEO has limited experience in the energy
      industry, including energy trading and production. However,
      our strategic partner JMACK Energy, LLC will work closely with
      management during the initial phases of any major project to ensure its
      feasibility and to consider the appropriate recovery techniques to be
      utilized.
 
 ·
              Incentivized
      Management. The compensation
      arrangements for our executive officers are weighted toward future
      performance.
  Company History
 
 Phoenix
Energy Resource Corporation was incorporated in the State of Nevada on June 3,
2005 as Exotacar, Inc. and focused on the development of online exotic
automobile sales. This business plan was ultimately abandoned following its
unsuccessful implementation. On February 2, 2008 Helvetic Capital Ventures AG,
Switzerland acquired 64% of the total outstanding shares of the Company
effectuating a change in control. Following the acquisition, we transitioned the
business plan focusing on energy resources. Subsequent to the change in
control, we changed our name to “Phoenix Energy Resource Corporation”. All of
our current operations are conducted through Phoenix Energy Resource
Corporation.
 
 Significant
Developments in Fiscal 2008 and Fiscal 2009 to Date
 
 The
following is a brief description of our most significant corporate developments
that occurred in fiscal 2008 and fiscal 2009 to date:
 
 ·
              In
      April and June of 2007, we completed a financing in which we issued
      22,500,000 shares of our common stock in return for
  $45,000
 
 ·
              In
      February of 2008, 64% of our Company was acquired by Helvetic Capital
      Ventures AG. and we changed our
name
 
 ·
              In
      March of 2008, we entered into an employment agreement with our new Chief
      Executive Officer, Mr. Rene Soullier for an initial term of one year with
      annual compensation of $36,000.
 
 ·
              In
      June of 2008, we amended our articles of incorporation whereby we changed
      our name from Exotacar, Inc to Phoenix Energy Resource Corporation;
      authorized a new class of 5,000,000 shares of preferred, $0.001 par value
      stock and effectuated a 50:1 forward split of our common
      stock.
 
 ·
              In
      May 2008, we issued a promissory note to Seymore Investments Limited in
      the amount of $150,000. The note bears interest at a rate of 10% per annum
      and matures on May 20, 2011.
 
 ·
              In
      September of 2008, we acquired mineral leases representing a total of 434
      net acres located in Allen County
Kentucky.
 
 ·
              In
      September of 2008, we entered into an Operating Agreement with JMACK
      Energy, LLC (“JMACK”), pursuant to which we granted to JMACK a 5%
      overriding royalty interest of all oil and/or gas produced from all
      mineral leases currently held by Phoenix
Energy.
 
 Relationship withJMACK Energy, LLC
 
 In
September of 2008, we entered into an operating agreement with Mark
Cornell, managing member of JMACK Energy, LLC. This agreement provides that
JMACK will provide drilling management and operation of all wells located on our
existing leases in Allen County Kentucky. Further, JMACK will consult with us at
an executive level regarding field development, acquisition evaluation,
identification of additional acquisition opportunities and overall business
strategy. JMACK has been in the oil exploration and production business since
its incorporation this year and Mark Cornell has been in the business for over
25 years.
 
 We
believe that this relationship provides us with a competitive advantage when
evaluating and sourcing acquisition opportunities. As a long-term producer and
oil field service provider, JMACK Energy’s managing member has existing
relationships with numerous oil and natural gas producers in Southern Kentucky
and is generally aware of existing opportunities to enhance many of these
properties through the deployment of capital, and application of enhanced
drilling and production technologies. We believe that we will be able to
leverage the experience and relationships of Mr. Cornell to compliment our
business strategy. To date, Mr. Cornell has helped us identify and evaluate all
of our property acquisitions, and has been instrumental in the creation of our
development plans of these properties.
 
 One of
our fundamental goals with respect to the operating arrangement is to align the
interests of JMACK with those of ours as much as possible. As a result, the
operating agreement provides that we will pay a 5% overriding royalty interest
on all oil and gas produced from the aforementioned mineral leases.
 
 Title to
Properties
 
 Our
properties are subject to customary royalty interests, liens under indebtedness,
liens incident to operating agreements and liens for current taxes and other
burdens, including mineral encumbrances and restrictions. Further, our debt is
secured by first and second liens on substantially all of our assets. We do
not believe that any of these burdens materially interferes with the use of our
properties in the operation of our business.
 
 We
believe that we have satisfactory title to or rights in all of our producing
properties. As is customary in the natural gas and oil industry, minimal
investigation of title is made at the time of acquisition of undeveloped
properties. In most cases, we investigate title and obtain title opinions from
counsel or have title reviewed by professional landsmen only when we acquire
producing properties or before we begin drilling operations. However, any
acquisition of producing properties without obtaining title opinions are subject
to a greater risk of title defects.
 
 4
 Table
of Contents
  Saleof Natural Gas and
Oil
 
 We do not
intend to refine our natural gas or oil production. We expect to sell all or
most of our production to a small number of purchasers in a manner consistent
with industry practices at prevailing rates by means of long-term and short-term
sales contracts, some of which may have fixed price components. Under current
conditions, we should be able to find other purchasers, if
needed.
 
 Secondary Recovery and Other
Production Enhancement Strategies
 
 When an
oil field is first produced, the oil typically is recovered as a result of
natural pressure within the producing formation, often assisted by pumps of
various types. The only natural force present to move the crude oil to the
wellbore is the pressure differential between the higher pressure in the
formation and the lower pressure in the wellbore. At the same time, there are
many factors that act to impede the flow of crude oil, depending on the nature
of the formation and fluid properties, such as pressure, permeability, viscosity
and water saturation. This stage of production is referred to as “primary
production”.
 
 Many, but
not all, oil fields are amenable to assistance from a waterflood, a form of
“secondary recovery,” which is used to maintain reservoir pressure and to help
sweep oil to the wellbore. In a waterflood, certain wells are used to inject
water into the reservoir while other wells are used to recover the oil in
place. We anticipate waterflooding to be our secondary recovery technique for
the majority of our oil field projects.
 
 As the
waterflood matures, the fluid produced contains increasing amounts of water and
decreasing amounts of oil. Surface equipment is used to separate the oil from
the water, with the oil going to pipelines or holding tanks for sale and the
water being recycled to the injection facilities.
 
 In
addition, we may utilize 3-D seismic analysis, horizontal drilling, and other
technologies and production techniques to improve drilling results and
ultimately enhance our production and returns. We also believe use of such
technologies and production techniques in exploring for, developing and
exploiting oil and natural gas properties will help us reduce drilling risks,
lower finding costs and provide for more efficient production of oil and natural
gas from our properties.
 
 Markets and
Marketing
 
 The
natural gas and oil industry has experienced rising and volatile prices in
recent years. As a commodity, global natural gas and oil prices respond to
macro-economic factors affecting supply and demand. In particular, world oil
prices have risen in response to political unrest and supply uncertainty in
Iraq, Venezuela, Nigeria and Iran, and increasing demand for energy in
rapidly growing economies, notably India and China. Due to rising world prices
and the consequential impact on supply, North American prospects have become
more attractive. Escalating conflicts in the Middle East and the ability of
OPEC to control supply and pricing are some of the factors negatively impacting
the availability of global supply. In contrast, increased costs of steel and
other products used to construct drilling rigs and pipeline infrastructure, as
well as higher drilling and well-servicing rig rates, negatively impact domestic
supply.
 
 Our
market is affected by many factors beyond our control, such as the availability
of other domestic production, commodity prices, the proximity and capacity of
natural gas and oil pipelines, and general fluctuations of global and domestic
supply and demand. Although we have entered into one sales contract with
Shell at this time, we do not anticipate difficulty in finding additional
sales opportunities, as and when needed.
 
 Natural
gas and oil sales prices are negotiated based on factors such as the spot price
for natural gas or posted price for oil, price regulations, regional price
variations, hydrocarbon quality, distances from wells to pipelines, well
pressure, and estimated reserves. Many of these factors are outside our control.
Natural gas and oil prices have historically experienced high volatility,
related in part to ever-changing perceptions within the industry of future
supply and demand.
 
 Competition
 
 The
natural gas and oil industry is intensely competitive and, as an early-stage
company, we must compete against larger companies that may have greater
financial and technical resources than we do and substantially more experience
in our industry. These competitive advantages may better enable our competitors
to sustain the impact of higher exploration and production costs, natural gas
and oil price volatility, productivity variances between properties, overall
industry cycles and other factors related to our industry. Their advantage may
also negatively impact our ability to acquire prospective properties, develop
reserves, attract and retain quality personnel and raise capital.
 
 Research
and Development Activities
 
 We have not spent any material amount
of time in the last fiscal year on research and development
activities.
 
 Governmental
Regulations
 
 Regulation of Oil and Natural Gas
Production.  Our oil and natural gas exploration, production
and related operations, when developed, are subject to extensive rules and
regulations promulgated by federal, state, tribal and local authorities and
agencies. For example, some states in which we may operate, including Kentucky,
require permits for drilling operations, drilling bonds and reports concerning
operations and impose other requirements relating to the exploration and
production of oil and natural gas. Such states may also have statutes or
regulations addressing conservation matters, including provisions for the
unitization or pooling of oil and natural gas properties, the establishment of
maximum rates of production from wells, and the regulation of spacing, plugging
and abandonment of such wells. Failure to comply with any such rules and
regulations can result in substantial penalties. Moreover, such states may place
burdens from previous operations on current lease owners, and the burdens could
be significant. The regulatory burden on the oil and natural gas industry will
most likely increase our cost of doing business and may affect our
profitability. Although we believe we are currently in substantial compliance
with all applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, we are unable to predict the future cost or
impact of complying with such laws. Significant expenditures may be required to
comply with governmental laws and regulations and may have a material adverse
effect on our financial condition and results of operations.
 
 Federal Regulation of Natural
Gas.  The Federal Energy Regulatory Commission (“FERC”)
regulates interstate natural gas transportation rates and service conditions,
which may affect the marketing of natural gas produced by us, as well as the
revenues that may be received by us for sales of such production. Since the
mid-1980’s, FERC has issued a series of orders, culminating in Order Nos. 636,
636-A and 636-B (“Order 636”), that have significantly altered the marketing and
transportation of natural gas. Order 636 mandated a fundamental restructuring of
interstate pipeline sales and transportation service, including the unbundling
by interstate pipelines of the sale, transportation, storage and other
components of the city-gate sales services such pipelines previously performed.
One of FERC’s purposes in issuing the order was to increase competition within
all phases of the natural gas industry. The United States Court of Appeals for
the District of Columbia Circuit largely upheld Order 636 and the Supreme Court
has declined to hear the appeal from that decision. Generally, Order 636 has
eliminated or substantially reduced the interstate pipelines’ traditional role
as wholesalers of natural gas in favor of providing only storage and
transportation service, and has substantially increased competition and
volatility in natural gas markets.
 
 The price
we may receive from the sale of oil and natural gas liquids will be affected by
the cost of transporting products to markets. Effective January 1, 1995, FERC
implemented regulations establishing an indexing system for transportation rates
for oil pipelines, which, generally, would index such rates to inflation,
subject to certain conditions and limitations. We are not able to predict with
certainty the effect, if any, of these regulations on our intended operations.
However, the regulations may increase transportation costs or reduce well
head prices for oil and natural gas liquids.
 
 5
 Table
of Contents
  Environmental
Matters
 
 Our
operations and properties are subject to extensive and changing federal, state
and local laws and regulations relating to environmental protection, including
the generation, storage, handling, emission, transportation and discharge of
materials into the environment, and relating to safety and health. The recent
trend in environmental legislation and regulation generally is toward stricter
standards, and this trend will likely continue.
 
 These
laws and regulations may:
 
 ·
              require
      the acquisition of a permit or other authorization before construction or
      drilling commences and for certain other
  activities;
 
 ·
              limit
      or prohibit construction, drilling and other activities on certain lands
      lying within wilderness and other protected areas;
  and
 
 ·
              impose
      substantial liabilities for pollution resulting from its operations, or
      due to previous operations conducted on any leased
  lands.
 
 The
permits required for our operations may be subject to revocation, modification
and renewal by issuing authorities. Governmental authorities have the power to
enforce their regulations, and violations are subject to fines or injunctions,
or both. In the opinion of management, we are in substantial compliance with
current applicable environmental laws and regulations, and have no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on us,
as well as the oil and natural gas industry in general.
 
 The
Comprehensive Environmental, Response, Compensation, and Liability Act, as
amended (“CERCLA”), and comparable state statutes impose strict, joint and
several liability on owners and operators of sites and on persons who disposed
of or arranged for the disposal of “hazardous substances” found at such sites.
It is not uncommon for the neighboring land owners and other third parties to
file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment. The Federal Resource
Conservation and Recovery Act, as amended (“RCRA”), and comparable state
statutes govern the disposal of “solid waste” and “hazardous waste” and
authorize the imposition of substantial fines and penalties for noncompliance.
Although CERCLA currently excludes petroleum from its definition of “hazardous
substance,” state laws affecting our operations may impose clean-up liability
relating to petroleum and petroleum related products. In addition, although RCRA
classifies certain oil field wastes as “non-hazardous,” such exploration and
production wastes could be reclassified as hazardous wastes thereby making such
wastes subject to more stringent handling and disposal
requirements.
 
 The
Federal Water Pollution Control Act of 1972, as amended (“Clean Water Act”), and
analogous state laws impose restrictions and controls on the discharge of
pollutants into federal and state waters. These laws also regulate the discharge
of storm water in process areas. Pursuant to these laws and regulations, we are
required to obtain and maintain approvals or permits for the discharge
of wastewater and storm water and develop and implement spill prevention,
control and countermeasure plans, also referred to as “SPCC plans,” in
connection with on-site storage of greater than threshold quantities of oil. The
EPA issued revised SPCC rules in July 2002 whereby SPCC plans are subject to
more rigorous review and certification procedures. We believe that our
operations are in substantial compliance with applicable Clean Water Act and
analogous state requirements, including those relating to wastewater and storm
water discharges and SPCC plans.
 
 The
Endangered Species Act, as amended (“ESA”), seeks to ensure that activities do
not jeopardize endangered or threatened animal, fish and plant species, nor
destroy or modify the critical habitat of such species. Under ESA, exploration
and production operations, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or its habitat. ESA provides for
criminal penalties for willful violations of the Act. Other statutes that
provide protection to animal and plant species and that may apply to our
operations include, but are not necessarily limited to, the Fish and Wildlife
Coordination Act, the Fishery Conservation and Management Act, the Migratory
Bird Treaty Act and the National Historic Preservation Act. Although we believe
that our operations will be in substantial compliance with such statutes, any
change in these statutes or any reclassification of a species as endangered
could subject us to significant expenses to modify our operations or could force
us to discontinue certain operations altogether.
 
 Personnel
 
 As of
June 30 2008, we had one full-time employee. As drilling production activities
increase, we intend to hire additional technical, operational and administrative
personnel as appropriate. We are using and will continue to use the services of
independent consultants and contractors to perform various professional
services, particularly in the area of land services, reservoir engineering,
geology drilling, water hauling, pipeline construction, well design, well-site
monitoring and surveillance, permitting and environmental assessment. We believe
that this use of third-party service providers may enhance our ability to
contain capital costs, general and administrative expenses.
 
 Facilities
 
 We
currently maintain an office at 1001 Bayhill Drive, 2nd
floor-Suite 200, San Bruno, California 94066. This space is leased pursuant to a
one year agreement, which expires on February 1, 2009.
  GLOSSARY
 
 Term
              
              DefinitionBarrel
      (bbl)
              
              The
      standard unit of measurement of liquids in the petroleum industry, it
      contains 42 U.S. standard gallons. Abbreviated to
“bbl”.Basin
              
              A
      depression in the crust of the Earth, caused by plate tectonic activity
      and subsidence, in which sediments accumulate. Sedimentary basins vary
      from bowl-shaped to elongated troughs. Basins can be bounded by faults.
      Rift basins are commonly symmetrical; basins along continental margins
      tend to be asymmetrical. If rich hydrocarbon source rocks occur in
      combination with appropriate depth and duration of burial, then a
      petroleum system can develop within the basin.BOPD
              
              Abbreviation
      for barrels of oil per day, a common unit of measurement for volume of
      crude oil. The volume of a barrel is equivalent to 42 U.S. standard
      gallons.Carried
      Working Interest
              
              The
      owner of this type of working interest in the drilling of a well incurs no
      capital contribution requirement for drilling or completion costs
      associated with a well and, if specified in the particular contract, may
      not incur capital contribution requirements beyond the completion of the
      well.Completion
      / Completing
              
              A
      well made ready to produce oil or natural gas.Costless
      Collar
              
              When
      viewed against an appropriate index, the parties agree to a maximum price
      (call option) and a minimum price (put option), through a
      financially-settled collar. If the average monthly prices are within the
      collar range there will be no monthly settlement. However, if average
      monthly prices fluctuate outside the collar, the parties settle the
      difference in cash.Development
              
              The
      phase in which a proven oil or natural gas field is brought into
      production by drilling development wells.Development
      Drilling
              
              Wells
      drilled during the Development phase.Division
      order
              
              A
      directive signed by the royalty owners verifying to the purchaser or
      operator of a well the decimal interest of production owned by the royalty
      owner. The Division Order generally includes the decimal interest, a legal
      description of the property, the operator’s name, and several legal
      agreements associated with the process. Completion of this step generally
      precedes placing the royalty owner on pay status to begin receiving
      revenue payments.Drilling
              
              Act
      of boring a hole through which oil and/or natural gas may be
      produced.Dry
      Wells
              
              A
      well found to be incapable of producing hydrocarbons in sufficient
      quantities such that proceeds from the sale of such production exceed
      production expenses and taxes.Exploration
              
              The
      phase of operations which covers the search for oil or natural gas
      generally in unproven or semi-proven territory.Exploratory
      Drilling
              
              Drilling
      of a relatively high percentage of properties which are
      unproven.Farm
      out
              
              An
      arrangement whereby the owner of a lease assigns all or some portion of
      the lease or licenses to another company for undertaking exploration or
      development activity.Field
              
              An
      area consisting of a single reservoir or multiple reservoirs all grouped
      on, or related to, the same individual geological structural feature or
      stratigraphic condition. The field name refers to the surface area,
      although it may refer to both the surface and the underground productive
      formations.Fixed
      price swap
              
              A
      derivative instrument that exchanges or “swaps” the “floating” or daily
      price of a specified volume of natural gas, oil or NGL, over a specified
      period, for a fixed price for the specified volume over the same period
      (typically three months or longer).Gathering
      line / system
              
              Pipelines
      and other facilities that transport oil or natural gas from wells and
      bring it by separate and individual lines to a central delivery point for
      delivery into a transmission line or mainline.Gross
      acre
              
              The
      number of acres in which the Company owns any working
      interest.Gross
      Producing Well
              
              A
      well in which a working interest is owned and is producing oil or natural
      gas or other liquids or hydrocarbons. The number of gross producing wells
      is the total number of wells producing oil or natural gas or other liquids
      or hydrocarbons in which a working interest is owned.Gross
      well
              
              A
      well in which a working interest is owned. The number of gross wells is
      the total number of wells in which a working interest is
      owned.Held-By-Production
      (HBP)
              
              Refers
      to an oil and natural gas property under lease, in which the lease
      continues to be in force, because of production from the
      property.Horizontal
      drilling
              
              A
      drilling technique used in certain formations where a well is drilled
      vertically to a certain depth and then turned and drilled horizontally.
      Horizontal drilling allows the wellbore to follow the desired
      formation.In-fill
      wells
              
              In-fill
      wells refers to wells drilled between established producing wells; a
      drilling program to reduce the spacing between wells in order to increase
      production and recovery of in-place hydrocarbons.Oil
      and Natural Gas Lease
              
              A
      legal instrument executed by a mineral owner granting the right to another
      to explore, drill, and produce subsurface oil and natural gas. An oil and
      natural gas lease embodies the legal rights, privileges and duties
      pertaining to the lessor and lessee.Lifting
      Costs
              
              The
      expenses of producing oil from a well. Lifting costs are the operating
      costs of the wells including the gathering and separating equipment.
      Lifting costs do not include the costs of drilling and completing the
      wells or transporting the oil.Mcf
              
              Thousand
      cubic feet.Mmcf
              
              Million
      cubic feet.Net
      acres
              
              Determined
      by multiplying gross acres by the working interest that the Company owns
      in such acres.Net
      Producing Wells
              
              The
      number of producing wells multiplied by the working interest in such
      wells.Net
      Revenue Interest
              
              A
      share of production revenues after all royalties, overriding royalties and
      other nonoperating interests have been taken out of production for a
      well(s).Operator
              
              A
      person, acting for itself, or as an agent for others, designated to
      conduct the operations on its or the joint interest owners’
      behalf.Overriding
      Royalty
              
              Ownership
      in a percentage of production or production revenues, free of the cost of
      production, created by the lessee, company and/or working interest owner
      and paid by the lessee, company and/or working interest owner out of
      revenue from the well.Pooled
      Unit
              
              A
      term frequently used interchangeably with “Unitization” but more properly
      used to denominate the bringing together of small tracts sufficient for
      the granting of a well permit under applicable spacing
    rules.Proved
      Developed Reserves
              
              Proved
      reserves that can be expected to be recovered from existing wells with
      existing equipment and operating methods. This definition of proved
      developed reserves has been abbreviated from the applicable definitions
      contained in Rule 4-10(a)(2-4) of Regulation S-X.Proved
      Developed Non-Producing
              
              Proved
      developed reserves expected to be recovered from zones behind casings in
      existing wells.Proved
      Undeveloped Reserves
              
              Proved
      undeveloped reserves are the portion of proved reserves which can be
      expected to be recovered from new wells on undrilled proved acreage, or
      from existing wells where a relatively major expenditure is required for
      completion. This definition of proved undeveloped reserves has been
      abbreviated from the applicable definitions contained in Rule 4-10(a)(2-4)
      of Regulation S-X.PV10
              
              PV10
      means the estimated future gross revenue to be generated from the
      production of proved reserves, net of estimated production and future
      development and abandonment costs, using prices and costs in effect at the
      determination date, before income taxes, and without giving effect to
      non-property related expenses, discounted to a present value using an
      annual discount rate of 10% in accordance with the guidelines of the SEC.
      PV10 is a non-GAAP financial measure.Re-completion
              
              Completion
      of an existing well for production from one formation or reservoir to
      another formation or reservoir that exists behind casing of the same
      well.Reservoir
              
              The
      underground rock formation where oil and natural gas has accumulated. It
      consists of a porous rock to hold the oil or natural gas, and a cap rock
      that prevents its escape.Reservoir
      Pressure
              
              The
      pressure at the face of the producing formation when the well is shut-in.
      It equals the shut-in pressure at the wellhead plus the weight of the
      column of oil and natural gas in the well.Roll-Up
      Strategy
              
              A
      “roll-up strategy” is a common business term used to describe a business
      plan whereby a company accumulates multiple small operators in a
      particular business sector with a goal to generate synergies, stimulate
      growth and optimize the value of the individual pieces.Secondary
      Recovery
              
              The
      stage of hydrocarbon production during which an external fluid such as
      water or natural gas is injected into the reservoir through injection
      wells located in rock that has fluid communication with production wells.
      The purpose of secondary recovery is to maintain reservoir pressure and to
      displace hydrocarbons toward the wellbore.
                The
      most common secondary recovery techniques are natural gas injection and
      waterflooding. Normally, natural gas is injected into the natural gas cap
      and water is injected into the production zone to sweep oil from the
      reservoir. A pressure-maintenance program can begin during the primary
      recovery stage, but it is a form of enhanced recovery.Shut-in
      well
              
              A
      well which is capable of producing but is not presently producing. Reasons
      for a well being shut-in may be lack of equipment, market or
      other.Stock
      Tank Barrel or STB
              
              A
      stock tank barrel of oil is the equivalent of 42 U.S. Gallons at 60
      degrees Fahrenheit.Undeveloped
      acreage
              
              Lease
      acreage on which wells have not been drilled or completed to a point that
      would permit the production of commercial quantities of oil and natural
      gas regardless of whether such acreage contains proved
      reserves.Unitize,
      Unitization
              
              When
      owners of oil and/or natural gas reservoir pool their individual interests
      in return for an interest in the overall unit.Waterflood
              
              The
      injection of water into an oil reservoir to “push” additional oil out of
      the reservoir rock and into the wellbores of producing wells. Typically a
      secondary recovery process.Water
      Injection Wells
              
              A
      well in which fluids are injected rather than produced, the primary
      objective typically being to maintain or increase reservoir pressure,
      often pursuant to a waterflood.Water
      Supply Wells
              
              A
      well in which fluids are being produced for use in a Water Injection
      Well.Wellbore
              
              A
      borehole; the hole drilled by the bit. A wellbore may have casing in it or
      it may be open (uncased); or part of it may be cased, and part of it may
      be open. Also called a borehole or hole.Working
      Interest
              
              An
      interest in an oil and natural gas lease entitling the owner to receive a
      specified percentage of the proceeds of the sale of oil and natural gas
      production or a percentage of the production, but requiring the owner of
      the working interest to bear the cost to explore for, develop and produce
      such oil and natural gas.
  6
 Table
of Contents
  Item
1A. Risk Factors.
  
 Risks Associated with Our
Business
 
 We have sustained
losses, which raises doubt as to our ability to successfully develop profitable
business
operations.
 
 Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered in establishing and maintaining a business in the oil and
natural gas industries. There is nothing conclusive at this time on which to
base an assumption that our business operations will prove to be successful or
that we will be able to operate profitably. Our future operating results will
depend on many factors, including:
 
 ·
              the
      future prices of natural gas and
oil;
 ·
              our
      ability to raise adequate working
capital;
 ·
              success
      of our development and exploration
efforts;
 ·
              demand
      for natural gas and oil;
 ·
              the
      level of our competition;
 ·
              our
      ability to attract and maintain key management, employees and
      operators;
 ·
              transportation
      and processing fees on our
facilities;
 ·
              fuel
      conservation measures;
 ·
              alternate
      fuel requirements;
 ·
              government
      regulation and taxation;
 ·
              technical
      advances in fuel economy and energy generation devices;
  and
 ·
              our
      ability to efficiently explore, develop and produce sufficient quantities
      of marketable natural gas or oil in a highly competitive and speculative
      environment while maintaining quality and controlling
    costs.
 
 To
achieve profitable operations, we must, alone or with others, successfully
execute on the factors stated above, along with continually developing ways to
enhance our production efforts. Despite our best efforts, we may not be
successful in our development efforts or obtain required regulatory approvals.
There is a possibility that some of our wells may never produce natural gas
or oil in sustainable or economic quantities.
 
 Natural gas and
oil prices are volatile. This volatility may occur in the future, causing
negative change in cash flows which may result in our inability to cover our
operating or capital expenditures.
 
 Our
future revenues, profitability, future growth and the carrying value of our
properties is anticipated to depend substantially on the prices we may realize
for our natural gas and oil production. Our realized prices may also affect the
amount of cash flow available for operating or capital expenditures and our
ability to borrow and raise additional capital.
 
 Natural
gas and oil prices are subject to wide fluctuations in response to relatively
minor changes in or perceptions regarding supply and demand. Historically, the
markets for natural gas and oil have been volatile, and they are likely to
continue to be volatile in the future. Among the factors that can cause this
volatility are:
 
 ·
              worldwide
      or regional demand for energy, which is affected by economic
      conditions;
 ·
              the
      domestic and foreign supply of natural gas and
  oil;
 ·
              weather
      conditions;
 ·
              natural
      disasters;
 ·
              acts
      of terrorism;
 ·
              domestic
      and foreign governmental regulations and
  taxation;
 ·
              political
      and economic conditions in oil and natural gas producing countries,
      including those in the Middle East and South
  America;
 ·
              impact
      of the U.S. dollar exchange rates on oil and natural gas
      prices;
 ·
              the
      availability of refining capacity;
 ·
              actions
      of the Organization of Petroleum Exporting Countries, or OPEC, and other
      state controlled oil companies relating to oil price and production
      controls; and
 ·
              the
      price and availability of other
fuels.
 
 It is impossible to predict natural gas
and oil price movements with certainty. Lower natural gas and oil prices may not
only decrease our future revenues on a per unit basis but also may reduce the
amount of natural gas and oil that we can produce economically. A substantial or
extended decline in natural gas and oil prices may materially and adversely
affect our future business enough to force us to cease our business operations.
In addition, our reserves, financial condition, results of operations, liquidity
and ability to finance and execute planned capital expenditures will also suffer
in such a price decline. Further, natural gas and oil prices do not necessarily
move together.
 
 Because we face
uncertainties in estimating proven recoverable reserves, you should not place
undue reliance on such reserve information.
 
 There are
numerous uncertainties inherent in estimating quantities of proved reserves and
cash flows from such reserves. Reserve engineering is a subjective process of
estimating underground accumulations of natural gas and oil that can be
economically extracted, which cannot be measured in an exact manner. The
accuracy of an estimate of quantities of reserves, or of cash flows attributable
to these reserves, is a function of the available data, assumptions regarding
future natural gas and oil prices, expenditures for future development and
exploitation activities, and engineering and geological interpretation and
judgment. Reserves and future cash flows may also be subject to material
downward or upward revisions based upon production history, development and
exploitation activities and natural gas and oil prices. Actual future
production, revenue, taxes, development expenditures, operating expenses,
quantities of recoverable reserves and value of cash flows from those reserves
may vary significantly from the assumptions and estimates in our reserve
reports. Any significant variance from these assumptions to actual figures could
greatly affect our estimates of reserves, the economically recoverable
quantities of natural gas and oil attributable to any particular group of
properties, the classification of reserves based on risk of recovery, and
estimates of the future net cash flows. In addition, reserve engineers may make
different estimates of reserves and cash flows based on the same available
data.
 
 The
present value of future net cash flows of proved reserves is not necessarily the
same as the current market value of estimated reserves. Estimated discounted
future net cash flows from proved reserves is based on prices and costs.
However, actual future net cash flows from our natural gas and oil properties
also will be affected by factors such as:
 
 ·
              Geological
      conditions;
 ·
              Assumptions
      governing future oil and natural gas
prices;
 ·
              Amount
      and timing of actual production;
 ·
              Availability
      of funds;
 ·
              Future
      operating and development costs;
 ·
              Actual
      prices we receive for natural gas and
oil;
 ·
              Supply
      and demand for our natural gas and
oil;
 ·
              Changes
      in government regulations and taxation;
and
 ·
              Capital
      costs of drilling new wells.
 
 The
timing of both production and incurrence of expenses in connection with the
development and production of our properties will affect the timing of actual
future net cash flows from proved reserves, and thus their actual present value.
In addition, the 10% discount factor we use when calculating discounted future
net cash flows may not be the most appropriate discount factor based on interest
rates in effect from time to time and risks associated with our business or the
natural gas and oil industry in general.
 
 The SEC
permits natural gas and oil companies, in their public filings, to disclose only
proved reserves that a company has demonstrated by actual production or
conclusive formation tests to be economically and legally producible under
existing economic and operating conditions. The SEC’s guidelines strictly
prohibit us from including “probable reserves” and “possible reserves” in such
filings. We also caution you that the SEC views such “probable” and “possible”
reserve estimates as inherently unreliable and these estimates may be seen as
misleading to investors unless the reader is an expert in the natural gas and
oil industry. Unless you have such expertise, you should not place undue
reliance on these estimates. Potential investors should also be aware that such
“probable” and “possible” reserve estimates will not be contained in any
“resale” or other registration statement filed by us that offers or sells shares
on behalf of purchasers of our common stock and may have an impact on the
valuation of the resale of the shares. Except as required by applicable law, we
undertake no duty to update this information and do not intend to update this
information.
 
 7
 Table
of Contents
  The differential
between the New York Mercantile Exchange, or NYMEX, or other benchmark price of
oil and natural gas and the wellhead price we receive could have a material
adverse effect on our results
of operations, financial condition and cash flows.
 
 The
prices that we receive for our oil and natural gas production sometimes trade at
a discount to the relevant benchmark prices, such as NYMEX, that are used for
calculating hedge positions. The difference between the benchmark price and the
price we receive is called a differential. We cannot accurately predict oil and
natural gas differentials. In recent years for example, production increases
from competing Canadian and Rocky Mountain producers, in conjunction with
limited refining and pipeline capacity from the Rocky Mountain area, have
gradually widened this differential. Increases in the differential between the
benchmark price for oil and natural gas and the wellhead price we receive could
have a material adverse effect on our results of operations, financial condition
and cash flows by decreasing the proceeds we receive for our oil and natural gas
production in comparison to what we would receive if not for the
differential.
 
 The natural gas and
oil business involves numerous uncertainties and operating risks that can
prevent us from realizing profits and can cause substantial
losses.
 
 Our
development, exploitation and exploration activities may be unsuccessful for
many reasons, including weather, cost overruns, equipment shortages and
mechanical difficulties. Moreover, the successful drilling of a natural gas and
oil well does not ensure a profit on investment. A variety of factors, both
geological and market-related, can cause a well to become uneconomical or only
marginally economical. In addition to their cost, unsuccessful wells can hurt
our efforts to replace reserves.
 
 The
natural gas and oil business involves a variety of operating risks,
including:
 
 ·
              unexpected
      operational events and/or
conditions;
 ·
              unusual
      or unexpected geological
formations;
 ·
              reductions
      in natural gas and oil prices;
 ·
              limitations
      in the market for oil and natural
gas;
 ·
              adverse
      weather conditions;
 ·
              facility
      or equipment malfunctions;
 ·
              title
      problems;
 ·
              natural
      gas and oil quality issues;
 ·
              pipe,
      casing, cement or pipeline
failures;
 ·
              natural
      disasters;
 ·
              fires,
      explosions, blowouts, surface cratering, pollution and other risks or
      accidents;
 ·
              environmental
      hazards, such as natural gas leaks, oil spills, pipeline ruptures and
      discharges of toxic gases;
 ·
              compliance
      with environmental and other governmental requirements;
  and
 ·
              uncontrollable
      flows of oil, natural gas or well
fluids.
 
 If we
experience any of these problems, it could affect well bores, gathering systems
and processing facilities, which could adversely affect our ability to conduct
operations. We could also incur substantial losses as a result of:
 
 ·
              injury
      or loss of life;
 ·
              severe
      damage to and destruction of property, natural resources and
      equipment;
 ·
              pollution
      and other environmental damage;
 ·
              clean-up
      responsibilities;
 ·
              regulatory
      investigation and penalties;
 ·
              suspension
      of our operations; and
 ·
              repairs
      to resume operations.
 
 Because
we use third-party drilling contractors to drill our wells, we may not realize
the full benefit of worker compensation laws in dealing with their employees.
Our insurance does not protect us against all operational risks. We do not carry
business interruption insurance at levels that would provide enough funds for us
to continue operating without access to other funds. 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 impact our operations
enough to force us to cease our operations.
 
 Drilling wells is
speculative, often involving significant costs that may be more than our
estimates, and may not
result in any addition to our production or reserves. Any material inaccuracies
in drilling costs, estimates or underlying assumptions will materially affect
our business.
 
 Developing
and exploring for natural gas and oil involves a high degree of operational and
financial risk, which precludes definitive statements as to the time required
and costs involved in reaching certain objectives. The budgeted costs of
drilling, completing and operating wells are often exceeded and can increase
significantly when drilling costs rise due to a tightening in the supply of
various types of oilfield equipment and related services. Drilling may be
unsuccessful for many reasons, including geological conditions, weather, cost
overruns, equipment shortages and mechanical difficulties. Moreover, the
successful drilling of a natural gas or oil well does not ensure a profit on
investment. Exploratory wells bear a much greater risk of loss than development
wells. A variety of factors, both geological and market-related, can cause a
well to become uneconomical or only marginally economic. Our initial drilling
and development sites, and any potential additional sites that may be developed,
require significant additional exploration and development, regulatory approval
and commitments of resources prior to commercial development. If our actual
drilling and development costs are significantly more than our estimated costs,
we may not be able to continue our business operations as proposed and would be
forced to modify our plan of operation.
 
 Development of reserves,
when established, may not occur as scheduled and the actual results may not be
as anticipated. Drilling activity and access to capital may result in downward
adjustments in reserves or higher than anticipated costs. Our estimates
will be based on various assumptions, including assumptions
over which we have control andassumptions required by
the SEC relating to natural gas and oil prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds.We have control over our operations that affect, among other things,
acquisitions and dispositions of properties, availability of funds, use of
applicable technologies, hydrocarbon recovery efficiency, drainage volume and
production decline rates that are part of these estimates and assumptions and
any variance in our operations that affects these items within our control may
have a material effect on reserves.  The process of estimating our
natural gas and oil reserves is anticipated to be extremely complex, and will
require significant decisions and assumptions in the evaluation of available
geological, geophysical, engineering and economic data for each reservoir. Our
estimates may not be reliable enough to allow us to be successful in our
intended business operations. Our actual production, revenues, taxes,
development expenditures and operating expenses will likely vary from those
anticipated. These variances may be material.
 
 A significant
portion of our potential future reserves and our business
plan depend upon secondary recovery techniques to establish production. There
are significant risks associated with such techniques.
 
 We
anticipate that a significant portion of our future reserves and our business
plan will be associated with secondary recovery projects that are either in the
initial stage of implementation or are scheduled for implementation. We
anticipate that secondary recovery will affect our reserves and our business
plan, and the exact project initiation dates and, by the very nature of
waterflood operations, the exact completion dates of such projects are
uncertain. In addition, the reserves and our business plan associated with these
secondary recovery projects, as with any reserves, are estimates only, as the
success of any development project, including these waterflood projects, cannot
be ascertained in advance. If we are not successful in developing a significant
portion of our reserves associated with secondary recovery methods, then the
project may be uneconomic or generate less cash flow and reserves than we had
estimated prior to investing the capital. Risks associated with secondary
recovery techniques include, but are not limited to, the following:
 
 ·
              higher
      than projected operating costs;
 ·
              lower-than-expected
      production;
 ·
              longer
      response times;
 ·
              higher
      costs associated with obtaining
capital;
 ·
              unusual
      or unexpected geological
formations;
 ·
              fluctuations
      in natural gas and oil prices;
 ·
              regulatory
      changes;
 ·
              shortages
      of equipment; and
 ·
              lack
      of technical expertise.
 
 If any of
these risks occur, it could adversely affect our financial condition or results
of operations.
 
 8
 Table
of Contents
  Any acquisitions
we complete are subject to considerable risk.
 
 Even when
we make acquisitions that we believe are good for our business, any acquisition
involves potential risks, including, among other things:
 
 ·
              the
      validity of our assumptions about reserves, future production, revenues
      and costs, including synergies;
 ·
              an
      inability to integrate successfully the businesses we
    acquire;
 ·
              a
      decrease in our liquidity by using our available cash or borrowing
      capacity to finance acquisitions;
 ·
              a
      significant increase in our interest expense or financial leverage if we
      incur additional debt to finance
acquisitions;
 ·
              the
      assumption of unknown liabilities, losses or costs for which we are not
      indemnified or for which our indemnity is
  inadequate;
 ·
              the
      diversion of management’s attention from other business
      concerns;
 ·
              an
      inability to hire, train or retain qualified personnel to manage the
      acquired properties or assets;
 ·
              the
      incurrence of other significant charges, such as impairment of goodwill or
      other intangible assets, asset devaluation or restructuring
      charges;
 ·
              unforeseen
      difficulties encountered in operating in new geographic or geological
      areas; and
 ·
              customer
      or key employee losses at the acquired
  businesses.
 
 Our decision to
acquire a property will depend in part on the evaluation of data obtained from
production reports and engineering studies, geophysical and geological analyses
and seismic and other information, the results of which
are often incomplete or inconclusive.
 
 Our
reviews of acquired properties can be inherently incomplete because it is not
always feasible to perform an in-depth review of the individual properties
involved in each acquisition. Even a detailed review of records and properties
may not necessarily reveal existing or potential problems, nor will it permit a
buyer to become sufficiently familiar with the properties to assess fully their
deficiencies and potential. Inspections may not always be performed on every
well, and environmental problems, such as ground water contamination, plugging
or orphaned well liability are not necessarily observable even when an
inspection is undertaken.
 
 We must obtain
governmental permits and approvals for drilling operations,
which can result in delays in our operations, be a costly and time consuming
process, and result in restrictions on our operations.
 
 Regulatory
authorities exercise considerable discretion in the timing and scope of permit
issuances in the region in which we operate. Compliance with the requirements
imposed by these authorities can be costly and time consuming and may result in
delays in the commencement or continuation of our exploration or production
operations and/or fines. Regulatory or legal actions in the future may
materially interfere with our operations or otherwise have a material adverse
effect on us. In addition, we are often required to prepare and present to
federal, state or local authorities data pertaining to the effect or impact
that a proposed project may have on the environment, threatened and endangered
species, and cultural and archaeological artifacts. Accordingly, the permits we
need may not be issued, or if issued, may not be issued in a timely fashion, or
may involve requirements that restrict our ability to conduct our operations or
to do so profitably.
 
 Due to our lack
of geographic diversification, adverse developments in our operating areas would
materially affect our business.
 
 We
currently only lease oil and natural gas properties located in Southern
Kentucky. As a result of this concentration, we may be disproportionately
exposed to the impact of delays or interruptions of production from these
properties caused by significant governmental regulation, transportation
capacity constraints, curtailment of production, natural disasters, adverse
weather conditions or other events which impact this area.
 
 We are not the
operator of our properties and we have limited control over the activities on
those properties.
 
 We are
not the operator on our current Project. We have a limited ability to influence
or control the operation or future development or the amount of capital
expenditures that we can fund with respect to it. In the case of the Cornell and
Robbins development, our dependence on the operator, JMACK Energy, limits our
ability to influence or control the operation or future development of the
project. Such limitations could materially adversely affect the realization of
our targeted returns on capital related to exploration, drilling or production
activities and lead to unexpected future costs.
 
 We may suffer
losses or incur liability for events for which we or the operator of a property
have chosen not to obtain insurance.
 
 Our
operations are subject to hazards and risks inherent in producing and
transporting natural gas and oil, such as fires, natural disasters, explosions,
pipeline ruptures, spills, and acts of terrorism, all of which can result in the
loss of hydrocarbons, environmental pollution, personal injury claims and other
damage to our and others’ properties. As protection against operating hazards,
we maintain insurance coverage against some, but not all, potential losses. In
addition, pollution and environmental risks generally are not fully insurable.
As a result of market conditions, existing insurance policies may not be renewed
and other desirable insurance may not be available on commercially reasonable
terms, if at all. The occurrence of an event that is not covered, or not fully
covered, by insurance could have a material adverse effect on our business,
financial condition and results of operations.
 
 Our hedging
activities could result in financial losses or could reduce ouravailable
fundsorincomeand thereforeadversely affectourfinancial
position.
 
 To
achieve more predictable cash flow and to reduce our exposure to adverse
fluctuations in the prices of oil and natural gas, we have developed derivative
arrangement plan that could result in both realized and unrealized hedging
losses. As of June 30 2008 we had not incurred any such losses. The extent of
our commodity price exposure is related largely to the effectiveness and scope
of our derivative activities. For example, the derivative instruments we may
utilize may be based on posted market prices, which may differ significantly
from the actual crude oil, natural gas and NGL prices we realize in our
operations.
 
 Our
actual future production may be significantly higher or lower than we estimate
at the time we enter into derivative transactions for such period. If the actual
amount is higher than we estimate, we will have greater commodity price exposure
than we intended. If the actual amount is lower than the nominal amount that is
subject to our derivative financial instruments, we might be forced to satisfy
all or a portion of our derivative transactions without the benefit of the cash
flow from our sale or purchase of the underlying physical commodity, resulting
in a substantial diminution of our liquidity. As a result of these factors, our
derivative activities may not be as effective as we intend in reducing the
volatility of our cash flows, and in certain circumstances may actually increase
the volatility of our cash flows.
 
 Our business
depends in part on gathering and transportation
facilities owned by others. Any limitation in the availability of those
facilities could interfere with our ability to market our oil and natural gas
production and could harm our business.
 
 The
marketability of our oil and natural gas production will depend in a very large
part on the availability, proximity and capacity of pipelines, oil and natural
gas gathering systems and processing facilities. The amount of oil and natural
gas that can be produced and sold is subject to curtailment in certain
circumstances, such as pipeline interruptions due to scheduled and unscheduled
maintenance, excessive pressure, physical damage or lack of available capacity
on such systems. The curtailments arising from these and similar circumstances
may last from a few days to several months. In many cases, we will be provided
only with limited, if any, notice as to when these circumstances will arise and
their duration. Any significant curtailment in gathering system or pipeline
capacity could significantly reduce our ability to market our oil and natural
gas production and harm our business.
 
 The high cost of
drilling rigs, equipment, supplies, personnel and other services could adversely
affect our ability to execute on a timely basis our development,
exploitation and
exploration plans within our budget.
 
 Shortages
or an increase in cost of drilling rigs, equipment, supplies or personnel could
delay or interrupt our operations, which could impact our financial condition
and results of operations. Drilling activity in the geographic areas in which we
conduct drilling activities may increase, which would lead to increases in
associated costs, including those related to drilling rigs, equipment, supplies
and personnel and the services and products of other vendors to the industry.
Increased drilling activity in these areas may also decrease the availability of
rigs. We do not have any contracts for drilling rigs and drilling rigs may not
be readily available when we need them. Drilling and other costs may increase
further and necessary equipment and services may not be available to us at
economical prices.
 
 Our exposure to
possible leasehold defectsand potential
title failurecould materially
adversely impact ourability to
conduct drilling operations.
 
 We obtain
the right and access to properties for drilling by obtaining oil and natural gas
leases either directly from the hydrocarbon owner, or through a third party that
owns the lease. The leases may be taken or assigned to us without title
insurance. There is a risk of title failure with respect to such leases, and
such title failures could materially adversely impact our business by causing us
to be unable to access properties to conduct drilling operations.
 
 Our reserves are
subject totheriskof
depletion
becausemany of our
leases are in mature fields that have produced large quantities of oil and
natural gas to date.
 
 Our
operations are located in fields in Southern Kentucky. As a result, many of our
leases are in, or directly offset, areas that have produced varying quantities
of oil and natural gas to date. As such, reserves may be partially or completely
depleted by offsetting wells or previously drilled wells, which could
significantly harm our business.
 
 Our lease
ownership may be diluted dueto financing
strategies we may employ in the future due to our lack of
capital.
 
 To
accelerate our development efforts we plan to take on working interest partners
who will contribute to the costs of drilling and completion and then share in
revenues derived from production. In addition, we may in the future, due to a
lack of capital or other strategic reasons, establish joint venture partnerships
or farm out all or part of our development efforts. These economic strategies
may have a dilutive effect on our lease ownership and could significantly
reduce our operating revenues.
 
 9
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of Contents
  We are subject to
complex laws and regulations, including environmental regulations, which can
adversely affect the cost, manner or feasibility of doing
business.
 
 Development,
production and sale of natural gas and oil in the United States are subject to
extensive laws and regulations, including environmental laws and regulations. We
may be required to make large expenditures to comply with environmental and
other governmental regulations. Matters subject to regulation include, but
are not limited to:
 
 ·
              location
      and density of wells;
 ·
              the
      handling of drilling fluids and obtaining discharge permits for drilling
      operations;
 ·
              accounting
      for and payment of royalties on production from state, federal and Indian
      lands;
 ·
              bonds
      for ownership, development and production of natural gas and oil
      properties;
 ·
              transportation
      of natural gas and oil by
pipelines;
 ·
              operation
      of wells and reports concerning operations;
and
 ·
              taxation.
 
 Under these laws and regulations, we
could be liable for personal injuries, property damage, oil spills, discharge of
hazardous materials, remediation and clean-up costs and other environmental
damages. Failure to comply with these laws and regulations also may result in
the suspension or termination of our operations and subject us to
administrative, civil and criminal penalties. Moreover, these laws and
regulations could change in ways that substantially increase our costs.
Accordingly, any of these liabilities, penalties, suspensions, terminations or
regulatory changes could materially adversely affect our financial condition and
results of operations enough to possibly force us to cease our business
operations.
 
 Our operations
may expose us to significant costs and liabilities with
respect to environmental, operational safety and other
matters.
 
 We may
incur significant costs and liabilities as a result of environmental and safety
requirements applicable to our oil and natural gas exploration and production
activities. We may also be exposed to the risk of costs associated with Kentucky
Corporation Commission requirements to plug orphaned and abandoned wells on our
oil and natural gas leases from wells previously drilled by third parties. In
addition, we may indemnify sellers or lessors of oil and natural gas properties
for environmental liabilities they or their predecessors may have created. These
costs and liabilities could arise under a wide range of federal, state and local
environmental and safety laws and regulations, including regulations and
enforcement policies, which have tended to become increasingly strict over time.
Failure to comply with these laws and regulations may result in the assessment
of administrative, civil and criminal penalties, imposition of cleanup and site
restoration costs, liens and to a lesser extent, issuance of injunctions to
limit or cease operations. In addition, claims for damages to persons or
property may result from environmental and other impacts of our
operations.
 
 Strict,
joint and several liability may be imposed under certain environmental laws,
which could cause us to become liable for the conduct of others or for
consequences of our own actions that were in compliance with all applicable laws
at the time those actions were taken. New laws, regulations or enforcement
policies could be more stringent and impose unforeseen liabilities or
significantly increase compliance costs. If we are not able to recover the
resulting costs through insurance or increased revenues, our ability to operate
effectively could be adversely affected.
 
 Our facilities
and activities could be subject to regulation by the Federal Energy Regulatory
Commission or the Department of Transportation, which could take actions that
could result in a materialadverse effect on
our financial condition.
 
 Although
it is anticipated that our natural gas gathering systems will be exempt from
FERC and DOT regulation, any revisions to this understanding may affect our
rights, liabilities, and access to midstream or interstate natural gas
transportation, which could have a material adverse effect on our operations and
financial condition. In addition, the cost of compliance with any revisions to
FERC or DOT rules, regulations or requirements could be substantial and could
adversely affect our ability to operate in an economic manner. Additional FERC
and DOT rules and legislation pertaining to matters that could affect our
operations are considered and adopted from time to time. We cannot predict what
effect, if any, such regulatory changes and legislation might have on our
operations, but we could be required to incur additional capital expenditures
and increased costs.
 
 Although
our natural gas sales activities are not currently projected to be subject to
rate regulation by FERC, if FERC finds that in connection with making sales in
the future, we (i) failed to comply with any applicable FERC administered
statutes, rules, regulations or orders, (ii) engaged in certain fraudulent acts,
or (iii) engaged in market manipulation, we could be subject to substantial
penalties and fines of up to $1.0 million per day per violation.
 
 We operate in a
highly competitive environment and our competitors may have greater resources
than us.
 
 The
natural gas and oil industry is intensely competitive and we compete with other
companies, many of which are larger and have greater financial, technological,
human and other resources. Many of these companies not only explore for and
produce crude oil and natural gas but also carry on refining operations and
market petroleum and other products on a regional, national or worldwide basis.
Such companies may be able to pay more for productive natural gas and oil
properties and exploratory prospects or define, evaluate, bid for and purchase a
greater number of properties and prospects than our financial or human resources
permit. In addition, such companies may have a greater ability to continue
exploration activities during periods of low oil and natural gas market prices.
Our ability to acquire additional properties and to discover reserves in the
future will be dependent upon our ability to evaluate and select suitable
properties and to consummate transactions in a highly competitive environment.
If we are unable to compete, our operating results and financial position may be
adversely affected.
 
 We may incur
substantial write-downs of the carrying value of our natural gas and oil
properties, which would adversely impact our earnings.
 
 We review
the carrying value of our natural gas and oil properties under the full-cost
accounting rules of the SEC on a quarterly basis. This quarterly review is
referred to as a ceiling test. Under the ceiling test, capitalized costs, less
accumulated amortization and related deferred income taxes, may not exceed an
amount equal to the sum of the present value of estimated future net revenues
(adjusted for cash flow hedges) less estimated future expenditures to be
incurred in developing and producing the proved reserves, less any related
income tax effects. In calculating future net revenues, current prices and
costs used are those as of the end of the appropriate quarterly period. Such
prices are utilized except where different prices are fixed and determinable
from applicable contracts for the remaining term of those contracts, including
the effects of derivatives qualifying as cash flow hedges. Two primary factors
impacting this test are reserve levels and current prices, and their associated
impact on the present value of estimated future net revenues. Revisions to
estimates of natural gas and oil reserves and/or an increase or decrease in
prices can have a material impact on the present value of estimated future net
revenues. Any excess of the net book value, less deferred income taxes, is
generally written off as an expense. Under SEC regulations, the excess above the
ceiling is not expensed (or is reduced) if, subsequent to the end of the period,
but prior to the release of the financial statements, natural gas and oil prices
increase sufficiently such that an excess above the ceiling would have been
eliminated (or reduced) if the increased prices were used in the
calculations.
 
 We will need
additional capital to finance our planned growth, which we may not be able to
raise or may only be available on termsunfavorable to us
or our stockholders, which may result in our inability to fund our working
capital requirements and harm our operational results.
 
 We have
and expect to continue to have substantial capital expenditure and working
capital needs. We will need to rely on cash flow from operations and borrowings
under our credit facility or raise additional cash to fund our operations, pay
outstanding long-term debt, fund our anticipated reserve replacement needs and
implement our growth strategy, or respond to competitive pressures and/or
perceived opportunities, such as investment, acquisition, exploration, workover
and development activities.
 
 If low
natural gas and oil prices, operating difficulties or other factors, many of
which are beyond our control, cause our revenues or cash flows from operations
to decrease, we may be limited in our ability to spend the capital necessary to
complete our development, production exploitation and exploration programs. If
our resources or cash flows do not satisfy our operational needs, we will
require additional financing, in addition to anticipated cash generated from our
operations, to fund our planned growth. Additional financing might not be
available on terms favorable to us, or at all. If adequate funds were not
available or were not available on acceptable terms, our ability to fund our
operations, take advantage of unanticipated opportunities, develop or enhance
our business or otherwise respond to competitive pressures would be
significantly limited. In such a capital restricted situation, we may
curtail our acquisition, drilling, development, and exploration activities or be
forced to sell some of our assets on an untimely or unfavorable
basis.
 
 If we
raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders would be reduced, and
these newly issued securities might have rights, preferences or privileges
senior to those of existing stockholders.
 
 10
 Table
of Contents
  Our success
depends on our key management and
professional personnel, includingRene
Soullier, the loss of
whom would harm our ability to execute our business plan.
 
 Our
success depends heavily upon the continued contributions of Rene Soullier, whose
knowledge, leadership and technical expertise would be difficult to replace, and
on our ability to retain and attract experienced engineers, geoscientists and
other technical and professional staff. We have entered into an employment
agreement with Mr. Soullier.  However, we do not maintain key person
insurance on Mr. Soullier. If we were to lose his services, our ability to
execute our business plan would be harmed and we may be forced to significantly
alter our operations until such time as we could hire a suitable replacement for
Mr. Soullier.
 
 Risks Associated with our
Common Stock
 
 Our common stock
is traded on an illiquid market, making it difficult for investors to sell their
shares.
 
 As of
April 18, 2008, our common stock commenced trading on the Over-the-Counter
Bulletin Board under the symbol “EXOT” (changed to
“PNXE” on July 18, 2008)  but trading has been minimal. Therefore, the
market for our common stock is limited. The trading price of our common stock
could be subject to wide fluctuations. Investors may not be able to purchase
additional shares or sell their shares within the time frame or at a price they
desire.
  The price of our
common stock may be volatile and you may not be able to resell your shares at a
favorable price.
 
 Regardless
of whether an active trading market for our common stock develops, the market
price of our common stock may be volatile and you may not be able to resell your
shares at or above the price you paid for such shares. The following factors
could affect our stock price:
 
 ·
              our
      operating and financial performance and
  prospects;
 ·
              quarterly
      variations in the rate of growth of our financial indicators, such as net
      income per share, net income and
revenues;
 ·
              changes
      in revenue or earnings estimates or publication of research reports by
      analysts about us or the exploration and production
    industry;
 ·
              potentially
      limited liquidity;
 ·
              actual
      or anticipated variations in our reserve estimates and quarterly operating
      results;
 ·
              changes
      in natural gas and oil prices;
 ·
              sales
      of our common stock by significant stockholders and future issuances of
      our common stock;
 ·
              increases
      in our cost of capital;
 ·
              changes
      in applicable laws or regulations, court rulings and enforcement and legal
      actions;
 ·
              commencement
      of or involvement in litigation;
 ·
              changes
      in market valuations of similar
companies;
 ·
              additions
      or departures of key management
personnel;
 ·
              general
      market conditions, including fluctuations in and the occurrence of events
      or trends affecting the price of natural gas and oil;
  and
 ·
              domestic
      and international economic, legal and regulatory factors unrelated to our
      performance.
 
 Our articles of
incorporation, bylaws andNevadaLaw contain
provisions that could discourage an acquisition or change of control of
us.
 
 Our
articles of incorporation authorize our board of directors to issue preferred
stock and common stock without stockholder approval. If our board of directors
elects to issue preferred stock, it could be more difficult for a third party to
acquire control of us. In addition, provisions of the articles of incorporation
and bylaws could also make it more difficult for a third party to acquire
control of us. In addition, Nevada’s “Combination with Interested Stockholders’
Statute” and its “Control Share Acquisition Statute” may have the effect in the
future of delaying or making it more difficult to effect a change in control of
us.
 
 These
statutory anti-takeover measures may have certain negative consequences,
including an effect on the ability of our stockholders or other individuals to
(i) change the composition of the incumbent board of directors; (ii) benefit
from certain transactions which are opposed by the incumbent board of directors;
and (iii) make a tender offer or attempt to gain control of us, even if such
attempt were beneficial to us and our stockholders. Since such measures may also
discourage the accumulations of large blocks of our common stock by purchasers
whose objective is to seek control of us or have such common stock repurchased
by us or other persons at a premium, these measures could also depress the
market price of our common stock. Accordingly, our stockholders may be deprived
of certain opportunities to realize the “control premium” associated with
take-over attempts.
 
 We have no plans
to pay dividends on our common stock. You may not receive funds without selling
your stock.
 
 We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business. Our future dividend policy is within the discretion
of our board of directors and will depend upon various factors, including our
business, financial condition, results of operations, capital requirements,
investment opportunities and restrictions imposed by our debentures and credit
facility.
 
 We may issue
shares of preferred stock with greater rights than our common
stock.
 
 Although
we have no current plans, arrangements, understandings or agreements to issue
any preferred stock, our articles of incorporation authorizes our board of
directors to issue one or more series of preferred stock and set the terms of
the preferred stock without seeking any further approval from our stockholders.
Any preferred stock that is issued may rank ahead of our common stock, with
respect to dividends, liquidation rights and voting rights, among other
things.
 
 Because
our common stock is deemed a low-priced “Penny” stock, an investment in our
common stock should be considered high risk and subject to marketability
restrictions.
 
 Since our
common stock is a penny stock, as defined in Rule 3a51-1 under the Securities
Exchange Act, it will be more difficult for investors to liquidate their
investment even if and when a market develops for the common stock. Until the
trading price of the common stock rises above $5.00 per share, if ever, trading
in the common stock is subject to the penny stock rules of the Securities
Exchange Act specified in rules 15g-1 through 15g-10. Those rules require
broker-dealers, before effecting transactions in any penny stock,
to:
 
 ·
              Deliver
      to the customer, and obtain a written receipt for, a disclosure
      document;
 ·
              Disclose
      certain price information about the
stock;
 ·
              Disclose
      the amount of compensation received by the broker-dealer or any associated
      person of the broker-dealer;
 ·
              Send
      monthly statements to customers with market and price information about
      the penny stock; and
 ·
              In
      some circumstances, approve the purchaser’s account under certain
      standards and deliver written statements to the customer with information
      specified in the rules.
  11
 Table
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  Consequently, the penny stock rules may
restrict the ability or willingness of broker-dealers to sell the common stock
and may affect the ability of holders to sell their common stock in the
secondary market and the price at which such holders can sell any such
securities.These additional procedures could also limit our ability to
raise additional capital in the future.
  If
we fail to remain current on our reporting requirements, we could be removed
from the OTC Bulletin Board, which would limit the ability of broker-dealers to
sell our securities and the ability of stockholders to sell their securities in
the secondary market.
 
 Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board.  More specifically, FINRA has enacted
Rule 6530, which determines eligibility of issuers quoted on the OTC Bulletin
Board by requiring an issuer to be current in its filings with the
Commission.  Pursuant to Rule 6530(e), if we file our reports late with the
Commission three times in a two-year period or our securities are removed from
the OTC Bulletin Board for failure to timely file twice in a two-year period
then we will be ineligible for quotation on the OTC Bulletin
Board.  As a result, the market liquidity for our securities could be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market.
 
 FINRA
sales practice requirements may limit a stockholder'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, the FINRA believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The 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.
  Not
applicable.
  Item
3. Legal Proceedings.
  We may become involved in various
routine legal proceedings incidental to our business. However, to our knowledge
as of the date of this report, there are no material pending legal proceedings
to which we are a party or to which any of our property is subject.
  Item
4. Submission of Matters to a Vote of Security Holders.
  We submitted three matters to a vote of
our security holders during the fourth quarter ended June 30 2008. The matters
were related to the amendment of our Articles of Incorporation as
follows:
 
 1.
              The
      articles of incorporation of the Company, (the “Articles of
      Incorporation”), will be amended to change the Company’s name from
      “Exotacar, Inc.” to “Phoenix Energy Resource
  Corporation”;
 2.
              The
      Articles of Incorporation will be amended to authorized a new class of
      5,000,000 shares of preferred stock, par value $0.001 per share, and
      authorize the Board of Directors to issue one or more series of the
      preferred stock with such designations, rights, preferences, limitations
      and/or restrictions as it should determine by vote of a majority of such
      directors.
 3.
              To
      effectuate a 50-to1 forward split of the Corporation’s common stock, which
      would increase the shares issued and outstanding from 1,250,000 to
      62,500,000 shares following the forward
split.
 
 Each
share of our common stock was entitled to one vote.  Only stockholders
of record at the close of business on June 2, 2008 were entitled to
vote.  The number of outstanding shares at the time was 1,250,000 held
by approximately 9 stockholders. The required quorum of stockholders was present
at this meeting with 800,000 shares (approximately 64%) represented in person or
by proxy.
 
 Votes on
the approval of granting discretionary authority to our board to enact the
aforementioned amendments were as follows:
 
 For
              Against
              Withheld800,000
              0
              450,000
  12
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of Contents
  PART
II
  Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
  (a)
Market Information
 
 PRICERANGEOF COMMON STOCK
 
 As of
April 18, 2008, our common stock commenced trading on the OTC:BB under the
symbol “EXOT” (changed to “PNXE” on July 18, 2008).  Our common stock
has traded infrequently on the OTC:BB, which limits our ability to locate
accurate high and low bid prices for each quarter within the last two fiscal
years. Therefore, the following table lists the quotations for the high and low
bid prices as reported by a Quarterly Trade and Quote Summary Report of the OTC
Bulletin Board and Yahoo! Finance for fiscal years 2007 and 2008. The quotations
reflect inter-dealer prices without retail mark-up, markdown, or commissions and
may not represent actual transactions.
 
 Low
              
              
              HighFiscal
      2008Quarter
      ended September 30, 2007
              
              $
              -
              
              
              $
              -Quarter
      ended December 31, 2007
              
              
              -
              
              
              
              -Quarter
      ended March 31, 2008
              
              
              0.12
              
              
              
              0.40Quarter
      ended June 30 2008
              
              
              0.40
              
              
              
              0.40
  The last
reported sale price of our common stock on the OTC:BB was $0.35 per share
on November 3, 2008.
 
 (b)
Holders of Common Stock
 
 As of
June 30, 2008, there were 9 holders of record of our common stock.
 
 (c)
Dividends
 
 We have
never paid or declared any cash dividends on our common stock. We currently
intend to retain any future earnings to finance the growth and development of
our business and we do not expect to pay any cash dividends on our common stock
in the foreseeable future. In addition, we are contractually prohibited by the
terms of our outstanding debt from paying cash dividends on our common stock.
Payment of future dividends, if any, will be at the discretion of our board of
directors and will depend on our financial condition, results of
operations, capital requirements, restrictions contained in current or future
financing instruments, including the consent of debt holders, if applicable at
such time, and other factors our board of directors deems relevant.
 
 (d)
Securities Authorized for Issuance under Equity Compensation Plans
 
 None.
 
 Recent
      Sales of Unregistered Securities
 
 None.
 
 Issuer
Purchases of Equity Securities
  We did
not repurchase any of our equity securities during the fiscal years ended June
30 2008 or 2007.
  Item
6. Selected Financial Data.
  Not
applicable.
  Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
 
 The following discussion of our
financial condition and results of operations should be read in
conjunction with our
financial statements and the related notes to our financial statements included
elsewhere in this report. In addition to historical financial information, the
following discussion and analysis contains forward-looking statements that
involverisks, uncertainties and
assumptions. Our actual results and timing of selected events may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including those discussed under ITEM 1A. Risk Factors
andelsewhere in this
report.
 
 OVERVIEW
AND OUTLOOK
 
 As a
result of our recent change of control, our business focus has been redirected
to the oil and natural gas industry.  Our corporate strategy is to
continue building value in Phoenix Energy through the development and
acquisition of gas and oil assets that exhibit consistent, predictable, and
long-lived production.
 
 Results
of Operations for the Fiscal Year Ended June 30, 2008.
 
 We are in
the early stage of developing properties in Kentucky and currently have no
production or revenues from these properties.  Our operations to date
have been limited to technical evaluation of the properties and the design of
development plans to exploit the oil and gas resources on those properties as
well as seeking financing opportunities to acquire additional oil and gas
properties.
 
 We will
not have any significant production revenue unless and until we are able to
establish commercial production in connection with new drilling activities
planned for 2009 or in connection with other acquisition
activities.  Accordingly, the oil and gas operations reflected in the
fiscal year ended June 30, 2008, we believe are not indicative of future oil and
gas operations.
 
 Our
expenses to date have consisted principally of general and administrative costs
associated with evaluating other potential acquisitions and raising
capital.  We expect these costs to increase as we proceed with our
development plans.  Total operating expenses for the fiscal year ended
June 30, 2008 were $61,489.  We had a net loss for the same period of
$59,474 or ($0.01) per share.
 
 Operation
Plan
 
 Our plan is to acquire oil and natural
gas assets, primarily in the mid-continent region of the United
States.  However, over time we may expand our area of operations as
opportunities to do so become available.  Once these assets are
acquired we plan to continue to focus our efforts on increasing production of
oil and natural gas, cash flows and enhancing our net asset value.
 
 We expect
to achieve these results by:
 
 ·
              Investing
      additional capital in development drilling and in secondary and tertiary
      recovery of oil as well as natural
gas;
 ·
              Using
      the latest technologies available to the oil and natural gas industry in
      our operations;
 ·
              Finding
      additional oil and natural gas reserves on the properties we
      acquire.
 
 We recently completed a financing with
Seymore Investments, Ltd. In the amount of $150,000 that will allow us to
continue to implement our business plan.  The proceeds will primarily
be used for the acquisition and development of mineral leases in Southern
Kentucky.
 
 Summary
 
 We have
several other projects that are in various stages of discussions and we are
continually evaluating oil and gas opportunities in Kentucky.  Once a
financial partner is selected we plan to bring multiple acquisitions to our
current financial partner for evaluation and financing.  It is our
vision to grow the business in a disciplined and well thought-through
manner.
 
 In
addition to raising additional capital we plan to take on Joint Venture (JV) or
Working Interest (WI) partners that will contribute to the capital costs of
drilling and completion and then share in revenues derived from production. This
economic strategy may allow us to utilize our own financial assets toward the
growth of our leased acreage holdings, pursue the acquisition of strategic oil
and gas producing properties or companies and generally expand our existing
operations.
 
 Because
of our limited operating history we have yet to generate any revenues from the
sale of oil or natural gas. Our activities have been limited to raising capital,
negotiating WI agreements, mineral lease acquisition and preliminary analysis of
reserves and production capabilities from our mineral lease acquisitions.
Consequently, we have incurred the expenses of start-up.
 
 Our
future financial results will depend primarily on: (i) the ability to continue
to source and screen potential projects; (ii) the ability to discover commercial
quantities of natural gas and oil; (iii) the market price for oil and natural
gas; and (iv) the ability to fully implement our exploration and development
program, which is dependent on the availability of capital resources. There can
be no assurance that we will be successful in any of these respects, that the
prices of oil and gas prevailing at the time of production will be at a level
allowing for profitable production, or that we will be able to obtain additional
funding to increase our currently limited capital resources.
 
 13
 Table
of Contents
  Liquidity
and Capital Resources
 
 Liquidity
is a measure of a company’s ability to meet potential cash requirements. We have
historically met our capital requirements through debt financing, revenues from
operations and the issuance of equity securities. In the future we anticipate we
will be able to provide some of the necessary liquidity we need by the revenues
generated from our net interests in our oil and natural gas production, and
sales of reserves in our existing properties, however, if we do not generate
sufficient sales revenues we will continue to finance our operations through
equity and/or debt financings.
 
 We will
actively manage our exposure to commodity price fluctuations by executing
derivative transactions to hedge the change in prices of our production, thereby
mitigating our exposure to price declines, but these transactions will also
limit our earnings potential in periods of rising commodity prices. There also
is a risk that we will be required to post collateral to secure our hedging
activities and this could limit our available funds for our business
activities.
 
 The
following table summarizes total current assets, total current liabilities and
working capital at June 30 2008 as compared to June 30 2007.
 
 June
      30
                2008
              June
      30
                2007
              Increase
      / (Decrease)$Current
      Assets
              $
              148,168
              $
              29,686
              118,482Current
      Liabilities
              $
              14,456
              $
              4,000
              10,456Working
      Capital
              $
              133,712
              $
              25,686
              108,026
 
 Discussion
of Material Balance Sheet Changes from Fiscal 2007 to Fiscal 2008
 
 During
the year ended June 30 2008, we have significantly changed the balance sheet of
our company.  Our business has expanded due to the issuance of stock
and debt.  Our total assets have increased from $29,686 at June 30
2007 to $148,168.  Our total liabilities increased from $4,000 at June
30 2007 to $164,456 at June 30 2008 primarily as a result of our loan agreement
with Seymore Investments, Ltd.
 
 Satisfaction of our cash obligations
for the next 12 months.
 
 A
critical component of our operating plan is the ability to obtain additional
capital through additional equity and/or debt financing and working interest
participants. We have not generated sufficient cash revenues to meet our monthly
expenses, we still have negative working capital. In the event we cannot obtain
additional capital to pursue our strategic plan, however, this would materially
impact our ability to continue our aggressive growth. However, there is no
assurance we would be able to obtain such financing on commercially reasonable
terms, if at all.
 
 We
intend to implement and successfully execute our business and marketing
strategy, continue to develop and upgrade technology and products, respond to
competitive developments, and attract, retain and motivate qualified personnel.
There can be no assurance that we will be successful in addressing such risks,
and the failure to do so can have a material adverse effect on our business
prospects, financial condition and results of operations.
 
 Summary of product research and
development that we will perform for the term of our plan.
 
 We do not
anticipate performing any significant product research and development under our
plan of operation until such time as we can raise adequate working capital to
sustain our operations.
 
 Expected purchase or sale of any
significant equipment.
 
 We
anticipate that we will purchase the necessary production and field service
equipment required to produce oil and natural gas during our normal course of
operations over the next twelve months. We currently estimate this amount to be
approximately $1.5 million.
 
 Significant changes in the number of
employees.
 
 As of
June 30 2008, we had 1 full time employee. As drilling and production activities
increase, we intend to hire additional technical, operational and administrative
personnel as appropriate. We anticipate offering a number of independent
contractors in the field full time employment to help secure a more stable work
base. We do not anticipate a material increase in expenses from this initiative,
as most of these individuals are already included in our current operating and
capital expenses. We are using and will continue to use the services of
independent consultants and contractors to perform various professional
services, particularly in the area of land services, reservoir engineering,
drilling, water hauling, pipeline construction, well design, well-site
monitoring and surveillance, permitting and environmental assessment. We believe
that this use of third-party service providers may enhance our ability to
contain general and administrative expenses.
 
 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.
 
 Critical
Accounting Policies and Estimates
 
 Our
critical accounting estimates include our oil and gas properties, asset
retirement obligations and the value of share-based payments.
 
 Oil and Gas
Properties:
 
 The
accounting for our business is subject to special accounting rules that are
unique to the gas and oil industry. There are two allowable methods of
accounting for oil and gas business activities: the successful efforts method
and the full-cost method. We will follow the full-cost method of accounting
under which all costs associated with property acquisition, exploration and
development activities are capitalized. We also capitalize internal costs that
can be directly identified with our acquisition, exploration and development
activities and do not include any costs related to production, general corporate
overhead or similar activities.
 
 Under the
full-cost method, capitalized costs are amortized on a composite
unit-of-production method based on proved gas and oil reserves. Depreciation,
depletion and amortization expense is also based on the amount of estimated
reserves. If we maintain the same level of production year over year, the
depreciation, depletion and amortization expense may be significantly different
if our estimate of remaining reserves changes significantly. Proceeds from the
sale of properties are accounted for as reductions of capitalized costs unless
such sales involve a significant change in the relationship between costs and
the value of proved reserves or the underlying value of unproved properties, in
which case a gain or loss is recognized. The costs of unproved properties are
excluded from amortization until the properties are evaluated. We review all of
our unevaluated properties quarterly to determine whether or not and to what
extent proved reserves have been assigned to the properties, and otherwise if
impairment has occurred. Unevaluated properties are assessed individually when
individual costs are significant.
 
 We will
review the carrying value of our gas and oil properties under the full-cost
accounting rules of the SEC on a quarterly basis. This quarterly review is
referred to as a ceiling test. Under the ceiling test, capitalized costs, less
accumulated amortization and related deferred income taxes, may not exceed an
amount equal to the sum of the present value of estimated future net revenues
(adjusted for cash flow hedges) less estimated future expenditures to be
incurred in developing and producing the proved reserves, less any related
income tax effects. In calculating future net revenues, current prices and costs
used are those as of the end of the appropriate quarterly period. Such prices
are utilized except where different prices are fixed and determinable from
applicable contracts for the remaining term of those contracts, including the
effects of derivatives qualifying as cash flow hedges. Two primary factors
impacting this test are reserve levels and current prices, and their associated
impact on the present value of estimated future net revenues. Revisions to
estimates of gas and oil reserves and/or an increase or decrease in prices can
have a material impact on the present value of estimated future net revenues.
Any excess of the net book value, less deferred income taxes, is generally
written off as an expense. Under SEC regulations, the excess above the ceiling
is not expensed (or is reduced) if, subsequent to the end of the period, but
prior to the release of the financial statements, gas and oil prices increase
sufficiently such that an excess above the ceiling would have been eliminated
(or reduced) if the increased prices were used in the calculations.
 
 The
process of estimating gas and oil reserves is very complex, requiring
significant decisions in the evaluation of available geological, geophysical,
engineering and economic data. The data for a given property may also change
substantially over time as a result of numerous factors, including additional
development activity, evolving production history and a continual reassessment
of the viability of production under changing economic conditions. As a result,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the subjective
decisions and variances in available data for various properties increase the
likelihood of significant changes in these estimates.
 
 14
 Table
of Contents
  Asset
Retirement Obligations:
 
 The asset
retirement obligation relates to the plug and abandonment costs when our wells
are no longer useful. We determine the value of the liability by obtaining
quotes for this service and estimate the increase we will face in the future. We
then discount the future value based on an intrinsic interest rate that is
appropriate for us. If costs rise more than what we have expected there could be
additional charges in the future however we monitor the costs of the abandoned
wells and we will adjust this liability if necessary.
  Recent
Accounting Pronouncements
  In February
2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for
Financial Assets and Liabilities including in amendment of SFAS 115”. This
Statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is
expected to expand the use of fair value measurement objectives for accounting
for financial instruments. This Statement is effective as of the beginning of an
entity’s first fiscal year that begins after November15, 2007, and interim
periods within those fiscal years. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of FASB Statement No. 157, “Fair
Value Measurements”. We are currently evaluating the impact of SFAS No. 159 on
our financial statements.
  In December
2007, the FASB issued SFAS No. 141R (revised 2007), “Business
Combinations”. Although this statement
amends and replaces SFAS No. 141, it retains the fundamental
requirements in SFAS No. 141 that (i) the purchase method of
accounting must be used for all business combinations; and (ii) an acquirer
be identified for each business combination. SFAS No. 141R defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This Statement applies to all transactions or other
events in which an entity (the acquirer) obtains control of one or more
businesses (the acquiree), including combinations achieved without the transfer
of consideration; however, this Statement does not apply to a combination
between entities or businesses under common control. Significant provisions of
SFAS No. 141R concern principles and requirements for how an acquirer
(i) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree; (ii) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and
(iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008 with
early adoption not permitted.   Management is assessing the
impact of the adoption of SFAS No. 141R.
 In December
2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in
Consolidated Financial Statements”. This Statement amends ARB 51 to establish
accounting and reporting standards for the non-controlling (minority) interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. We have not yet determined the impact, if any, that SFAS
No. 160 will have on our financial statements.
  In December
2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding the use
of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in developing
an estimate of expected term of "plain vanilla" share options in accordance with
SFAS No. 123 (R), Share-Based Payment.  In particular, the staff
indicated in SAB 107 that it will accept a company's election to use the
simplified method, regardless of whether the company has sufficient information
to make more refined estimates of expected term. At the time SAB 107 was issued,
the staff believed that more detailed external information about employee
exercise behavior (e.g., employee exercise patterns by industry and/or other
categories of companies) would, over time, become readily available to
companies. Therefore, the staff stated in SAB 107 that it would not expect a
company to use the simplified method for share option grants after December 31,
2007. The staff understands that such detailed information about employee
exercise behavior may not be widely available by December 31, 2007. Accordingly,
the staff will continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. The Company currently uses the
simplified method for “plain vanilla” share options and warrants, and will
assess the impact of SAB 110 for fiscal year 2009. It is not believed that this
will have an impact on the Company’s financial position, results of operations
or cash flows.
  In March
2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities—an amendment of
FASB Statement No. 133.  This standard requires companies to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company has not yet
adopted the provisions of SFAS No. 161, but does not expect it to have a
material impact on its financial position, results of operations or cash
flows.
  In May 2008,
the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles”.  SFAS No. 162
sets forth the level of authority to a given accounting pronouncement or
document by category. Where there might be conflicting guidance between two
categories, the more authoritative category will prevail. SFAS No. 162 will
become effective 60 days after the SEC approves the PCAOB’s amendments to AU
Section 411 of the AICPA Professional Standards. SFAS No. 162 has no effect on
the Company’s financial position, statements of operations, or cash flows at
this time.
  In May 2008,
the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163,
“Accounting for Financial Guarantee Insurance Contracts-and interpretation of
FASB Statement No. 60”.  SFAS No. 163 clarifies how Statement 60
applies to financial guarantee insurance contracts, including the recognition
and measurement of premium revenue and claims liabilities. This statement also
requires expanded disclosures about financial guarantee insurance contracts.
SFAS No. 163 is effective for fiscal years beginning on or after December 15,
2008, and interim periods within those years. SFAS No. 163 has no effect on the
Company’s financial position, statements of operations, or cash flows at this
time.
 
 Effects
of Inflation and Pricing
 
 The oil
and natural gas industry is very cyclical and the demand for goods and services
of oil field companies, suppliers and others associated with the industry puts
extreme pressure on the economic stability and pricing structure within the
industry. Material changes in prices impact revenue stream, estimates of future
reserves, borrowing base calculations of bank loans and value of properties in
purchase and sale transactions. Material changes in prices can impact the value
of oil and natural gas companies and their ability to raise capital, borrow
money and retain personnel. We anticipate the increased business costs will
continue while the commodity prices for oil and natural gas, and the demand for
services related to production and exploration, both remain high (from a
historical context) in the near term.
  15
 Table
of Contents
  Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.
  Not
applicable.
  Item
8. Financial Statements and Supplementary Data.
  Management
Responsibility for Financial Information
 
 We are
responsible for the preparation, integrity and fair presentation of our
financial statements and the other information that appears in this annual
report on Form 10-K. The financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and include
estimates based on our best judgment.
 
 We
maintain a comprehensive system of internal controls and procedures designed to
provide reasonable assurance, at an appropriate cost-benefit relationship, that
our financial information is accurate and reliable, our assets are safeguarded
and our transactions are executed in accordance with established
procedures.
 
 Mantyla
McReynolds, LLC, an independent registered public accounting firm, is retained
to audit our consolidated financial statements. Its accompanying report is based
on an audit conducted in accordance with the standards of the Public Company
Accounting Oversight Board (United States).
 
 Our
consolidated financial statements and notes thereto, and other information
required by this Item 8 are included in this report beginning on page
F-1.
  Item
9. Changes in and Disagreements With Accountants On Accounting and Financial
Disclosure.
  On May
16, 2008, Registrant’s Board of Directors made the decision to change its
auditor.  Instead of Lawrence Scharfman & Co., CPA P.C., the Board
of Directors decided to retain Mantyla McReynolds, LLC as its independent
auditor to review Registrant’s quarterly reports for the quarter ending March
31, 2008 and to audit Registrant’s financial statements for the year ended June
30, 2008. The former auditor, Lawrence Scharfman & Co., CPA P.C., was
dismissed effective on May 14, 2008 upon the change in the Registrant’s
management. Registrant does not have an audit committee.
 
 In the
audit report on the financial statements for the year ended June 30, 2007,
Lawrence Scharfman & Co., CPA P.C. disclosed an uncertainty of the
Registrant to continue as a going concern. During the two most recent fiscal
years and any subsequent interim period through the date of dismissal, there
were no disagreements with the former auditor on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of the
former auditor, would have caused it to make reference to the subject matter of
the disagreement(s) in connection with its reports.
 
 The
Company had not consulted with Mantyla McReynolds, LLC on either the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the Company’s
consolidated financial statements, or any other matter that was the subject of a
disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a
reportable event (as defined in Item 304(a)(1)(v) of Regulation
S-K).
  Item
9A(T). Controls and Procedures.
  Our Chief Executive and
Principal Accounting Officer, Rene Soullier,evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period covered by
this annual report on Form 10-K. Based on this evaluation, our Chief Financial
Officer concluded that, as of June 30, 2008, our disclosure controls and
procedures are ineffective in ensuring that the information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
 
 Management’s
Report on Internal Control over Financial Reporting
 
 Our
Management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(c) and (d) of the
Exchange Act. Our internal controls are designed to provide reasonable assurance
that the reported financial information is presented fairly, financial
disclosures are adequate and that the judgments inherent in the preparation of
financial statements are reasonable and in accordance with generally accepted
accounting principles of the United States of America (GAAP).
 
 Because of its inherent limitations, a
system of internal control over financial reporting can provide only reasonable
assurance and may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Further, because of
changes in conditions, effectiveness of internal control over financial
reporting may vary over time.
  A significant deficiency is a control
deficiency, or combination of control deficiencies, that adversely affects the
company’s ability to initiate, authorize, record, process, or report external
financial data reliably in accordance with generally accepted accounting
principles such that there is more than a remote likelihood that a misstatement
of the company’s annual or interim financial statements that is more than
inconsequential will not be prevented or detected. An internal control material
weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
 
 As part
of our compliance efforts relative to Section 404 of the Sarbanes-Oxley Act of
2002, our management assessed the effectiveness of our internal control over
financial reporting as of June 30, 2008. In making this assessment, management
used the criteria set forth in the Internal Control - Integrated Framework by
the Committee of Sponsoring Organizations of the Treadway Commission
("COSO").We
evaluated control deficiencies identified through our test of the design and
operating effectiveness of controls over financial reporting to determine
whether the deficiencies, individually or in combination, are significant
deficiencies or material weaknesses. In performing the assessment, our
management has identified one material weakness in internal control over
financial reporting existing as of June 30, 2008. Our evaluation of the
significance of each deficiency included both quantitative and qualitative
factors. Based on that evaluation, the Company’s management concluded that as of
June 30, 2008 and as of the date that the evaluation of the effectiveness of our
internal controls and procedures was completed, the Company’s internal controls
are not effective, for the reason discussed below:
 
 Segregation of
Duties
 
 As a result of limited employees within
the accounting department we were unable to meet certain segregation of duties
criteria and did not have existing resources for creating a compensating control
mechanism. In April of 2008, during our evaluation of our internal controls our
Chief Financial Officer identified the inability to include proper segregation
of transaction authorization, transaction processing and custody within our
accounting department, resulting in a material weakness in our internal controls
over financial reporting. Despite our material weakness regarding our
segregation of duties, we believe that our financial statements included in this
report fairly present in all material respects the Company's financial
condition, results of operations and cash flows for the periods presented and
that this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this report.
  Remediation
Initiative
  We plan to rectify the segregation of
duties weakness through a change in our internal control procedures upon gaining
sufficient working capital. We have implemented certain processes whereby we are
utilizing outside consultants to provide appropriate checks and balances over
all functions that could potentially have a material impact on our financial
statements. Further, the consulting firm will assist us in implementing
additional controls to improve our overall control processes. In addition, it is
our intention to hire a minimum of one qualified accounting individual as soon
as the necessary financial resources become available.
  Other than the weakness identified
above and our partial remediation of the weakness, there were no other changes
in our internal control over financial reporting that occurred during our most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
 
 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 permits the company to provide only management’s report
in this annual report.
  Item
9B. Other Information.
  None.
  16
 Table
of Contents
  PART
III
  Item
10. Directors, Executive Officers and Corporate Governance.
  
 The following table sets forth certain
information regarding our current directors and executive officers. Our
executive officers serve one-year terms.
 
 Name
              Age
              Position
              
              Board Committee(s)Rene
      Soullier
              33
              President,
      Chief Executive Officer, Principal Financial and Accounting Officer and
      Chairman, Director
              
              None
 
 Rene Soullier has been our
President, Chief Executive Officer and Chairman since March 1,
2008.
 
 Rene
Soullier was born in 1975 in Canada.  After graduation in 1993 from
Summerland Secondary School, Summerland British Columbia, he went on to graduate
from Okanagan University College, British Columbia, with a Bachelor of Science
in Natural Sciences.  His focal points, in addition to Biology, were
Earth and Environmental Sciences including Geology, Physical Geography, Stream
Analysis and Field Techniques.
 
 In 2003
Mr. Soullier joined the research team of Summerland Agricultural Research
Station where he stayed until beginning of 2006.  Already in the last
months of his research project at the end of 2005 Mr. Soullier was appointed a
director of a European based company providing business and management
consultancy world-wide.  He has specialized in management consultancy
for ecologically oriented companies and structures.
  Section
16(a) Beneficial Ownership Reporting Compliance
  Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires our executive officers and directors, and persons who beneficially own
more than ten percent of our common stock, to file initial reports of ownership
and reports of changes in ownership with the SEC. Executive officers, directors
and greater than ten percent beneficial owners are required by SEC regulations
to furnish us with copies of all Section 16(a) forms they file. Based upon a
review of the copies of such forms furnished to us and written representations
from our executive officers and directors, we believe that as of the date of
this report they were all current in their 16(a) reports.
 
 Board
of Directors
 
 Our board of directors currently
consists of one member. Our directors serve one-year terms.
 
 Committees
of the Board of Directors
  None.
  Code of Ethics
 
 We have
not adopted a Code of Business Conduct and Ethics at this time.
 
 Limitation of Liability of
Directors
 
 Pursuant
to the Nevada General Corporation Law, our Articles of Incorporation exclude
personal liability for our Directors for monetary damages based upon any
violation of their fiduciary duties as Directors, except as to liability for any
breach of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, or any transaction
from which a Director receives an improper personal benefit. This exclusion of
liability does not limit any right which a Director may have to be indemnified
and does not affect any Director’s liability under federal or applicable state
securities laws. We have agreed to indemnify our directors against expenses,
judgments, and amounts paid in settlement in connection with any claim against a
Director if he acted in good faith and in a manner he believed to be in our best
interests.
 
 NevadaAnti-Takeover Law and Charter and
By-law Provisions
 
 Depending
on the number of residents in the state of Nevada who own our shares, we could
be subject to the provisions of Sections 78.378 et seq. of the Nevada Revised
Statutes which, unless otherwise provided in a company’s articles of
incorporation or by-laws, restricts the ability of an acquiring person to obtain
a controlling interest of 20% or more of our voting shares. Our articles of
incorporation and by-laws do not contain any provision which would currently
keep the change of control restrictions of Section 78.378 from applying to
us.
 
 We are
subject to the provisions of Sections 78.411 et seq. of the Nevada Revised
Statutes. In general, this statute prohibits a publicly held Nevada corporation
from engaging in a “combination” with an “interested stockholder” for a period
of three years after the date of the transaction in which the person became an
interested stockholder, unless the combination or the transaction by which the
person became an interested stockholder is approved by the corporation’s board
of directors before the person becomes an interested stockholder. After the
expiration of the three-year period, the corporation may engage in a combination
with an interested stockholder under certain circumstances, including if the
combination is approved by the board of directors and/or stockholders in a
prescribed manner, or if specified requirements are met regarding consideration.
The term “combination” includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an “interested stockholder” is a person who, together with
affiliates and associates, owns, or within three years did own, 10% or more of
the corporation’s voting stock. A Nevada corporation may “opt out” from the
application of Section 78.411 et seq. through a provision
in its articles of incorporation or by-laws. We have not “opted out” from the
application of this section.
 
 Apart
from Nevada law, however, our articles of incorporation and by-laws do not
contain any provisions which are sometimes associated with inhibiting a change
of control from occurring (i.e., we do not provide for a staggered board, or for
“super-majority” votes on major corporate issues). However, we do have 5,000,000
shares of authorized “blank check” preferred stock, which could be used to
inhibit a change in control.
  17
 Table
of Contents
  Item
11. Executive Compensation.
  The
following table sets forth summary compensation information for the fiscal years
ended June 30 2008 and 2007 for our Chief Executive Officer. We did not have any
other executive officers as of the end of fiscal 2008.
 
 Summary Compensation
Table
  Name
      and Principal Position
              Fiscal
      Year
              
              Salary
                ($)
              
              
              Bonus
      ($)
              
              
              Option
      Awards
                ($)
              
              
              All
      Other Compen-sation
                ($)
              
              
              Total
                ($)Rene
      Soullier
              2008
              
              $
              36,000
              (1)
              
              
              -0-
              
              
              
              -0-
              
              
              $
              -0-
              
              
              $
              36,000President,
      Chief Executive Officer and
                Principal
      Financial and Accounting
                Officer
              2007
              
              $
              -0-
              
              
              
              -0-
              
              
              
              -0-
              
              
              $
              -0-
              
              
              $
              -0-
 
 (1)
              Mr.
      Soullier began receiving compensation as of March 1, 2008. We agreed to
      pay Mr. Soullier a monthly salary of $3,000. Mr. Soullier agreed to defer
      his salary until financing was secured. As of June 30 2008, we accrued
      $12,000 of Mr. Soullier’s salary. Subsequent to June 30 2008, Mr.
      Soullier’s accrued salary was paid and Mr. Soullier is no longer accruing
      salary.
 
 Outstanding Equity Awards at 2008
Fiscal Year-End
 
 None.
 
 Potential Payments Upon Termination
or Change in Control
 
 We have
not entered into any compensatory plans or arrangements with respect to our
named executive officer, which would in any way result in payments to such
officer because of his resignation, retirement, or other termination of
employment with us or our subsidiaries, or any change in control of, or a change
in his responsibilities following a change in control.
 
 Non-Employee
Director Compensation
 
 None.
 
 Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
 
 The
following table presents information, to the best of Phoenix Energy’s knowledge,
about the ownership of Phoenix Energy’s common stock on November 3, 2008
relating to those persons known to beneficially own more than 5% of Phoenix
Energy’s capital stock and by Phoenix Energy’s named executive officer,
directors and directors and executive officers as a group. The percentage of
beneficial ownership for the following table is based on 62,500,000 shares of
common stock outstanding.
 
 Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and does not necessarily indicate beneficial ownership for
any other purpose. Under these rules, beneficial ownership includes those shares
of common stock over which the stockholder has sole or shared voting or
investment power. It also includes shares of common stock that the stockholder
has a right to acquire within 60 days after June 24, 2008 pursuant to options,
warrants, conversion privileges or other right. The percentage ownership of the
outstanding common stock, however, is based on the assumption, expressly
required by the rules of the Securities and Exchange Commission, that only the
person or entity whose ownership is being reported has converted options or
warrants into shares of Phoenix Energy’s common stock.
 
 Name
      and Address of Beneficial Owner, Officer or Director(1)
              
              Number
                of
      Shares
              
              
              Percent
      of Outstanding Shares of Common Stock(2)Rene
      Soullier, President & Chief Executive Officer(3)
              
              
              -0-
              
              
              
              *Directors
      and Officers as a Group
              
              
              -0-
              
              
              
              *Helvetic
      Capital Ventures AG
                Sihlamtsstrasse
      5
                Zurich,
      Switzerland CH8002
              
              
              40,000,000
              
              
              
              64
              %*Represents beneficial
      ownership of less than 1%
  (1)
              As
      used in this table, “beneficial ownership” means the sole or shared power
      to vote, or to direct the voting of, a security, or the sole or shared
      investment power with respect to a security (i.e., thepower to dispose
      of, or to direct the disposition of, a
  security).
 (2)
              Figures
      are rounded to the nearest tenth of a
percent.
 (3)
              The
      address of each person is care of Phoenix
  Energy:
  Item
13. Certain Relationships and Related Transactions, and Director
Independence.
  We were not a
party to any transactions or series of similar transactions that have occurred
during this fiscal year in which:
  •
              The
      amounts involved exceeds the lesser of $120,000 or one percent of the
      average of our total assets at year end for the last two completed fiscal
      years; and•
              A
      director, executive officer, holder of more than 5% of our common stock or
      any member of their immediate family had or will have a direct or indirect
      material interest.
  Item
14. Principal Accountant Fees and Services.
  MantylaMcReynolds, LLC served as our
principal independent public accountants for fiscal 2008 and Lawrence Scharfman,
CPA was our principal independent auditor for fiscal year 2007. Aggregate fees
billed to us for the fiscal years ended June 30, 2008 and 2007 by
MantylaMcReynolds, LLC and Lawrence Scharfman, CPA were as follows:
 
 For
      the Fiscal Years Ended
                June
      30,2008
              
              2007(1)
      Audit Fees(1)
              
              $
              4,000
              
              
              $
              500(2)
      Audit-Related Fees(2)
              
              
              -0-
              
              
              
              500(3)
      Tax Fees(3)
              
              
              -0-
              
              
              
              -0-(4)
      All Other Fees
              
              
              -0-
              
              
              
              -0-Total
      fees paid or accrued to our principal accountant
              
              $
              4,000
              
              
              $
              1,000
 
 (1)
              Audit
      Fees include fees billed and expected to be billed for services performed
      to comply with Generally Accepted Auditing Standards (GAAS), including the
      recurring audit of the Company’s consolidated financial statements for
      such period included in this Annual Report on Form 10-K and for the
      reviews of the consolidated quarterly financial statements included in the
      Quarterly Reports on Form 10-QSB filed with the Securities and
      Exchange Commission. This category also includes fees for audits provided
      in connection with statutory filings or procedures related to audit of
      income tax provisions and related reserves, consents and assistance with
      and review of documents filed with the
SEC.
 (2)
              Audit-Related
      Fees include fees for services associated with assurance and reasonably
      related to the performance of the audit or review of the Company’s
      financial statements. This category includes fees related to assistance in
      financial due diligence related to mergers and acquisitions, consultations
      regarding Generally Accepted Accounting Principles, reviews and
      evaluations of the impact of new regulatory pronouncements, general
      assistance with implementation of Sarbanes-Oxley Act of 2002 requirements
      and audit services not required by statute or
  regulation.
 (3)
              Tax
      fees consist of fees related to the preparation and review of the
      Company’s federal and state income tax
returns.
 
 18
 Table
of Contents
  PART
IV
  Item
15. Exhibits, Financial Statement Schedules.
  The
following information required under this item is filed as part of this
report:
 
 (a) 1.
Financial Statements
 
 PageManagement
      Responsibility for Financial Information
              
              22Management’s
      Report on Internal Control Over Financial Reporting
              
              23Index
      to Financial Statements
              
              F-21Report
      of Independent Registered Public Accounting Firm
              
              F-22Consolidated
      Balance Sheets
              
              F-24Consolidated
      Statements of Operations
              
              F-25Consolidated
      Statements of Stockholders Equity
              
              F-26Consolidated
      Statements of Cash Flows
              
              F-27
 
 2.
Financial Statement Schedules
 
 None.
 
 3.
Exhibit Index
 
 Exhibit No.
              
              Description2.13.1
              
              Amended
      and Restated Articles of Incorporation, as currently in effect
      (incorporated by reference to Exhibit A to the Form DEF 14C filed on June
      2, 2008)4.1
              
              Article
      I of Amended and Restated Articles of Incorporation of Exotacar, Inc.
      (incorporated by reference to Exhibit A to the Form DEF 14C filed on June
      2, 2008)4.2
              
              Article
      IV and Article VIII, Sections 3 & 6 of Amended and Restated Bylaws of
      Exotacar, Inc. (incorporated by reference to Exhibit A to the Form DEF 14C
      filed on June 2, 2008)31.1
              
              Certification of Chief Executive and Principal
      Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
              
              Certification of Chief Executive and Principal
      Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
  19
 Table
of Contents
  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.
   PHOENIX
ENERGY RESOURCES, INC.
  By: /s/ Rene
Soullier
 Rene
Soullier, Chief Executive Officer
  Date:  November
6, 2008
  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.
  Name
              Title
              Date/s/ Rene
      Soullier
                Rene
      Soullier
              President,
      Chief Executive Officer, (Principal Executive Officer), Principal
      Accounting Officer, Secretary, Chairman
              November
      6, 2008
 
 20
 Table
of Contents
  Index
to Financial Statements
  PageIndex
      to Financial Statements
              F-21Report
      of Independent Registered Public Accounting Firm
              F-22Consolidated
      Balance Sheets at June 30 2008 and 2007
              F-24Consolidated
      Statements of Operations for the Fiscal Years Ended June 30 2008 and
      2007
              F-25Consolidated
      Statement of Stockholders’ Equity(Deficit) for the Fiscal Years Ended June
      30 2008 and 2007
              F-26Consolidated
      Statement of Cash Flows for the Fiscal Years Ended June 30 2008 and
      2007
              F-27Notes
      to Consolidated Financial Statements
              F-28
  21
 Table
of Contents
  Report
of Independent Registered Public Accounting Firm
 
 Stockholders
and Directors
 Phoenix
Energy Resources, Inc
 
 
 We have
audited the accompanying balance sheet of Phoenix Energy Resource Corporation as
of June 30, 2008 and the related statements of operations, stockholders’ equity,
and cash flows for the year ended June 30, 2008. 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. The financial
statements of Phoenix Energy Resources, Inc. [fka Exotocar, Inc.] for the period
from inception [June 3, 2005] through June 30, 2007, were audited by other
auditors whose report dated September 21, 2007 expressed an unqualified opinion
on those statements.  Our opinion, in so far as it relates to the
period from June 3, 2005 through June 30, 2007, is based solely on the reports
of the other auditors.
 
 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 misstatements. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.  Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  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 Phoenix Energy Resources
Corporation as of June 30, 2008 and the results of its operations, stockholders’
equity and cash flows for the year ended June 30, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  The Company is a development stage
enterprise and as of the date of our report, had not fully implemented its
planned principal operations and as such has not generated recurring revenues
within its current business plan.  As discussed in Note 3 to the
financial statements, these issues raise is substantial doubt about the
Company’s ability to continue as a going concern.  Management’s plans
in regards to these matters are also described in Note 3.  The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
 
 /S/ MantylaMcReynolds,
LLC
 
 MantylaMcReynolds,
LLC
 Salt Lake
City, Utah
 
 November
11, 2008
  22
 Table
of Contents
  Lawrence
Scharfman & Co., CPA P.C.
 Certified
Public Accountants
 
 18
      E. SUNRISE HIGHWAY, #203
              9608
      HONEY BELL CIRCLEFREEPORT,
      NY 11520
              BOYNTON
      BEACH, FL 33437TELEPHONE:
      (516) 771-5900
              TELEPHONE:
      (561 ) 733-0296FACSIMILE:
      (516) 771-2598
              FACSIMILE:
      (56 I) 740-0613
 
 INDEPENDENT
AUDITORS' REPORT
 
 EXOTACAR,
INC.
 2132
Horse Prairie Drive
 Las
Vegas NV 89052
 
 We have
audited the accompanying balance sheet of EXOTACAR, INC. (the Company) (A
Development Stage Company) as of June 30, 2007, and the related statement of
operations, stockholders equity, and cash flows for the year then ended and for
the period from June 3, 2005 (Date of inception) to June 30, 2007. These
statements are the responsibility of Company's Management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
 
 We
conducted our audit in accordance with 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 misstatements. 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.
 
 The
company has had difficulty in generating sufficient cash flow to meet its
obligations, and is dependent on management's ability to develop profitable
operations. These factors, among others may raise substantial doubt about their
ability to continue as a going concern.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of EXOTACAR, INC. (A Development Stage
Company) as of June 30, 2007, and the results of its operations and cash flows
for the year then ended, and for the period June 3, 2005 (Date of Inception) to
June 30, 2007, in conformity with generally accepted accounting
principles.
 
 
 /s/ Lawrence
Scharfman
  Boynton
Beach
Florida
 September
21, 2007
 
 23
 Table
of Contents
  -
LICENSED IN FLORIDA & NEW YORK -
 Phoenix
Energy Resource Corporation
 (formerly
Exotacar, Inc.)
 (an
Exploration Stage Company)
 Balance
Sheets
  June
      30,2008
              
              
              2007AssetsCurrent
      assets:Cash
              
              $
              140,576
              
              
              $
              2,210Restricted
      cash
              
              
              -
              
              
              
              27,476Prepaid
      expenses
              
              
              7,592
              
              
              
              -Total
      current assets
              
              
              148,168
              
              
              
              29,686Total
      assets
              
              $
              148,168
              
              
              $
              29,686Liabilities
      and Stockholders’ Equity (Deficit)Current
      liabilities:Accounts
      payable
              
              $
              -
              
              
              $
              4,000Accrued
      liabilities
              
              
              1,043
              
              
              
              -Accrued
      interest
              
              
              1,413
              
              
              
              -Accrued
      compensation – related party
              
              
              12,000
              
              
              
              -Total
      current liabilities
              
              
              14,456
              
              
              
              4,000Long
      term liabilities:Note
      payable
              
              
              150,000
              
              
              
              -Total
      long-term liabilities
              
              
              150,000
              
              
              
              -Total
      Liabilities
              
              
              164,456
              
              
              
              4,000Stockholders’
      Equity (Deficit):Preferred
      stock, $0.001 par value, 5,000,000shares
      authorized, no shares issued and outstanding
              
              
              -
              
              
              
              -Common
      stock, $0.001 par value, 100,000,000 shares authorized;shares
      issued and outstanding – 62,500,000 at June 30, 2008and
      40,000,000 at June 30, 2007
              
              
              62,500
              
              
              
              40,000Subscription
      payable
              
              
              -
              
              
              
              27,500Additional
      paid in capital
              
              
              27,500
              
              
              
              5,000(Deficit)
      accumulated during development stage
              
              
              (106,288
              )
              
              
              (46,814
              )Total
      stockholders’ equity (deficit)
              
              
              (16,288
              )
              
              
              25,686Total
      liabilities and stockholders’ equity (deficit)
              
              $
              148,168
              
              
              $
              29,686
 
 The
accompanying notes are an integral part of these financial
statements
  24
 Table
of Contents
  Phoenix
Energy Resource Corporation
 (formerly
Exotacar, Inc.)
 (an Exploration Stage
Company)
 Statements
of Operations
  June
      3, 2005For
      the Years Ended
              
              
              (Inception)
      toJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008Revenue
              
              $
              -
              
              
              $
              -
              
              
              $
              -Expenses:Consulting
              
              
              -
              
              
              
              -
              
              
              
              7,000Executive
      compensation
              
              
              12,000
              
              
              
              -
              
              
              
              12,000General
      and administrative
              
              
              9,414
              
              
              
              324
              
              
              
              9,738Professional
      fees
              
              
              40,075
              
              
              
              6,500
              
              
              
              51,575Total
      operating expenses
              
              
              61,489
              
              
              
              6,684
              
              
              
              80,313Net
      operating (loss)
              
              
              (61,489
              )
              
              
              (6,684
              )
              
              
              (80,313
              )Other
      income (expense):Debt
      forgiveness
              
              
              3,000
              
              
              
              -
              
              
              
              3,000Interest
      expense
              
              
              (1,413
              )
              
              
              -
              
              
              
              (1,413
              )Interest
      income
              
              
              428
              
              
              
              10
              
              
              
              438Total
      other income (expense)
              
              
              2,015
              
              
              
              10
              
              
              
              2,025Net
      (loss)
              
              $
              (59,474
              )
              
              $
              (6,814
              )
              
              $
              (78,288
              )Weighted
      average number of common sharesoutstanding
      – basic and diluted
              
              
              58,442,623
              
              
              
              39,650,685Net
      (loss) per share – basic and diluted
              
              $
              (0.01
              )
              
              $
              (0.01
              )
 
 The
accompanying notes are an integral part of these financial
statements
 
 25
 Table
of Contents
  Phoenix
Energy Resource Corporation
 (formerly
Exotacar, Inc.)
 (an Exploration Stage
Company)
 Statements
of Stockholders’ Equity (Deficit)
  Additional
              
              
              
              
              
              Accumulated
              
              
              TotalPreferred
      Stock
              
              
              Common
      Stock
              
              
              Paid-in
              
              
              Subscription
              
              
              Development
              
              
              Stockholders’Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Payable
              
              
              Stage
      (deficit)
              
              
              Equity
      (deficit)June
      3, 2005 – FoundersShares
              
              
              -
              
              
              $
              -
              
              
              
              35,000,000
              
              
              $
              35,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              (28,000
              )
              
              $
              7,000Net
      (loss), June 3, 2005(Inception)
      to June 30, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,000
              )
              
              
              (7,000
              )Balance,
      June 30, 2005
              
              
              -
              
              
              
              -
              
              
              
              35,000,000
              
              
              
              35,000
              
              
              
              -
              
              
              
              -
              
              
              
              (35,000
              )
              
              
              -January
      15, 2006 shares issuedProfessional
      services
              
              
              -
              
              
              
              -
              
              
              
              2,500,000
              
              
              
              2,500
              
              
              
              2,500
              
              
              
              -
              
              
              
              -
              
              
              
              5,000Net
      (loss), June 30, 2006
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,000
              )
              
              
              (5,000
              )Balance,
      June 30, 2006
              
              
              -
              
              
              
              -
              
              
              
              37,500,000
              
              
              
              37,500
              
              
              
              2,500
              
              
              
              -
              
              
              
              (40,000
              )
              
              
              -Shares
      issued for cash
              
              
              -
              
              
              
              -
              
              
              
              2,500,000
              
              
              
              2,500
              
              
              
              2,500
              
              
              
              -
              
              
              
              -
              
              
              
              5,000Subscription
      payable
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              27,500
              
              
              
              -
              
              
              
              27,500Net
      (loss), June 30, 2007
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,814
              )
              
              
              (6,814
              )Balance,
      June 30, 2007
              
              
              -
              
              
              
              -
              
              
              
              40,000,000
              
              
              
              40,000
              
              
              
              5,000
              
              
              
              27,500
              
              
              
              (46,814
              )
              
              
              25,686Shares
      issued per subscriptionAgreement
              
              
              -
              
              
              
              -
              
              
              
              22,500,000
              
              
              
              22,500
              
              
              
              22,500
              
              
              
              (27,500
              )
              
              
              -
              
              
              
              17,500Net
      (loss), June 30, 2008
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (59,474
              )
              
              
              (59,474
              )Balance,
      June 30, 2008
              
              
              -
              
              
              $
              -
              
              
              
              62,500,000
              
              
              $
              62,500
              
              
              $
              27,500
              
              
              $
              -
              
              
              $
              (106,288
              )
              
              $
              (16,288
              )
  The
accompanying notes are an integral part of these financial
statements
 
 26
 Table
of Contents
  Phoenix
Energy Resource Corporation
 (formerly
Exotacar, Inc.)
 (an Exploration Stage
Company)
 Statements
of Cash Flows
  For
      the Years Ended
              
              
              June
      3, 2005June
      30,
              
              
              (inception)
      to June 30,2008
              
              
              2007
              
              
              2008Cash
      flows from operating activitiesNet
      (loss)
              
              $
              (59,474
              )
              
              $
              (6,814
              )
              
              $
              (78,288
              )Adjustments
      to reconcile net (loss) tonet
      cash used by operating activities:Shares
      issued for services
              
              
              -
              
              
              
              -
              
              
              
              12,000Prepaid
      expenses
              
              
              (7,592
              )
              
              
              -
              
              
              
              (7,592
              )Accounts
      payable
              
              
              (4,000
              )
              
              
              4,000
              
              
              
              -Accrued
      liabilities
              
              
              1,043
              
              
              
              -
              
              
              
              1,043Accrued
      interest
              
              
              1,413
              
              
              
              -
              
              
              
              1,413Accrued
      salaries – related party
              
              
              12,000
              
              
              
              -
              
              
              
              12,000Net
      cash used by operating activities
              
              
              (56,610
              )
              
              
              (2,814
              )
              
              
              (59,424
              )Cash
      flows from financing activitiesProceeds
      from notes payable
              
              
              150,000
              
              
              
              -
              
              
              
              150,000Subscription
      payable
              
              
              -
              
              
              
              27,500
              
              
              
              -Restricted
      cash
              
              
              27,476
              
              
              
              (27,476
              )
              
              
              -Issuance
      of common stock
              
              
              17,500
              
              
              
              5,000
              
              
              
              50,000Net
      cash provided by financing activities
              
              
              194,976
              
              
              
              5,024
              
              
              
              200,000Net
      increase in cash
              
              
              138,366
              
              
              
              2,210
              
              
              
              140,576Cash,
      beginning
              
              
              2,210
              
              
              
              -
              
              
              
              -Cash,
      ending
              
              $
              140,576
              
              
              $
              2,210
              
              
              $
              140,576Supplemental
      disclosures:Interest
      paid
              
              $
              -
              
              
              $
              -
              
              
              $
              -Income
      taxes paid
              
              $
              -
              
              
              $
              -
              
              
              $
              -Non
      cash transactions:Shares
      issued for services
              
              $
              -
              
              
              $
              -
              
              
              $
              12,000Shares
      issued for stock subscription payable
              
              $
              27,500
              
              
              $
              -
              
              
              $
              -
 
 The
accompanying notes are an integral part of these financial
statements
  27
 Table
of Contents
  Phoenix
Energy Resource Corporation
 (formerly
Exotacar, Inc.)
 (an Exploration Stage
Company)
 Notes
to Financial Statements
 
 Note
1 – Summary of Accounting Policies
 
 Organization
  Phoenix
Energy, formerly known as Exotacar, Inc., is an energy acquisition, exploration
and development company. In February of 2008, Exotacar, Inc., changed the focus
of its business plan from the development of online exotic car sales and entered
into the oil and natural gas industry. In conjunction with the change, the
company was renamed Phoenix Energy Resource Corporation.
 
 Nature of
Business
  We are an
independent energy company engaged in the business of producing and selling
crude oil and natural gas. This crude oil and natural gas is obtained primarily
by the acquisition and subsequent exploration and development of mineral
leases.  Development and exploration may include drilling new
exploratory or development wells on these leases. These operations are conducted
primarily in Southern Kentucky.
 
 Use of
Estimates
  The
preparation of these financial statements requires the use of estimates by
management in determining our assets, liabilities, revenues, expenses and
related disclosures.  Actual amounts could differ from those
estimates.
 
 Trade Accounts
Receivable
  Trade
accounts receivable are recorded at the invoiced amount and do not bear any
interest.  We regularly review receivables to insure that the amounts
will be collected and establish or adjust an allowance for uncollectible amounts
as necessary using the specific identification method.  Account
balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. There
were no reserves for uncollectible amounts in the periods
presented.
 
 Share-Based
Payments
  Common
stock, warrants and options issued for services are accounted for based on the
fair market value at the date of grant.  If the awards are based on a
vesting period, the fair market value of the awards are expensed over the
shorter of the requisite service period or the vesting period.
 
 Income
Taxes
  We
account for income taxes under the Statement of Financial Accounting Standards
“SFAS” Statement 109, “Accounting for Income Taxes”.  The asset and
liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of assets and liabilities.  The
provision for income taxes differs from the amount currently payable because of
temporary differences in the recognition of certain income and expense items for
financial reporting and tax reporting purposes.
  We
adopted the Financial Accounting Standards Board “FASB” Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”) as of April 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in companies’ financial
statements in accordance with FASB Statement No. 109, “Accounting for Income
Taxes”. As a result, we apply a more-likely-than-not recognition threshold for
all tax uncertainties. FIN 48 only allows the recognition of those tax benefits
that have a greater than fifty percent likelihood of being sustained upon
examination by the taxing authorities. As a result of implementing FIN 48, we
have reviewed our tax positions and determined there were no outstanding or
retroactive tax positions with less than a 50% likelihood of being sustained
upon examination by the taxing authorities, therefore the implementation of this
standard has not had a material effect on the Company.
  We
classify tax-related penalties and net interest on income taxes as income tax
expense. As of June 30 2008 and 2007, no income tax expense had been
incurred.
  Fair Value of Financial
Instruments
  Our
financial instruments consist of accounts receivable and notes payable. Interest
rates currently available to us for debt with similar terms and remaining
maturities are used to estimate fair value of such financial instruments.
Accordingly the carrying amounts are a reasonable estimate of fair
value.
 
 Earnings Per
Share
  SFAS No.
128, “Earnings Per Share”, requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the diluted income or loss per share
computation.  Earnings per share calculations reflect the effect of
the Company’s 50:1 forward stock split.
 
 Cash and Cash
Equivalents
  We
consider all highly liquid investment instruments purchased with original
maturities of three months or less to be cash equivalents for purposes of the
statements of cash flows and other statements. We maintain cash on deposit,
which, at times, exceed federally insured limits. The Company exceeded federally
insured limits by $40,576 as of June 30, 2008.  We have not
experienced any losses on such accounts and believe we are not exposed to any
significant credit risk on cash and equivalents.
 
 Revenue Recognition and
Imbalances
 Oil and
gas revenues will be recognized net of royalties when production is sold to a
purchaser at a fixed or determinable price, when delivery has occurred and title
has transferred, and if collection of the revenue is reasonably assured. Cash
received relating to future revenues is deferred and recognized when all revenue
recognition criteria are met.
 
 We will
use the sales method of accounting for gas production imbalances. The volumes
sold may differ from the volumes to which we are entitled based on our interests
in the properties. These differences create imbalances that are recognized as a
liability only when the properties’ estimated remaining reserves net to us will
not be sufficient to enable the under-produced owner to recoup its entitled
share through production.
 
 28
 Table
of Contents
  Property and
Equipment
  Property
and equipment are recorded at cost. Depreciation is on a straight-line method
using the estimated lives of the assets (3-15 years).  Expenditures
for maintenance and repairs are charged to expense.
 
 Long-Lived
Assets
  Impairment
of long-lived assets is recorded when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets’ carrying value.  The carrying value of the assets is
then reduced to their estimated fair value that is usually measured based on an
estimate of future discounted cash flows.
 
 Recent Issued Accounting
Standards
  In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option
for Financial Assets and Liabilities including in amendment of SFAS 115”. This
Statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is
expected to expand the use of fair value measurement objectives for accounting
for financial instruments. This Statement is effective as of the beginning of an
entity’s first fiscal year that begins after November15, 2007, and interim
periods within those fiscal years. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of FASB Statement No. 157, “Fair
Value Measurements”. We are currently evaluating the impact of SFAS No. 159 on
our financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business
Combinations”. Although this statement
amends and replaces SFAS No. 141, it retains the fundamental
requirements in SFAS No. 141 that (i) the purchase method of
accounting must be used for all business combinations; and (ii) an acquirer
be identified for each business combination. SFAS No. 141R defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This Statement applies to all transactions or other
events in which an entity (the acquirer) obtains control of one or more
businesses (the acquiree), including combinations achieved without the transfer
of consideration; however, this Statement does not apply to a combination
between entities or businesses under common control. Significant provisions of
SFAS No. 141R concern principles and requirements for how an acquirer
(i) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree; (ii) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and
(iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008
with early adoption not permitted.   Management is assessing the
impact of the adoption of SFAS No. 141R.
 In
December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in
Consolidated Financial Statements”. This Statement amends ARB 51 to establish
accounting and reporting standards for the non-controlling (minority) interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. We have not yet determined the impact, if any, that SFAS
No. 160 will have on our financial statements.
  In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS No. 123 (R), Share-Based Payment.  In particular,
the staff indicated in SAB 107 that it will accept a company's election to use
the simplified method, regardless of whether the company has sufficient
information to make more refined estimates of expected term. At the time SAB 107
was issued, the staff believed that more detailed external information about
employee exercise behavior (e.g., employee exercise patterns by industry and/or
other categories of companies) would, over time, become readily available to
companies. Therefore, the staff stated in SAB 107 that it would not expect a
company to use the simplified method for share option grants after December 31,
2007. The staff understands that such detailed information about employee
exercise behavior may not be widely available by December 31, 2007. Accordingly,
the staff will continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. The Company currently uses the
simplified method for “plain vanilla” share options and warrants, and will
assess the impact of SAB 110 for fiscal year 2009. It is not believed that this
will have an impact on the Company’s financial position, results of operations
or cash flows.
  In March
2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities—an amendment of
FASB Statement No. 133.  This standard requires companies to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company has not yet
adopted the provisions of SFAS No. 161, but does not expect it to have a
material impact on its financial position, results of operations or cash
flows.
  In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162,
“The Hierarchy of Generally Accepted Accounting Principles”.  SFAS No.
162 sets forth the level of authority to a given accounting pronouncement or
document by category. Where there might be conflicting guidance between two
categories, the more authoritative category will prevail. SFAS No. 162 will
become effective 60 days after the SEC approves the PCAOB’s amendments to AU
Section 411 of the AICPA Professional Standards. SFAS No. 162 has no effect on
the Company’s financial position, statements of operations, or cash flows at
this time.
  In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163,
“Accounting for Financial Guarantee Insurance Contracts-and interpretation of
FASB Statement No. 60”.  SFAS No. 163 clarifies how Statement 60
applies to financial guarantee insurance contracts, including the recognition
and measurement of premium revenue and claims liabilities. This statement also
requires expanded disclosures about financial guarantee insurance contracts.
SFAS No. 163 is effective for fiscal years beginning on or after December 15,
2008, and interim periods within those years. SFAS No. 163 has no effect on the
Company’s financial position, statements of operations, or cash flows at this
time.
 
 Reclassifications
  Certain
reclassifications have been made to prior periods to conform to current
presentation.
 
 29
 Table
of Contents
  Note
2 – Change in control
 
 On
February 8, 2008, the Company’s former management entered into a “Transfer and
Change of Control Agreement” with Helvetic Capital Ventures AG (“Helvetic”)
whereby Ari Lee, our former President and CEO agreed to sell 750,000 shares of
his common stock representing approximately 60% of the total outstanding shares
of the Company, in exchange for cash totaling $633,768. Further, with the
consummation of the aforementioned transaction, Mr. Lee resigned as the
President and Chief Executive officer. We have appointed Mr. Rene Soullier to
fill each vacancy.
 
 Note
3 – Going concern
 
 The
accompanying financial statements have been prepared using the generally
accepted accounting principles applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. For the Company to continue as a going concern we must seek additional
sources of capital, and must attain future profitable operations. We are
currently initiating our business plan and also in the process of raising
additional capital. The accompanying financial statements do not include any
adjustments that might be necessary should we be unable to continue as a going
concern.
 
 Note
4 – Related party
 
 On
February 1, 2008, we entered into an employment agreement with Mr. Soullier, our
sole executive officer and director. The initial term of the agreement is one
year commencing on March 1, 2008 with annual compensation of $36,000. In
addition, we have agreed to provide Mr. Soullier a company vehicle upon securing
our initial financing.  The agreement will renew annually and may be
terminated by either party with 6 month written notice. Further, Mr. Soullier
has agreed to defer his compensation until such point we have obtained
sufficient working capital through our financing efforts. As of June 30, 2008,
we have accrued $12,000 in executive compensation.
 
 Note
5 – Notes Payable
 
 At June
30 2008 we had a note payable to Seymore Investments totaling
$150,000.  The note bears interest at a rate of 10% per annum, is
unsecured and matures on May 20, 2011. Further, we have the option to repay the
note in shares of our common stock at a 15% discount to the five day average
trading price as quote on the Over-the Counter Bulletin Board at the time of
conversion. At June 30, 2008 we have accrued interest related to this note in
the amount of $1,413.
 
 Note
6 – Stockholders’ Equity
 
 The
Company is authorized to issue 5,000,000 shares of $0.001 par value preferred
stock and 100,000,000 shares of $0.001 par value common stock. On April 17,
2008, our Board of Directors resolved to effectuate a 50:1 forward split of the
Company’s common stock.  The Company has retroactively stated all
share amounts.
 
 On June
3, 2005, the Company issued 35,000,000 shares [700,000 pre-split] of its $0.001
par value common stock as founders’ shares for services valued at
$7,000.
 
 On
January 15, 2006, the Company issued 2,500,000 shares [50,000 pre-split] of its
$0.001 par value common stock for legal services valued at $5,000.
 
 On August
21, 2006, the Company issued 2,500,000 shares [50,000 pre-split] of its $0.001
par value common stock to its sole officer for cash totaling
$5,000.
 
 On
September 4, 2007, the Company issued 22,500,000 shares [450,000 pre-split] of
its $0.001 par value common stock to 47 investors for cash totaling
$45,000.
 
 Note
7 - Income Taxes
 
 The
provision for income taxes consists of the following:
  2008
              
              
              
              2007Current
      tax
              
              $
              —
              
              
              $
              —Deferred
      tax benefit
              
              
              (20,221
              )
              
              
              (6,300
              )Benefits
      of operating loss carryforwards
              
              
              20,221
              
              
              
              6,300Provision
      for Income Tax
              
              $
              —
              
              
              $
              —
  Below is
a summary of deferred tax asset calculations on net operating loss carry forward
amounts as of June 30, 2008. Currently there is no reasonable assurance that the
Company will be able to take advantage of a deferred tax asset. Thus, an
offsetting allowance has been established for the deferred asset. Furthermore,
the Company has determined that prior net operating loss caryforwards were
nullified with the Company’s change in business plan.  The Company’s
beginning deferred tax asset and valuation allowance were reduce to
zero.
  Description
              
              NOL
      Balance
              
              
              Tax
              
              
              RateNet
      Operating Loss
              
              $
              47,474
              
              
              $
              16,141
              
              
              
              34
              %Accrued
      compensation – related party
              
              
              12,000
              
              
              
              4,080
              
              
              
              34
              %Valuation
      Allowance
              
              
              
              
              
              
              (20,221
              )Deferred
      Tax Asset – 6/30/2008
              
              
              
              
              
              $
              —
  During
the year ended June 30, 2008, the valuation allowance increased to
$20,221.
  The
Company has the following operating loss carry forwards available at June 30,
2008:
  Operating
      LossesExpires
              
              Amount2022
              
              47,474
  Reconciliation
between income taxes at the statutory tax rate (34%) and the actual income tax
provision for continuing operations follows:
  2007
              
              
              
              2006Expected
      Tax Provision
              
              $
              (20,221
              )
              
              $
              (2,316
              )Effect
      of:Graduated
      rates
              
              
              
              
              
              
              16Increase
      in Valuation allowance
              
              
              20,221
              
              
              
              3,028Actual
      Tax Provision
              
              $
              —
              
              
              $
              —
  Note
8 – Commitments
 
 The
Company leases office space for $190 per month.  The Company will be
required to make future minimum lease payments of $1,520 through February 1,
2009, when the lease expires.
 
 Note
9 – Subsequent Events
 
 In
September of 2008, the Company purchased three mineral leases in Allen County
Kentucky representing approximately 483 gross acres at $10 per acre. In
addition, the Company entered into an operating agreement with Mark Cornell,
managing member of JMACK Energy, LLC. This agreement provides that JMACK will
provide drilling management and operation of all wells located on our existing
leases in Allen County Kentucky. Further, JMACK will consult with us at an
executive level regarding field development, acquisition evaluation,
identification of additional acquisition opportunities and overall business
strategy. The operating agreement provides that we will pay a 5% overriding
royalty interest on all oil and gas produced from the aforementioned mineral
leases. As of September 30, 2008 we had advanced $60,000 to JMACK Energy for the
commencement of exploration.
 
 In
October 2008, the Company issued Mr. Cornell 200,000 shares of its common stock
as a bonus for his services rendered in connection with the acquisition of our
mineral leases.