References to “Company”, “we” or “us” refer to Petrocorp Inc., unless the context requires otherwise.
Forward Looking Statements
The following is provided to supplement, and should be read in conjunction with, our financial statements and the accompanying notes included in our Form 10-K as of December 31, 2010. This report contains forward-looking statements and information relating to us that is based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. When used in this report, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. These statements reflect management’s current view of us concerning future events and are subject to certain risks, uncertainties and assumptions, including among many others:
| ● | the quality of our properties with regard to, among other things, the existence of reserves in economic quantities; |
| ● | uncertainties about the estimates of reserves; |
| ● | our ability to increase our production and oil and natural gas income through exploration and development; |
| ● | the number of well locations to be drilled and the time frame within which they will be drilled; |
| ● | the timing and extent of changes in commodity prices for natural gas and crude oil; |
| ● | domestic demand for oil and natural gas; |
| ● | drilling and operating risks; |
| ● | the availability of equipment, such as drilling rigs and transportation pipelines; |
| ● | changes in our drilling plans and related budgets; |
| ● | the adequacy of our capital resources and liquidity including, but not limited to, access to additional borrowing capacity; and |
| ● | risks and uncertainties described in the Risk Factors section or elsewhere in our Annual Report on Form 10-K. |
Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.
Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Business Overview
Petrocorp Inc. was incorporated on June 19, 2006 under the laws of the State of Delaware. Prior to September 2007, the Company’s business model provided telephonic conferencing services to businesses, organizations and individuals in North America.
During 2009 the Company changed its emphasis from an international oil and gas company primarily to a US focused company because of world economic conditions and lack of debt/capital financing. The Company disposed of its foreign oil and gas leases/permits in two separate transactions. The Company completed an extensive review of its Alaska and Oklahoma oil and gas leases, operations and recorded a $900,865 impairment charge in 2010 as compared to $639,813 in 2009.
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Our office is located at 1065 Dobbs Ferry Road, White Plains, NY 10607 and our telephone number is (914) 674-4373.
Plan of Operation
We are a US exploration stage Company engaged in the acquisition, exploration and production, if warranted, development of prospective oil and gas properties. We plan to conduct exploration work on each of our current and future properties in order to ascertain whether any of them possess commercially exploitable quantities of oil and gas reserves. The Company currently has lease holdings on the North Slope of Alaska and oil and gas production in Oklahoma.
Alaska
On October 25, 2007, Union Energy (Alaska) LLC (“UEA”), our subsidiary, was the winning bidder for tracts 254, 258 and 259 in the North Slope Areawide 2007 Competitive Oil and Gas Lease Sale. The leases, covering 14,680 net acres, were issued on August 1, 2008, with a term of seven years and subject to a 12.5% royalty interest in favor of the State of Alaska. These tracts are contiguous and the Company believes, based upon current available geological data and maps from the public domain, to contain the Kavik gas field, discovered in 1969, which has been evaluated in detail by the U.S. Department of the Interior, U.S Geological Survey ("USGS").
On February 27, 2008, UEA was the winning bidder for tracts 922, 923, 927, 988, 989, 990, 991, 992 and 925 in the State of Alaska North Slope Foothills Areawide 2008 Competitive Oil and Gas Lease Sale. The leases, covering 9,600 net acres, were issued on September 1, 2008, with a term of 10 years and subject to a 12.5% royalty interest in favor of the State of Alaska. These tracts are contiguous and the Company believes, based upon current available geological data and maps from the public domain, to contain the East Kurupa gas field, discovered by Texaco in 1976. The USGS has been studying the potential for unconventional over-pressured, continuous gas deposits in the Colville basin that contains the Kurupa anticline and is now interpreting the East Kurupa well to have encountered a thick section of over-pressured gas in Brookian strata.
Furthermore, any gas recovered from our Alaska leases will not be salable unless or until a proposed North Slope gas pipeline is completed.
Oklahoma
On August 12, 2008, the Company acquired from its President, James Fitzsimons, a 50% working interest (41.25% net revenue interest) in the Snake Creek prospect, a 3,200 gross (3,022 net) acre gas development project located in northern Okmulgee County. The Company reimbursed Mr. Fitzsimons for his historic costs (acreage and drilling) by issuing a secured, non-interest bearing note, payable on demand for $210,917 and assumed responsibility for all further costs.
On November 30, 2008, the Company acquired from Mr. Fitzsimons, a 100% working interest (81.25% net revenue interest) in the Spanish Peak prospect, a 2,041 gross (900 net) acre gas development project located in Okmulgee County, Oklahoma. The Company reimbursed Mr. Fitzsimons for his historic costs (acreage) by issuing a secured, non-interest bearing note, payable on demand for $173,141 and assumed responsibility for all further costs.
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On March 31, 2009, the Company purchased 171 oil and gas lease interests totaling 3,827 gross (2,666 net) acres in Okfuskee and Okmulgee Counties, Oklahoma from CH4 Energy, Inc., a company controlled by Soladino Investments SA at a cost of $583,823. The Company reimbursed Soladino for its historic costs (acreage) by issuing a secured, non-interest bearing note, payable on demand for $583,823 and assumed responsibility for all further costs.
The Oklahoma leases are in areas which the Company believes are promising for oil and gas production although the Company does not make any representations as to future profitable production, if any.
Results of Operations
For the quarter ended March 31, 2011, we had revenues of $34,795, oil and gas operating costs of $16,660 and incurred a loss of $60,083, as compared to revenues of $30,910, operating costs of $22,560 and a loss of $82,046 in 2010. During the 2011 quarter, the Company paid compensation to its President of $30,000 which was recorded as a capital contribution by the Company and professional fees of $25,500, which related primarily to the development of the Company’s business plan and costs associated with being a public company, as compared to $31,500 for the 2010 quarter. Also during the 2011 quarter, the Company paid general and administrative expenses of $963, as compared to $6,782 for the 2010 quarter. Interest expense of $14,250 was computed on the majority stockholder loans at an implied rate of 6% and this amount was recorded as a capital contribution by the Company during the quarter.
Liquidity and Capital Resources
Our Company's principal cash requirements are for exploration expenses which we anticipate will rise as we proceed to determine the feasibility of developing our current or future property interests. As of March 31, 2011, we had cash of $29,750 and negative working capital of $945,798. Our net cash provided by financing activities from June 19, 2006 (inception) to March 31, 2011 was $2,416,992.
At March 31, 2011, the Company has $949,950 in notes (four) payable to Soladino Investments SA. The notes are secured by the Company’s oil and gas leases, are non interest bearing and payable upon demand.
We anticipate that additional funding will be provided in the form of equity financing from the sale of our common stock or loans from our majority stockholder. We cannot provide investors with any assurance that additional funds will be raised. Currently, we do not have any arrangements in place for future equity financings.
Critical Accounting Policies
Financial Reporting Release No. 60 of the SEC encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of the financial statements. There are no current revenue generating activities that give rise to significant assumptions or estimates. Our most critical accounting policies relate to the accounting and disclosure of related party transactions. Our financial statements filed as part of our December 31, 2010 Annual Report on Form 10-K include a summary of the significant accounting policies and methods used in the preparation of our financial statements.
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Off-Balance Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is not required as we are a smaller reporting company.
Item 4T. - Controls and Procedures
Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following two material weaknesses which have caused management to conclude that, as of March 31, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the quarter ending March 31, 2011. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
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2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
| ● ● ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the issuer; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
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As of the end of our most recent quarter, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, as of March 31, 2011, such internal control over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets. The aforementioned material weaknesses were identified by our Chief Financial Officer in connection with the review of our financial statements as of March 31, 2011.
Management believes that the material weaknesses set forth in items (1) and (2) above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
This quarterly 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 SEC that permit the Company to provide only the management's report in this annual report.
Management's Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
We will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. First, we will create a position to segregate duties consistent with control objectives of having separate individuals perform (i) the initiation of transactions, (ii) the recording of transactions and (iii) the custody of assets. Second, we will create a senior position to focus on financial reporting and standardizing and documenting our accounting procedures with the goal of increasing the effectiveness of the internal controls in preventing and detecting misstatements of accounting information. Third, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us. We anticipate the costs of implementing these remediation initiatives will be approximately $37,500 to $75,000 a year in increased salaries, legal and accounting expenses.
Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.
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We anticipate that these initiatives will be at least partially, if not fully, implemented by December 31, 2011.
The Company is not currently a party to any legal proceedings.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None
None
None
Item 5 - Other Information
None
Item 6 - Exhibits
The following documents are filed as part of this Report.
Exhibit Number |
Exhibit Description
|
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. ** |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. ** |
32.1 | Certificate (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Principal Financial Officer. ** |
32.2 | Certificate (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Principal Financial Officer. ** |
** Filed herewith
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
PETROCORP INC.
Date: May 16, 2011
By: /s/ James Fitzsimons
James Fitzsimons
CEO and President
