Oceanic Exploration (OCEX) 10QSB 2007 Q3 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

þ Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007

o Transition Report Under Section 13 or 15(d) of the Exchange Act

For the transition period from                    to                    

Commission file number 001-08521.

Oceanic Exploration Company

(Exact name of small business issuer as specified in its charter)

Delaware	84-0591071
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

7800 East Dorado Place, Suite 250, Englewood, CO 80111
(Address of principal executive offices)

(303) 220-8330
(Issuer’s telephone number)

(Former name, former address and former fiscal year,
if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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

Shares outstanding at
November 9, 2007
59,688,881

Common $.0625 Par Value

Transitional Small Business Disclosure Format (Check One) YESo NOþ

TABLE OF CONTENTS

	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
Rule 13a4-14(a) Certification of Principal Executive Officer
Rule 13a4-14(c) Certification of Chief Financial Officer
Rule 13a4-14(b) Certification of Officers

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

	September 30,			December 31,
	2007			2006
	(Unaudited)			(Audited)
Assets
Cash, unrestricted	$	1,572,733		$	2,985,985
Due from affiliates		7,872			14,674
Prepaid expenses and other		22,485			8,485
Total current assets		1,603,090			3,009,144
Oil and gas property interests (note 7)		—			—
Furniture, fixtures, and equipment		64,249			59,173
Less accumulated depreciation		(43,720	)		(39,490	)
		20,529			19,683
Total assets	$	1,623,619		$	3,028,827
Liabilities and Stockholders’ Equity (Deficit)
Accounts payable	$	27,053		$	436,487
Accrued expenses		678,392			491,381
Accrued expenses – security for legal costs (note 3)		305,657			282,325
Total current liabilities		1,011,102			1,210,193
United Kingdom taxes payable including accrued interest		849,745			793,859
Other non-current liabilities		10,607			12,569
Total non-current liabilities		860,352			806,428
Total liabilities		1,871,454			2,016,621
Commitments and contingencies (notes 2, 3 and 5)		—			—
Stockholders’ equity (deficit) (note 4)
Preferred stock, $10 par value. Authorized 600,000 shares; no shares issued		—			—
Common stock, $.0625 par value. Authorized 100,000,000 shares; 59,688,881 shares issued and outstanding		3,730,555			3,730,555
Capital in excess of par value		8,165,609			8,165,609
Retained deficit		(12,143,999	)		(10,883,958	)
Total stockholders’ equity (deficit)		(247,835	)		1,012,206
Total liabilities and stockholders’ equity (deficit)	$	1,623,619		$	3,028,827

See accompanying notes to condensed consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenue:
Management revenue — related parties	$	266,657		$	267,820		$	738,021		$	797,665
Costs and expenses:
Exploration expenses (note 3)		92,495			326,398			795,800			922,850
Amortization and depreciation		1,299			1,195			4,230			3,384
General and administrative		434,698			393,984			1,267,450			1,203,629
		528,492			721,577			2,067,480			2,129,863
Operating loss		(261,835	)		(453,757	)		(1,329,459	)		(1,332,198	)
Other income (expense):
Interest income		24,721			36,191			82,522			43,714
Interest and financing costs		(7,040	)		(20,909	)		(20,736	)		(120,239	)
Foreign currency gains (losses)		1,327			(15,683	)		7,632			(50,982	)
		19,008			(401	)		69,418			(127,507	)
Loss before income taxes		(242,827	)		(454,158	)		(1,260,041	)		(1,459,705	)
Income tax expense (note 6)		—			—			—			—
Net loss	$	(242,827	)	$	(454,158	)	$	(1,260,041	)	$	(1,459,705	)
Basic and diluted loss per common share	$	(0.00	)	$	(0.01	)	$	(0.02	)	$	(0.03	)
Weighted average number of common shares outstanding		59,688,881			54,732,359			59,688,881			45,421,482

See accompanying notes to condensed consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months Ended September 30,
	2007			2006
Cash flows from operating activities:
Net loss	$	(1,260,041	)	$	(1,459,705	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		4,230			3,384
Changes in operating assets and liabilities:
Decrease (increase) in due from affiliates		6,802			(83	)
Increase in prepaid expenses and other assets		(14,000	)		(14,925	)
Decrease in accounts payable		(409,434	)		(27,603	)
Increase in accrued expenses		187,011			111,688
Decrease in other current liabilities		—			887
Increase (decrease) in security for legal costs		23,332			(1,965	)
Increase in United Kingdom taxes payable, including accrued interest payable		55,886			77,820
Decrease in other noncurrent liabilities		(1,962	)		—
Net cash used in operating activities		(1,408,176	)		(1,310,502	)
Cash used in investing activities:
Purchase of fixed assets		(5,076	)		(2,414	)
Cash flows from financing activities:
Proceeds from rights offering, net		—			6,031,610
Increase in note payable, related party — NWO Resources, Inc. including accrued interest payable		—			1,177,279
Payment of note payable to NWO Resources, Inc. including accrued interest payable					(2,569,456	)
Net cash provided by financing activities		—			4,639,433
Net (decrease) increase in cash		(1,413,252	)		3,326,517
Cash at beginning of period		2,985,985			79,706
Cash at end of period	$	1,572,733		$	3,406,223

See accompanying notes to condensed consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

	September 30,			December 31,
	2007			2006
	(Unaudited)			(Audited)
Common stock:
Balance, beginning of year	$	3,730,555		$	2,543,055
Common stock issued in connection with rights offering		—			1,187,500
Balance, end of period	$	3,730,555		$	3,730,555
Capital in excess of par value:
Balance, beginning of year	$	8,165,609		$	3,323,410
Additional paid in capital from rights offering net of related costs of $50,301 (note 4)		—			4,842,199
Balance, end of period	$	8,165,609		$	8,165,609
Retained deficit:
Balance, beginning of year	$	(10,883,958	)	$	(8,394,449	)
Net loss for the nine months ended September 30, 2007 and the twelve months ended December 31, 2006, respectively		(1,260,041	)		(2,489,509	)
Balance, end of period	$	(12,143,999	)	$	(10,883,958	)
Total stockholders’ equity (deficit)	$	(247,835	)	$	1,012,206

See accompanying notes to consolidated financial statements.

OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2007

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The condensed consolidated balance sheet as of December 31, 2006 that has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements included herein, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to those rules and regulations, although Oceanic Exploration Company (Oceanic or the Company) believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments consisting of normal recurring accruals have been made which are necessary for the fair presentation of the periods included. Certain amounts recorded in prior periods have been reclassified to conform to current presentation. Interim results are not necessarily indicative of results for a full year. The information included herein should be read in conjunction with the financial statements and notes thereto included in the December 31, 2006 Form 10-KSB.

All of the Company’s revenue is derived from management contracts with related parties. The Company operates as one segment.

(2)PENDING LITIGATION

On March 1, 2004, Oceanic and Petrotimor filed a Complaint in the United States District Court for the District of Columbia. Oceanic and Petrotimor, as plaintiffs, brought this action to redress the harm caused by the defendants’ (collectively including ConocoPhillips, Inc. and designated subsidiaries, the Timor Sea Designated Authority for the Joint Petroleum Development Area, the Timor Gap Joint Authority for the Zone of Cooperation, PT Pertamina and BP Migas) theft, misappropriation and conversion of oil and gas resources within the Company’s 14.8 million-acre Timor Gap concession. On March 1, 2005, the Complaint was amended to reflect claims that the misdeeds of the defendants effectively prevented the Company from competing for concessions granted by the Designated Authority.

The Complaint describes violations of the following United States statutes: Racketeer Influenced Corrupt Organizations Act (RICO), the Lanham Act and the Robinson-Patman Act. The Complaint seeks damages of at least $10.5 billion from the defendants and cites unjust enrichment, unfair competition, and intentional interference with the contract and prospective economic advantage. Based upon the RICO and anti-trust claims, Oceanic and Petrotimor seek to recover treble damages, reasonable attorneys’ fees and punitive damages.

The Company filed a Second Amended Complaint with the Court on March 1, 2005. The defendants filed motions to dismiss with the Court on March 28, 2005.

On September 21, 2006, the Court issued an Order and Memorandum Opinion deciding these motions. The Court denied the motions of defendants ConocoPhillips, Inc. and ConocoPhillips Company (ConocoPhillips) with respect to Oceanic’s claims under RICO, the Robinson-Patman Act and under common law theories of intentional interference with prospective economic advantage and unfair competition. Since the Court found that Oceanic had stated legally cognizable claims against ConocoPhillips, these two defendants were ordered and did file an answer to the Second Amended Complaint on October 10, 2006. The other defendants and claims were dismissed. The two defendants filed a motion for reconsideration or in the alternative to certify the Order and Memorandum Opinion for interlocutory appeal. On November 17, 2006, the Court denied the defendants’ motions for reconsideration and interlocutory appeal. On February 5, 2007, the Court granted the defendants’ motion to transfer the case to the United States District Court for the Southern District of Texas.

On April 5, 2007, a hearing was held before the new presiding judge in the United States District Court in Houston, Texas. In advance of such hearing, ConocoPhillips filed a motion for a stay of discovery and a motion for a judgment on the pleadings. Based upon the judge’s ruling at the hearing, discovery awaits the judge’s determination on the ConocoPhillips’ motion for judgment on the pleadings. The Court has yet to rule on the motion for judgment on the pleadings.

As stated in the Second Amended Complaint, the Company has consistently proposed to locate liquefied natural gas facilities in East Timor which would significantly benefit the people of East Timor, yet the Company has not been given an opportunity to bid on production sharing contracts granted by the Designated Authority due to bribes and corruption. Under these circumstances, the Company believes it is entitled to prove its case, and if given the opportunity by the Court, intends to do so. The Company continues to believe that it has a persuasive case against the defendants based upon the evidence.

The Company anticipates that the defendants will continue to deny the allegations of the Second Amended Complaint and will otherwise vigorously defend against the Company’s claims. The Company understands that pursuing this lawsuit to its fullest extent in 2007 could take substantial time by Company personnel, and the Company could incur substantial expense. Additional resources may be required in connection with this litigation. The Company believes that the financial opportunity justifies this substantial commitment of time and expense.

(3)EXPLORATION EXPENSES

On August 21, 2001, Oceanic and Petrotimor issued a Statement of Claim (as amended) out of the Federal Court of Australia against the Commonwealth of Australia, the Joint Authority established under the Timor Gap Treaty and the ConocoPhillips Petroleum companies operating within the Timor Gap area (the Respondents). Oceanic and Petrotimor claimed that the Timor Gap Treaty and the related legislation of the Australian Parliament was void or invalid for a number of reasons including (i) the Timor Gap Treaty and the legislation sought to claim significant portions of the continental shelf over which it had no sovereign rights for Australia, which the Company believed under international law belonged to East Timor, and (ii) the Timor Gap Treaty and the legislation attempted to extinguish the property interest and rights granted by the then legitimate power, Portugal, to Oceanic and Petrotimor, without providing for just compensation as required by Australian law.

There were several procedural challenges by the Respondents. A hearing by the full Court on the question of whether the Court had jurisdiction over this claim was held on May 16 and 17, 2002. On February 3, 2003, the Federal Court of Australia issued an adverse decision in Petrotimor v. Commonwealth of Australia, ruling that it lacked the jurisdiction to hear the claims made by Oceanic and Petrotimor. On May 6, 2003, the Federal Court ruled that it lacked jurisdiction relating to claims of misuse of confidential information.

The Company sought special leave in 2003 to appeal to the Australian High Court. That appeal was discontinued on February 6, 2004 when the Company determined that the most appropriate venue would be in the United States.

As part of the Australian litigation, Oceanic was required to provide Bank Guarantees as security for costs. The Australia and New Zealand Banking Group (ANZ Bank) in Sydney, Australia provided the necessary guarantees. As of September 30, 2007 and December 31, 2006, the Company had $360,621 and $309,673, respectively, on deposit with ANZ Bank as collateral for the guarantees. The change in the balance results from the exchange rate fluctuation between the U.S. and Australian dollars and by interest earned on the account. In September 2005, the Australian Government Solicitor accepted the Company’s offer of $250,000 AU ($222,092 in U.S. dollars at September 30, 2007) in full and final settlement of their outstanding costs. We expect this amount to be withdrawn from this bank account in the near future. The Company believes that the deposit will be forfeited to pay for the defendants’ legal expenses. At the present time, the Company is unable to quantify the total costs and expenses that may be assessed against it by the Court.

During the nine months ended September 30, 2007 and 2006, the Company incurred expenses of $776,043 and $907,160, respectively, specifically related to legal, consulting and commercial activities in Australia and the Timor Gap area. These expenses have been recorded as exploration expenses in the accompanying statements.

Although Oceanic is not currently directly involved in any other oil and gas exploration or production activities, the Company continues to evaluate potential exploration and production activities elsewhere in the world. The Company did not receive any revenue from oil and gas properties in 2006. Other than the potential recovery of damages from the pending litigation, the Company is not currently conducting any activities that would result in material oil and gas revenue in 2007.

(4)CAPITAL STOCK

On March 6, 2006, the Board of Directors unanimously voted to increase the authorized common stock from 50,000,000 shares to 100,000,000 shares. This was adopted by written consent on May 8, 2006 by holders entitled to vote a majority of the outstanding shares of the Company’s common stock. The Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation, effecting this increase with the Secretary of State of the State of Delaware on July 13, 2006.

On May 18, 2006, the Company filed a Registration Statement on Form SB-2 with the Securities and Exchange Commission registering shares of common stock to be issued to stockholders pursuant to a rights offering. Under the terms of the rights offering, the Company offered the holders of its common stock the right to subscribe for additional shares at a purchase price of $.32 per share on the basis of 0.466958 shares of common stock for each share held as of June 19, 2006. A total of 19,000,000 shares of common stock were offered to all stockholders. The Registration Statement was declared effective on June 19, 2006.

The right to purchase common stock expired on July 21, 2006. The following subscriptions were accepted by the Company, resulting in gross proceeds of $6,080,000:

• 16,050,851 shares of common stock, at an aggregate purchase price of $5,136,272, pursuant to the basic subscription rights, and

• 2,949,149 shares of common stock, at an aggregate purchase price of $943,728, pursuant to the over-subscription privilege.

The Company also received, but did not accept, subscriptions for an additional 43,337 shares of common stock pursuant to the over-subscription privilege. The $13,868 received by the Company as a result of these unaccepted subscriptions was returned to the subscribing shareholders immediately after the expiration date of the rights offering.

NWO Resources, Inc. (NWO) purchased 18,949,116 shares of common stock in the rights offering pursuant to its basic subscription rights and over-subscription privilege. At the completion of the rights offering, NWO’s ownership increased from 84.2% to 89.2%.

The proceeds of the rights offering were used to pay off the note and accrued interest with NWO, fund the cost of the rights offering, and were and will continue to be used to pay for the legal and professional expenses associated with the Petrotimor lawsuit and to cover the cost of operations.

(5)NOTE PAYABLE – RELATED PARTY

In 2005, the Company established a line of credit with NWO, Oceanic’s principal shareholder, evidenced by a promissory note in the amount of $2,000,000 at an interest rate of 2% over the prime rate with repayment due on or before March 6, 2006. In addition, NWO committed to increase the line of credit to $4,000,000 under certain circumstances. These circumstances occurred and the promissory note was increased to $4,000,000 with a due date of March 6, 2007. On July 24, 2006, after the termination of the rights offering, the Company paid the note and accrued interest in full, paying NWO $2,569,456 in principal and interest as of that date. The 2005 line of credit was then terminated.

On March 7, 2007, the Company established a new line of credit with NWO, evidenced by a promissory note in the amount of $4,000,000 at an interest rate of 2% over prime rate with repayment due on or before March 7, 2008. In addition, NWO committed to increase the line of credit to $6,000,000 under certain circumstances. As of September 30, 2007, the Company had not borrowed any funds under this line of credit.

The Company believes that the cash on hand at September 30, 2007, plus cash generated from 2007 revenues and available borrowings from the 2007 line of credit from NWO will be sufficient to fund operations beyond December 31, 2007. The status of Oceanic’s current litigation may substantially affect the need for and the ability to raise capital in the long-term.

(6)INCOME TAXES

Oceanic and NWO maintain a tax-sharing agreement with the same provisions applicable to all subsidiaries included in NWO’s consolidated return. Oceanic’s tax provision is calculated using the then-current statutory rates, on a stand-alone basis, and specifically estimating the book-tax differences, including the share of any differences applied ratably to all subsidiaries. Oceanic includes a tax benefit from losses to the extent of the previous profits, but only to the extent such profits were included in the NWO consolidated return. To the extent a tax benefit for a loss has not been previously allowed, and Oceanic has profits in a future year which falls within the period to which, on a stand-alone basis, the prior tax loss could be carried forward under United States tax rules, the benefit of the loss will be included in the provision to the extent the loss would provide a tax benefit on a stand-alone basis.

In evaluating the realizability of the net deferred tax assets, the Company takes into account a number of factors, primarily relating to the ability to generate taxable income. Where it is determined that it is likely that the Company will be unable to realize deferred tax assets, a valuation allowance is established against the portion of the deferred tax asset.   Because it cannot be accurately determined when the Company will become profitable, a valuation allowance was provided against the entire deferred income tax asset attributable to the net operating losses incurred during the nine months ended September 30, 2007 and 2006.

(7)OIL AND GAS INTERESTS

Oceanic holds various interests in concessions or leases for oil and gas exploration around the world as described in the December 31, 2006 Form 10-KSB. Costs for these oil and gas property interests have been charged to expense in prior years so no amounts are reflected on the balance sheet. The Company is not currently conducting any direct exploration activities other than pursuing legal claims relating to the disputed oil and gas concession existing in the Timor Gap between East Timor and Australia.

(8)TRANSACTIONS WITH RELATED PARTIES

The current Company president, Mr. Stephen M. Duncan, is Vice-Chairman of the Board of General Atomic Technologies Corporation (GATC) in San Diego, California, a company indirectly controlled by James N. Blue, Chairman and CEO of Oceanic. Mr. Duncan is an employee of GATC’s operating subsidiary, General Atomics (GA) and will divide his time between GA and Oceanic on an as-needed basis. On July 30, 2007, Oceanic’s Board approved a Service Agreement between GA and Oceanic to reimburse GA for Mr. Duncan’s services at the current rate of $7,500 per month. After one year, the reimbursement rate may be re-negotiated by the parties. Oceanic does not have any other employment agreement or any other executive compensation agreement with Mr. Duncan. This agreement was attached as Exhibit 10.33 to the 10-QSB filing for the quarterly period ended June 30, 2007.

Karsten Blue, son of Oceanic’s Chairman of the Board of Directors and Chief Executive Officer, coordinates various activities for the Company relating to the East Timor situation, including coordinating with legal counsel and meeting with business and governmental advisors. Karsten Blue was an employee of Cordillera Corporation and Karsten Blue’s services were made available to the Company pursuant to a service agreement between Oceanic and Cordillera signed in 2002. Karsten Blue is now an employee of GA. Accordingly, effective August 1, 2007, the service agreement with Cordillera was terminated and replaced with a Service Agreement between Oceanic and GA for the services of Karsten Blue. Oceanic has agreed to reimburse GA for Karsten Blue’s services at the rate of $6,500 per month. All other terms are similar to the Service Agreement for Mr. Duncan. This agreement was attached as Exhibit 10.34 to the 10-QSB filing for the quarterly period ended June 30, 2007.

GA is currently providing Oceanic with legal and litigation management services related to Oceanic’s litigation over oil and gas rights in the East Timor Sea, on an as-requested basis.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Any statements that are contained in this Form 10-QSB that are not statements of historical fact are forward-looking statements. Readers can identify these statements by words such as ‘may,’ ‘will,’ ‘expect,’ ‘anticipate,’ ‘estimate,’ ‘continue’ or other similar words. These statements discuss future expectations, contain projections of results of operations or financial condition or state other forward-looking information and are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, including such factors as uncertainties in cash flow, expected costs of litigation, the outcome of litigation, the potential impact of government regulations and rulings, fluctuations in the economic environment and other such matters, many of which are beyond the control of the Company. Readers are cautioned that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those expressed or implied in the forward-looking statements.

The following discussion and analysis should be read in conjunction with Oceanic’s condensed consolidated financial statements and notes thereto for the respective periods ended December 31, 2006 and September 30, 2007 and 2006.

Critical Accounting Policies

The discussion and analysis of financial condition and results of operations is based on the Company’s condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. On an on-going basis, management evaluates the estimates including those related to the realizability of income tax assets and the provision for loss contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.

To record income tax expense, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This involves estimating actual current tax exposure together with assessing temporary differences that result in deferred tax assets and liabilities and expected future tax rates. The Company records a valuation allowance to reduce the deferred tax assets to an amount that management believes is more likely than not to be realized. Management considers future taxable income and prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If management subsequently determines that the Company will realize more or less of the net deferred tax assets in the future, such adjustment would be recorded as an increase or reduction of income tax expense in the period such determination is made.

In evaluating the need to provide for contingent liabilities, the Company takes into account a number of factors, including the expected likelihood of an unfavorable outcome, and the ability to reasonably estimate the financial impact of an unfavorable outcome and management’s intentions with respect to the contingency.

Liquidity and Capital Resources

Oceanic has historically addressed long-term liquidity needs for oil and gas exploration and development through the use of farm-out agreements. Under such agreements, the Company sells a portion of its ownership interest in the concession to an outside party who is then responsible for the exploration activities. This is a strategy that management intends to continue in the event it becomes feasible to begin further exploration in any of the areas where the Company currently owns concessions.

Cash Flow.Cash used in operating activities was $1,408,176 for the first nine months of 2007, compared to $1,310,502 in the first nine months of 2006. The first nine months of 2007 ended with a net decrease in total cash of $1,413,252, including the purchase of fixed assets totaling $5,076. During the nine months ended September 30, 2007 and 2006, Oceanic made actual cash payments of $466,511 and $727,291, respectively, related to legal and professional activities in Australia and the Timor Gap area. An additional $537,049 of expenses were accrued and remained unpaid as of September 30, 2007. These costs are included in exploration expenses. Exploration expenses have decreased in 2007 compared to the same period in 2006, primarily because of the reduction of legal and investigative work being done while waiting for a ruling from the Court. Until a final judgment is obtained or settlement of the lawsuit occurs, exploration expenses will continue to be high and will consume most of Oceanic’s cash resources.

Oceanic had $1,572,733 in cash at September 30, 2007 compared with $2,985,985 in cash and cash equivalents at December 31, 2006. The Company had a positive working capital of $591,988 at September 30, 2007 compared to $1,798,951 at December 31, 2006. This decrease of $1,206,963 in working capital from December 31, 2006 to September 30, 2007 was primarily a result of paying expenses associated with the lawsuit.

On March 7, 2007, the Company established a new line of credit with NWO, Oceanic’s principal shareholder, evidenced by a promissory note in the amount of $4,000,000 at an interest rate of 2% over the prime rate with repayment due on or before March 7, 2008. In addition, NWO committed to increase the line of credit to $6,000,000 under certain circumstances. As of September 30, 2007, the Company had not borrowed any funds under the line of credit.

The Company believes that the cash on hand at September 30, 2007, plus cash generated from 2007 revenues and the available borrowings from the 2007 line of credit from NWO will be sufficient to fund operations beyond December 31, 2007. The Company is also evaluating other potential financing sources for long-term capital. At this time, the Company has no firm commitments for the provision of long-term capital. The status of Oceanic’s current litigation may substantially affect the need for and the ability to raise capital in the long-term.

Revenue.Oceanic provides management services to various entities with which our Chairman of the Board of Directors and Chief Executive Officer is affiliated. Services provided are:

• Management, administrative and bookkeeping services to San Miguel Valley Corporation (San Miguel),

• Management, administrative and professional services to Cordillera Corporation (Cordillera), and

• Consulting services, including monitoring exploration and production activities on a worldwide basis to identify potential investment opportunities for Harvard International Resources Ltd. (HIRL).

Together, these management services provided all of Oceanic’s total revenue for the nine months ended September 30, 2007 and 2006.

Management Fee Revenue
(Unaudited)

	Nine months ended September 30,
Company	2007				2006
Cordillera Corporation	$	288,900	39	%	$	328,545	41	%
San Miguel Valley Corporation		422,470	57	%		443,790	56	%
Harvard International Resources, Ltd.		26,651	4	%		25,330	3	%
Total management fee revenue	$	738,021			$	797,665

Except for the contract with HIRL, all labor services are provided at payroll cost plus benefits and include a 5% markup on that total to cover the administrative expense. This charge is calculated annually and readjusted at year-end. All expenses are billed at cost. The purpose of the management agreements is to avoid duplication of functions and costs for the economic benefit of all of the companies involved.

Results of Operations

Revenue.Management fee revenue for the nine months ended September 30, 2007 decreased $59,644 or 7%, compared to the nine months ended September 30, 2006. Monthly fees for the first five months of 2007 decreased for Cordillera by $11,925 and for San Miguel by $360, totaling a net decrease in monthly revenue from those two sources of $12,285, compared to the same period in the prior year. Management fees were recalculated in June 2007 to account for the resignation of the Company’s President and the substitution of other employees providing services to Cordillera and San Miguel. The recalculated monthly management fee beginning June 2007 for Cordillera is $41,500 which is an increase of $16,920. The recalculated monthly management fee for San Miguel decreased by $4,520, resulting in a monthly fee of $44,430. Because the level of service is dependent upon the needs of the applicable corporations and available employees, it is normal to see fluctuations in management fee rates from year to year.

Although Oceanic is not currently directly involved in any other oil and gas exploration or production activities, the Company continues to evaluate potential exploration and production activities elsewhere in the world, including Indonesia and the United States. The Company did not receive any revenue from oil and gas properties in 2006. Other than the potential recovery of damages from the pending litigation, the Company is not currently conducting any activities that would result in oil and gas revenue in 2007.

Exploration Expenses.The Company continues to have ongoing legal and professional fees associated with the litigation in the U.S. District Court and the pursuit of commercial opportunities in East Timor. During the nine months ended September 30, 2007 and 2006, the Company incurred total exploration expenses of $795,800 and $922,850, respectively. These related primarily to legal and professional fees associated with the litigation in the U.S. court and the pursuit of commercial opportunities in East Timor. These expenses have been recorded as exploration expenses.

As part of the Australian litigation, Oceanic was required to provide Bank Guarantees as security for costs. The Australia and New Zealand Banking Group (ANZ Bank) in Sydney, Australia provided the necessary guarantees. As of September 30, 2007 and December 31, 2006, the Company had $360,621 and $309,673, respectively, on deposit with ANZ Bank as collateral for the guarantees. The change in the balance results from the exchange rate fluctuation between the U.S. and Australian dollars and by interest earned on the account. In September 2005, the Australian Government Solicitor accepted the Company’s offer of $250,000 AU ($222,092 in U.S. dollars at September 30, 2007) in full and final settlement of their outstanding costs. We expect this amount to be withdrawn from this bank account in the near future. The Company believes that the deposit will be forfeited to pay for the defendants’ legal expenses. At the present time, the Company is unable to quantify the total costs and expenses that may be assessed against it by the Court.

Pending Litigation.On March 1, 2004, Oceanic and Petrotimor filed a Complaint in the United States District Court for the District of Columbia. Oceanic and Petrotimor, as plaintiffs, brought this action to redress the harm caused by the defendants’ (collectively including ConocoPhillips, Inc. and designated subsidiaries, the Timor Sea Designated Authority for the Joint Petroleum Development Area, the Timor Gap Joint Authority for the Zone of Cooperation, PT Pertamina and BP Migas) theft, misappropriation and conversion of oil and gas resources within the Company’s 14.8 million-acre Timor Gap concession. On March 1, 2005, the Complaint was amended to reflect claims that the misdeeds of the defendants effectively prevented the Company from competing for concessions granted by the Designated Authority.
The Complaint describes violations of the following United States statutes: Racketeer Influenced Corrupt Organizations Act (RICO), the Lanham Act and the Robinson-Patman Act. The Complaint seeks damages of at least $10.5 billion from the defendants, and cites unjust enrichment, unfair competition, and intentional interference with the contract and prospective economic advantage. Based upon the RICO and anti-trust claims, Oceanic and Petrotimor seek to recover treble damages, reasonable attorneys’ fees and punitive damages.

The Company filed a Second Amended Complaint with the Court on March 1, 2005. The defendants filed motions to dismiss with the Court on March 28, 2005.

On September 21, 2006, the Court issued an Order and Memorandum Opinion deciding these motions. The Court denied the motions of defendants ConocoPhillips, Inc. and ConocoPhillips Company (ConocoPhillips) with respect to Oceanic’s claims under RICO, the Robinson-Patman Act and under common law theories of intentional interference with prospective economic advantage and unfair competition. Since the Court found that Oceanic had stated legally cognizable claims against ConocoPhillips, these two defendants were ordered and did file an answer to the Second Amended Complaint on October 10, 2006. The other defendants and claims were dismissed. The two defendants filed a motion for reconsideration or in the alternative to certify the Order and Memorandum Opinion for interlocutory appeal. On November 17, 2006, the Court denied the defendants’ motions for reconsideration and interlocutory appeal. On February 5, 2007, the Court granted the defendants’ motion to transfer the case to the United States District Court for the Southern District of Texas.

On April 5, 2007, a hearing was held before the new presiding judge in the United States District Court in Houston, Texas. In advance of such hearing, ConocoPhillips filed a motion for a stay of discovery and a motion for a judgment on the pleadings. Based upon the judge’s ruling at the hearing, discovery awaits the judge’s determination on the ConocoPhillips’ motion for judgment on the pleadings. The Court has yet to rule on the motion for judgment on the pleadings.

As stated in the Second Amended Complaint, the Company has consistently proposed to locate liquefied natural gas facilities in East Timor which would significantly benefit the people of East Timor, yet the Company has not been given an opportunity to bid on production sharing contracts granted by the Designated Authority due to bribes and corruption. Under these circumstances, the Company believes it is entitled to prove its case, and if given the opportunity by the Court, intends to do so. The Company continues to believe that it has a persuasive case against the defendants based upon the evidence.

The Company anticipates that the defendants will continue to deny the allegations of the Second Amended Complaint and will otherwise vigorously defend against the Company’s claims. The Company understands that pursuing this lawsuit to its fullest extent in 2007 could take substantial time by Company personnel, and the Company could incur substantial expense. Additional resources may be required in connection with this litigation. The Company believes that the financial opportunity justifies this substantial commitment of time and expense.

General and Administrative Expenses.Total general and administrative costs and expenses for the nine months ended September 30, 2007 increased by $63,821 from the same period in 2006. While total expenses remained substantially the same for the two years:

• Salaries and employee benefits increased by approximately 2% or $17,772.

• Contract services increased by approximately $9,400 because of increased documentation and testing of the Company’s information technology systems.

• Officers’ fees increased by $22,500 from the prior year pursuant to the Services Agreement with GA for Steve Duncan’s services.

• Travel expenses increased by approximately $4,700 because of increased travel by the Company’s officers.

Other Income and Expense.Interest income for the nine months ended September 30, 2007 is $82,522 which is $38,808 higher than the amount for the same period last year. This is because the Company did not have available cash to invest early in 2006. In the year-to-date ended September 30, 2007, the Company earned interest on the remaining proceeds resulting from the 2006 rights offering.

Interest expense of $20,736 is primarily from the United Kingdom estimated tax liability, which is compounded on both static principal and the increasing accrued interest payable compared to $120,239 for the same period in 2006. Interest expense for the quarter ended September 30, 2006 was substantially higher because of interest accrued on the note payable to NWO in the amount of $102,278. This note and related interest were paid in full in July 2006.

Non-cash foreign exchange gains of $7,632 at September 30, 2007 versus losses of $50,982 at September 30, 2006 resulted from the fluctuations in exchange rates in 2007 and 2006 between the U.S. dollar, the British pound, the Euro and the Australian dollar.

ITEM 3. CONTROLS AND PROCEDURES

At the end of the period covered by this report, the President and the Chief Financial Officer carried out an evaluation, which included inquiries made to certain other of our employees, of the Company’s disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.

Based upon that evaluation, the President and Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Legal proceeding developments in 2006 were reported in the December 31, 2006 Form 10-KSB. See the ‘Pending Litigation’ section in Management’s Discussion and Analysis above for activity through November 9, 2007.

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits filed herewith are listed below and attached to this report. The ‘Exhibit Number’ refers to the Exhibit Table in Item 601 of Regulation S-B.

Exhibit Number	Name of Exhibit
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Rule 13a-14(b) Certification of Officers

(b) On July 6, 2007, the Company filed a Form 8-K dated July 5, 2007 to report the appointment of a new President, Stephen M. Duncan, effective June 30, 2007.

SIGNATURES

     In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Oceanic Exploration Company
Date: November 9, 2007	/s/ Stephen M. DuncanStephen M. Duncan — President
Date: November 9, 2007	/s/ Courtney CowgillCourtney Cowgill — Chief Financial Officer

EXHIBIT INDEX

Exhibit Number	Name of Exhibit
31.1	Rule 13a-14(a) Certification of Principal Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Rule 13a-14(b) Certification of Officers