UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2008
--------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------ -------
Commission File Number: 000-30009
PETROL OIL AND GAS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 90-0066187
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11020 King Street, Suite 375
Overland Park, Kansas 66210
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(913) 323-4925
--------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark 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 last 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.
Yes |X| No |_|
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 [X] Smaller Reporting Company [ ]
(do not check if smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The number of shares of Common Stock, $0.001 par value, outstanding on August
13, 2008 was 29,090,926.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Petrol Oil and Gas, Inc.
Condensed Consolidated Balance Sheet
June 30, December 31,
2008 2007
------------ ------------
(Unaudited) (Audited)
Assets
Current assets:
Cash $ 478,914 $ 506,711
Accounts receivable 420,450 529,554
Prepaid expenses and other 42,495 120,295
------------ ------------
Total current assets 941,859 1,156,560
------------ ------------
Fixed assets:
Pipeline 1,522,423 1,522,423
Equipment and vehicles 403,801 388,762
------------ ------------
1,926,223 1,911,185
Less accumulated depreciation 572,174 487,954
------------ ------------
Net fixed assets 1,354,049 1,423,231
------------ ------------
Other assets:
Oil and gas properties using full cost accounting:
Properties not subject to
amortization 313,829 313,829
Properties subject to
amortization 8,276,394 8,605,842
Deposits 3,000 3,000
------------ ------------
Total other assets 8,593,223 8,922,671
------------ ------------
$ 10,889,131 $ 11,502,462
============ ============
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable $ 198,253 $ 37,366
Accrued liabilities 1,239,207 649,031
Short term derivative liability 2,188,530 --
Current portion of long term debt 26,662,814 26,639,094
------------ ------------
Total liabilities 30,288,804 27,325,491
------------ ------------
Asset retirement obligation 532,718 511,000
------------ ------------
Commitments and contingencies:
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized 29,090,926 shares issued and
outstanding 29,090 29,090
Additional paid-in capital 27,220,866 27,220,866
Other comprehensive income (loss) (2,188,530) 77,800
Accumulated (deficit) (44,993,817) (43,661,785)
------------ ------------
(19,932,391) (16,334,029)
------------ ------------
$ 10,889,131 $ 11,502,462
============ ============
See notes to condensed consolidated financial statements.
1
Petrol Oil and Gas, Inc.
Condensed Consolidated Statement of Operations
(Unaudited)
For the Quarter Ended For the Six Months Ended
June 30, June 30,
------------ ------------ ------------ ------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue
Oil and gas activities $ 1,162,800 $ 1,336,821 $ 2,255,584 $ 2,948,229
Expenses:
Direct costs 404,203 746,029 872,545 1,500,067
Pipeline costs 12,099 286,391 33,295 551,719
General and administrative 353,928 481,574 665,481 962,953
Impairment of oil & gas properties and
pipelines -- 8,812,027 -- 8,812,027
Professional and consulting fees 128,778 354,286 294,286 511,507
Depreciation, depletion and amortization 223,945 593,057 424,109 1,245,454
------------ ------------ ------------ ------------
Total expenses 1,122,954 11,273,364 2,289,716 13,583,727
------------ ------------ ------------ ------------
Net operating income (loss) 39,846 (9,936,543) (34,132) (10,635,498)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 362 -- 1,141 --
Loss on disposal of assets -- -- (26,775) --
Interest expense (507,300) (1,067,435) (1,272,266) (2,155,688)
------------ ------------ ------------ ------------
(506,938) (1,067,435) (1,297,900) (2,155,688)
Net (loss) $ (467,092) $(11,003,978) $ (1,332,032) $(12,791,186)
============ ============ ============ ============
Weighted average number of
common shares outstanding - basic and fully
diluted 29,090,926 29,090,926 29,090,926 29,090,926
============ ============ ============ ============
Net (loss) per share - basic and fully diluted $ (0.02) $ (0.38) $ (0.05) $ (0.44)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
2
Petrol Oil and Gas, Inc.
Condensed Consolidated Statement of Cash Flows
(unaudited)
For the Six Months Ended June 30,
----------- ------------
2008 2007
------------ ------------
Cash flows from operating activities
Net (loss) $ (1,332,032) $(12,791,186)
Depreciation, depletion and amortization 413,668 1,020,243
Warrant accretion -- 544,169
Impairment of oil & gas properties -- 8,812,027
Warrants, options, and shares issued for services -- 167,928
Loss on disposal of assets 26,775 --
Accretion of asset retirement obligation 21,718 40,340
Adjustments to reconcile net (loss) to cash
used in operating activities:
Accounts receivable 109,104 117,120
Prepaid and other assets -- (37,035)
Accounts payable 160,887 (265,716)
Accrued liabilities 590,175 (25,363)
------------ ------------
Net cash provided by (used in) operating activities (9,705) (2,417,473)
------------ ------------
Cash flows from investing activities
Purchase of fixed assets (41,810) (38,509)
Additions to other assets -- (20,136)
Additions to oil and gas properties and deposits -- (468,490)
------------ ------------
Net cash provided from (used in) investing activities (41,810) (527,135)
------------ ------------
Cash flows from financing activities
Proceeds from loans payable 36,557 23,452
Amortized loan fees -- 225,211
Payments on notes payable (12,839) (1,375,555)
------------ ------------
Net cash provided from financing activities 23,718 (1,126,892)
------------ ------------
Net increase (decrease) in cash (27,797) (4,071,500)
Cash - beginning 506,711 5,917,958
------------ ------------
Cash - ending $ 478,914 $ 1,846,458
============ ============
Supplemental disclosures:
Interest paid $ 542,266 $ 1,639,644
============ ============
Income taxes paid -- --
============ ============
See notes to condensed consolidated financial statements.
3
Petrol Oil and Gas, Inc.
Notes to Condensed Financial Statements
Note 1 - Basis of Presentation
The unaudited condensed financial statements have been prepared in accordance
with United States generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation. All such adjustments are of a normal recurring nature. The results
of operations for the interim period are not necessarily indicative of the
results to be expected for a full year. Certain amounts in the prior year
statements have been reclassified to conform to the current year presentations.
These statements should be read in conjunction with the financial statements and
footnotes thereto included in the Form 10-K for the year ended December 31,
2007.
Note 2 - Going Concern
The accompanying condensed consolidated financial statements have been prepared
assuming that we will continue as a going concern. Our ability to continue as a
going concern is dependent upon attaining profitable operations based on the
development of products that can be sold. We intend to use borrowings and
security sales to mitigate the affects of our cash position, however, no
assurance can be given that debt or equity financing, if and when required, will
be available. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets and classification
of liabilities that might be necessary should we be unable to continue in
existence.
Note 3 - Stock Transactions
During the six months ended June 30, 2008 there was no activity in our stock. A
summary of stock options and warrants is as follows:
Options Exercise Warrants Exercise
Price Price
Outstanding - 01/01/08 760,000 $2.12 8,233,333 $2.28
Granted -- -- -- --
Cancelled (50,000) 3.25 -- --
Exercised -- -- -- --
---------------------------------------------------------
Outstanding - 6/31/08 710,000 $2.04 8,233,333 $2.28
=========================================================
Note 4 - Asset Retirement Obligation
Our asset retirement obligations relate to the abandonment of oil and gas wells.
The amounts recognized are based on numerous estimates and assumptions,
including future retirement costs, inflation rates and credit adjusted risk-free
interest rates. The following shows the changes in asset retirement obligations
for the financial statements presented.
June 30, 2008
-------------
Asset retirement obligation -January 1, 2008 $ 511,000
Liabilities incurred during the year --
Liabilities settled during the year --
Accretion of expense 21,718
---------
Asset retirement obligations - June 30, 2008 $ 532,718
=========
4
Note 5 - Debt
Debt consists of the following:
June 30, 2008
-------------
Total notes payable $ 26,662,814
============
Our long-term debt has been classified as current as we were in default at June
30, 2008.
Interest expense related to our debt was $1,272,266 for the six months ended
June 30, 2008 and $2,155,688 for the six months ended June 30, 2007.
On April 30, 2008, Petrol Oil and Gas, Inc., Neodesha Pipeline, Inc. and Coal
Creek Pipeline, Inc. (collectively, "Petrol") entered into a Foreclosure-Related
Agreement (the "Agreement") with LV Administrative Services, Inc. ("LV"),
administrative and collateral agent for Laurus Master Fund, Ltd. ("Laurus"),
Valens Offshore SPV I, Ltd. ("Valens Offshore"), Valens U.S. SPV I, LLC ("Valens
US"), Calliope Capital Corporation ("Calliope") and Pallas Production Corp.
("Pallas", and together with, Laurus, Valens Offshore, Valens US and Calliope,
the "Holders").
Petrol is in default of certain obligations to its Holders under its Secured
Convertible Term Note, dated October 28, 2004, in the principle amount of
$8,000,000; its Secured Term Note, dated October 31, 2005, in the principle
amount of $10,000,000; its Secured Term Note, dated March 31, 2006, in the
principle amount of $5,000,000; and its Secured Term Note, dated May 26, 2006,
in the principle amount of $10,000,000 (collectively, the "Notes," and all other
obligations of Petrol together with the Notes, the "Outstanding Obligations"),
and has received from LV and the Holders a default and acceleration notice with
respect to the Outstanding Obligations.
The Outstanding Obligations are secured by various mortgages and other fixed and
mixed assets and real and personal property pursuant to security and other
agreements covering assets or other rights to which Petrol has rights (all such
assets, rights and collateral, collectively, the "Collateral"), a portion of
which are assets and rights referred to as the "Petrol-Neodesha Project,"
located in Neosho and Wilson Counties, Kansas, consisting of, among other
Collateral, mortgages, and real, personal property and fixed and mixed assets
used in connection with the Petrol-Neodesha Project (the "Neodesha Collateral").
The Agreement allows the Holders to foreclose on the Neodesha Collateral and
governs the terms and conditions of the foreclosure. The Agreement provides that
Petrol will not contest the sale of the Neodesha Collateral, which will be
conducted as a public foreclosure sale in accordance with Kansas law. Petrol has
agreed to reasonably assist LV and the Holders in the completion of the
foreclosure sale. After the sale of the Neodesha Collateral becomes final, LV
and the Holders will release Petrol of all remaining amounts owed or claims they
may have, and the Holders will reassign to Petrol their overriding royalty
interests in the mineral leases located at Petrol's Coal Creek Project.
As part of the Agreement, Petrol will cancel all outstanding warrants for
purchases of securities issued to Holders in connection with the outstanding
obligations and replace them with warrants to purchase 1,000,000 shares of
common stock at an initial exercise price of $0.20 per share.
Note 6 - Fixed Price Sales Contracts
We have entered into various contracts with our customers to sell gas and oil at
a fixed price. At June 30, 2008 we had contracts covering approximately 45,000
mmbtu per month for the period of July 2008 to March 2009 at an average price of
$7.10 per mmbtu.
Note 7 - Subsequent Events
On July 9, 2008, the Company granted Non-Qualified Stock Options to purchase the
Company's common stock, $0.001 par value, under the 2006 Plan to Messrs. Loren
Moll and Robert Kite. Mr. Moll, the Company's president, chief executive officer
and a member of the board of directors was granted options to purchase 2.9
million shares of the Company's common stock at exercise prices ranging from
$0.20 to $1.20. Mr. Kite, a member of the Company's board of directors, was
granted options to purchase 1.5 million shares of the Company's common stock at
exercise prices ranging from $0.20 to $0.50. These options may be exercised at
any time between July 9, 2008 and July 9, 2018. The closing price of the
Company's stock on July 9, 2008 was $0.14 per share.
5
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements other
than statements of historical fact are "forward-looking statements" for purposes
of federal and state securities laws, including, but not limited to, any
projections of earnings, revenue or other financial items; any statements of the
plans, strategies and objections of management for future operations; any
statements concerning proposed new services or developments; any statements
regarding future economic conditions or performance; any statements of belief;
and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words "may," "could," "will
be," "estimate," "intend," "plan," "continue," "believe," "expect,"
"anticipate," "goal" or "forecast" or other similar words. These forward-looking
statements present our estimates and assumptions only as of the date of this
report. Except as otherwise required by applicable securities laws, we do not
intend, and undertake no obligation, to update any forward-looking statement.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and inherent risks and
uncertainties. The factors impacting these risks and uncertainties include, but
are not limited to:
o attainment of profitable operations based on the development of oil
and gas products that can be sold, and the continued availability of
debt or equity financing. The Company's ability to continue to operate
is contingent on refinancing or restructuring indebtedness. See
"Liquidity and Capital Resources."
o increased competitive pressures from existing competitors and new
entrants;
o increases in interest rates or our cost of borrowing or a default
under any material debt agreements;
o deterioration in general or regional economic conditions;
o adverse state or federal legislation or regulation that increases the
costs of compliance, or adverse findings by a regulator with respect
to existing operations;
o hedging risks;
o ability to attract and retain key personnel;
o inability to achieve future sales levels or other operating results;
o fluctuations of oil and gas prices;
o the unavailability of funds for capital expenditures; and
o operational inefficiencies in distribution or other systems.
For a detailed description of these and other factors that could cause
actual results to differ materially from those expressed in any forward-looking
statement, please see the "Risk Factors" section of our Annual Report on Form
10-K for the year ended December 31, 2007 and to the extent applicable, our
Quarterly Reports on Form 10-Q.
References to "Petrol," "the Company," "we," "us," and "our" refer to
Petrol Oil and Gas, Inc.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations for the Three Months Ended June 30, 2008 and 2007.
The following table summarizes selected items from the statement of
operations for the three months ended June 30, 2008 compared to the three months
ended June 30, 2007.
Three Months Ended June 30,
-------------------------------- Increase Percentage
2008 2007 (Decrease) Change
------------ ------------ ------------ -----
Revenue $ 1,162,800 $ 1,336,821 $ (174,021) 13%
Expenses:
Direct costs
404,203 746,029 (341,826) 45.8%
Pipeline costs
12,099 286,391 (274,292) 95.8%
General and administrative
353,928 481,574 (127,646) 26.5%
Impairment of oil and gas properties
and pipelines -- 8,812,027 (8,812,027)
Professional and consulting fees
128,778 354,286 (225,508) 63.7%
Depreciation, depletion and amortization
223,945 593,057 (369,112) 62.2%
------------ ------------ ------------ -----
Total expenses 1,122,954 11,273,364 (10,150,410) 90%
------------ ------------ ------------ -----
Net operating income (loss) 39,846 (9,936,543) 9,976,389 100.4%
------------ ------------ ------------ -----
Other income (expense):
Interest income 362 -- 362 100%
------------ ------------ ------------ -----
Interest expense (507,300) (1,067,435) 560,135 52.5%
------------ ------------ ------------ -----
Total other income (expense) (506,938) (1,067,435) 560,497 52.5%
Net income (loss) (467,092) $(11,003,978) $ 10,536,886 95.8%
============ ============ ============ =====
Revenues. Revenues for the three months ended June 30, 2008 were
$1,162,800 compared to revenues of $1,336,821 in the three months ended June 30,
2007. This resulted in a decrease of $174,021 or 13.0%, from the same period one
year ago. The decrease in revenues is primarily the result of decreased
production, together with decreased pricing (after impact of the Company's
hedging activities).
Direct Costs. Direct costs are the costs associated with operating
producing wells, and transporting the oil and natural gas to the market for
sale. Direct costs for the three months ended June 30, 2008 were $404,203, a
decrease of $341,826 or 45.8%, from $746,029 for the three months ended June 30,
2007. This decrease reflects expenses incurred in the first quarter of 2007
related to the Company's failed efforts to dewater and obtain commercial
production from wells drilled beginning during the last half of 2006 with
respect to its Burlington and Waverly properties in the Coal Creek Project. The
Company ceased dewatering efforts in Coal Creek near the end of the Company's
second quarter 2007. We have also reduced our costs related to work-overs,
repairs and modification to the Neodesha wells and pipeline system that we had
previously experienced during the same period in the previous year. We do not
anticipate maintenance and work-over costs to that extent in the future and our
current direct operating costs are more indicative of our overall production
costs.
Pipeline Costs. Pipeline costs for the three months ended June 30, 2008
were $12,099, a decrease of $274,292, or 95.8%, from $286,391 for the three
months ended June 30, 2007. The decrease in pipeline costs was primarily the
result of our cessation of the operation of the Company's pipeline system
7
supporting its Waverly properties in the Coal Creek Project and reduced
operating of its Burlington properties, also in the Coal Creek Project during
the second quarter 2007, followed by a cessation of operation of the Burlington
properties during the second quarter of 2008, and changes to our compression
system, resulting in reduced compressor rentals, together will reduce overall
expenses.
General and Administrative Expenses. General and administrative
expenses for the three months ended June 30, 2008 were $353,928, a decrease of
$127,646, or 26.5%, from $481,574 for the three months ended June 30, 2007. The
decrease in general and administrative expenses is attributable to the
streamlining and reduction of expenses.
Professional and Consulting Fees. Professional and consulting fees for
the three months ended June 30, 2008 was $128,778, a decrease of $225,508, or
63.7%, from $354,286 for the three months ended June 30, 2007. The decrease in
professional and consulting fees in the current period was a result of decreased
investor relations fees and a lessened reliance on outside consultants.
Depreciation, Depletion, and Amortization Expense. Depreciation,
depletion, and amortization expense for the three months ended June 30, 2008 was
$223,945, a decrease of $369,112 or 62.2%, from $593,057 for the three months
ended June 30, 2007. The decrease in depreciation, depletion and amortization
reflects a significantly lower level of applicable assets in the first quarter
2008 as compared to the first quarter of 2007 due to the charge for impairment
of oil and gas properties and pipelines and the sale of oil properties.
Net Operating Loss. The net operating loss for the three months ended
June 30, 2008 was $39,846, versus a net operating loss of $9,936,543.
Interest Expense. Interest expense for the three months ended June 30,
2008 was $507,300, a decrease of $560,135, or 52.2%, from $1,067,435 for the
three months ended June 30, 2007. The decrease in interest expense is the result
of the accretion of warrants in 2007 and no remaining accretion in 2008.
Results of Operations for the Six Months Ended June 30, 2008 and 2007.
The following table summarizes selected items from the statement of
operations for the six months ended June 30, 2008 compared to the six ended June
30, 2007.
Six Months Ended June 30,
-------------------------------- Increase Percentage
2008 2007 (Decrease) Change
------------ ------------ ------------ -----
Revenue $ 2,255,584 $ 2,948,229 $ (692,645) 23.5%
Expenses:
Direct costs 872,545 1,500,067 (627,522) 41.8%
Pipeline costs 33,295 551,719 (518,424) 93.9%
General and administrative 665,481 962,953 (297,472) 30.9%
Impairment of oil and gas properties
and pipelines -- 8,812,027 (8,812,027)
Professional and consulting fees 294,286 511,507 (217,221) 42.5%
Depreciation, depletion and amortization 424,109 1,245,454 (821,345) 66%
------------ ------------ ------------ -----
Total expenses 2,289,716 13,583,727 (11,294,011) 83.1%
------------ ------------ ------------ -----
Net operating (loss) $ (34,132) $(10,635,498) $ 10,601,366 99.7%
------------ ------------ ------------ -----
Other income (expense):
Interest income 1,141 -- 1,141 n/a
Loss on disposal of assets (26,775) -- (26,775) n/a
Interest expense (1,272,266) (2,155,688) 883,422 40.98%
------------ ------------ ------------ -----
Total other income (expense) (1,297,900) (2,155,688) 857,788 39.79%
Net income (loss) (1,332,032) $(12,791,186) $ 11,459,154 89.59%
============ ============ ============ =====
8
Revenues. Revenues for the six months ended June 30, 2008 were
$2,255,584 compared to revenues of $2,948,229 in the six months ended June 30,
2007. This resulted in a decrease of $692,645 or 23.5%, from the same period one
year ago. The decrease in revenues is primarily the result of decreased
production, together with decreased pricing (after impact of the Company's
hedging activities).
Direct Costs. Direct costs for the six months ended June 30, 2008 were
$872,545, a decrease of $627,522, or 41.8%, from $1,500,067 for the six months
ended June 30, 2007. This decrease reflects expenses incurred in the first
quarter of 2007 related to the Company's failed efforts to dewater and obtain
commercial production from wells drilled beginning during the last half of 2006
with respect to its Burlington and Waverly properties in the Coal Creek Project.
The Company ceased dewatering efforts in Coal Creek near the end of the
Company's second quarter 2007. We have also reduced our costs related to
work-overs, repairs and modification to the Neodesha wells and pipeline system
that we had previously experienced during the same period in the previous year.
We do not anticipate maintenance and work-over costs to that extent in the
future and our current direct operating costs are more indicative of our overall
production costs.
Pipeline Costs. Pipeline costs for the six months ended June 30, 2008
were $33,295 a decrease of $518,424, or 93.9%, from $551,719 for the six months
ended June 30, 2007. The decrease in pipeline costs was primarily the result of
our cessation of the operation of the Company's pipeline system supporting its
Waverly properties in the Coal Creek Project and reduced operating of its
Burlington properties, also in the Coal Creek Project during the second quarter
2007, followed by a cessation of operation of the Burlington properties during
the second quarter of 2008, and changes to our compression system, resulting in
reduced compressor rentals, together will reduce overall expenses.
General and Administrative Expenses. General and administrative
expenses for the six months ended June 30, 2008 were $665,481, a decrease of
$297,472 or 30.9%, from $962,953 for the six months ended June 30, 2007. The
decrease in general and administrative expenses is attributable to the
streamlining and reduction of expenses.
Impairment of Oil and Gas Properties. During the six months ended June
30, 2007, we impaired our oil and gas properties by $8,812,027 based on our
reserve study of the present value of future cash flows discounted by 10%. The
impairment is primarily attributable to decrease in reserves.
Professional and Consulting Fees. Professional and consulting fees for
the six months ended June 30, 2008 was $294,286, a decrease of $217,221, or
42.5%, from $511,507 for the six months ended June 30, 2007. The decrease in
professional and consulting fees in the current period was a result of decreased
investor relations fees and a lessened reliance on outside consultants.
Depreciation, Depletion, and Amortization Expense. Depreciation,
depletion, and amortization expense for the six months ended June 30, 2008 was
$424,109, a decrease of $821,345, or 66%, from $1,245,454 for the six months
ended June 30, 2007. The decrease in depreciation, depletion and amortization
reflects a significantly lower level of applicable assets in the first quarter
2008 as compared to the first quarter of 2007 due to the charge for impairment
of oil and gas properties and pipelines and the sale of oil properties.
9
Net Operating Loss. The net operating loss for the six months ended
June 30, 2007 was $10,635,498, versus a net operating loss of $34,132 for the
six months ended June 30, 2008.
Interest Expense. Interest expense for the six months ended June 30,
2008 was $1,272,266, an decrease of $883,422, or 40.98%, from $2,155,688 for the
six months ended June 30, 2007. The decrease in interest expense is the result
of the accretion of warrants in 2007 and no remaining accretion in 2008. In the
six months ended June 30, 2008, we incurred a loss on the disposal of fixed
assets of $26,775.
Liquidity and Capital Resources
During the six months ended June 30, 2008 our cash position decreased
by $27,797. During that period, our operating activities utilized $9,705 of cash
mainly from operating expenses we incurred, and we made payments on notes
payable of $12,839. The following table summarizes total assets, accumulated
deficit, stockholders' equity and working capital at June 30, 2008 compared to
December 31, 2007.
Increase / (Decrease)
------------------------------------
June 30, 2008 December 31, 2007 $ %
------------------- ------------------- ------------------ ------------------
Current assets $ 941,859 $ 1,156,560 $ (214,701) 18.56%
=================== =================== ================== ==================
Current liabilities $30,288,804 $27,325,492 $2,963,312 10.84%
=================== =================== ================== ==================
Working capital (deficit) $(29,346,945) $(26,168,932) $( 3,178,013) (12.14)%
=================== =================== ================== ==================
Financing. On October 28, 2004, we entered into agreements with Laurus
Master Fund, Ltd., a Cayman Islands corporation. Under the terms of the Laurus
Funds agreements, we issued a Secured Convertible Term Note (the "Note") in the
aggregate principal amount of $8,000,000 and a five-year warrant (the "Warrant")
to purchase 3,520,000 shares of our common stock at $2.00 per share and
1,813,333 shares of our common stock at $3.00 per share. On June 2, 2006, Laurus
transferred the 5,333,333 warrants to Pallas Production Corp. ("Pallas"). The
Note is convertible into shares of our common stock at a fixed conversion price
of $1.50 per share. The Note has a three-year term and bears an interest rate
equivalent to the "prime rate" published by the Wall Street Journal from time to
time plus 3%, subject to a floor of 7.5% per annum.
On January 28, 2005, we amended the Laurus Note and the Registration
Rights Agreement. Laurus agreed to move five months of principal payments
(January through May of 2005) to be paid on the Maturity Date (October 28,
2007). Additionally, Laurus agreed to extend certain filing and effectiveness
dates under the registration rights agreement. In consideration for the
amendment, we issued an additional common stock purchase warrant to Laurus to
purchase up to 1,000,000 shares of our common stock at $2.50 per share for the
first 666,667 shares and $3.00 per share for the remaining 333,333 shares. On
June 20, 2006, Laurus transferred the 1,000,000 warrants to Pallas. Further,
pursuant to the amendment agreement executed on April 28, 2004, we have agreed
to file semi-annual registration statements to register shares of our common
stock issued to Laurus for the conversion of interest under the Note.
As of June 30, 2007, Laurus had converted $2,283,823 of principal
payments into 1,522,550 shares of our common stock and $779,352 of accrued
interest into 519,568 shares of our common stock (2,042,118 shares in total).
The conversion of principal and accrued interest allowed us additional cash to
use in our operations.
10
On October 31, 2005, we entered into another financing agreement with
Laurus, under which $10,000,000 was funded into an escrow account and was
disbursed to us in November 2005 after finalization of certain closing
requirements. We issued a three-year Secured Term Note in the aggregate
principal amount of $10,000,000 and a five-year warrant to purchase 1,000,000
shares of our common stock at $2.00 per share. On June 20, 2006, Laurus
transferred the 1,000,000 warrants to Pallas. The note bears an interest rate
equivalent to the "prime rate" published by the Wall Street Journal from time to
time plus 3.25%, subject to a floor of 10% and a ceiling of 14% per annum. In
addition, Laurus, in their sole discretion, was able to purchase additional
notes from us in an aggregate principal amount of up to $40,000,000 pursuant to
substantially similar terms of the initial note dated October 31, 2005.
On June 30, 2006, we entered into agreements with Laurus to draw down
an additional $5,000,000 under the credit facility provided by Laurus in October
2005. Under the terms of the Laurus agreements we issued a Secured Term Note in
the aggregate principal amount of $5,000,000 and a five-year warrant to purchase
200,000 shares of our common stock at $1.80 per share. On June 20, 2006, Laurus
transferred the 200,000 warrants to Pallas. The Note has a three-year term and
bears an interest rate equivalent to the "prime rate" published by the Wall
Street Journal from time to time plus 3.25%, subject to a floor of 10% and a
ceiling of 14% per annum. Concurrently with the agreements listed above, we
amended and restated our previous $10,000,000 Secured Term Note dated October
31, 2005 with Laurus.
On April 7, 2006, the funds were released from Escrow. Net proceeds to
Petrol from the financing, after payment of fees and expenses to Laurus and its
affiliates, were $4,806,688. The proceeds were primarily utilized by Petrol for
drilling activities on our Coal Creek Project.
On May 31, 2006, we entered into agreements with Laurus to draw down an
additional $10,000,000 under the credit facility provided by Laurus in October
2005. Under the terms of the Laurus agreements we issued a Secured Term Note in
the aggregate principal amount of $10,000,000 and a five-year warrant to
purchase 400,000 shares of our common stock at $1.65 per share. On June 20,
2006, Laurus transferred the 400,000 warrants to Pallas. The Note has a
three-year term and bears an interest rate equivalent to the "prime rate"
published by the Wall Street Journal from time to time plus 3.25%, subject to a
floor of 10% and a ceiling of 14% per annum. Concurrently with the execution of
the new Laurus Funds agreements, Petrol amended and restated its previous
$10,000,000 Secured Term Note dated October 31, 2005 and the $5,000,000 Secured
Term Note dated June 30, 2006 with Laurus Funds.
On June 2, 2006, the funds were released from Escrow. Net proceeds to
Petrol from the financing, after payment of fees and expenses to Laurus Funds
and its affiliates, were $9,629,679. The proceeds were primarily utilized by
Petrol for drilling activities on Petrol's Coal Creek Project.
At December 31, 2007, the Company had long term debt (including the
current portion of long term debt) of approximately $26.7 million. Approximately
$15 million of this debt was utilized to develop the Coal Creek Project, which
has contributed no significant revenue to the Company. As a result, the
Company's cash position has seriously declined. On October 28, 2007, the Company
was required to make a principal payment of approximately $1.1 million on a
portion of its long term debt. The Company did not have adequate cash to make
such principal payment and is currently in default under the terms of the note
for this long term debt.
On April 9, 2008, the Company's debt was declared in default and
accelerated by Laurus.
11
On April 30, 2008, the Company entered into a Foreclosure-Related
Agreement (the "Foreclosure Agreement") with Laurus. The aggregate amount due
and owing to Laurus as of April 30, 2008 was approximately $35.7 million.
The outstanding obligations are secured by various mortgages and other
fixed and mixed assets and real and personal property pursuant to security and
other agreements covering assets or other rights to which the Company has rights
(all such assets, rights and collateral, collectively, the "Collateral"), a
portion of which are assets and rights referred to as the "Petrol-Neodesha
Project," located in Neosho and Wilson Counties, Kansas, consisting of, among
other Collateral, mortgages, and real, personal property and fixed and mixed
assets used in connection with the Petrol-Neodesha Project (the "Neodesha
Collateral").
The Agreement allows Laurus to foreclose on the Neodesha Collateral and
governs the terms and conditions of the foreclosure. The Agreement provides that
the Company will not contest the sale of the Neodesha Collateral, which will be
conducted as a public foreclosure sale in accordance with Kansas law. The
Company has agreed to reasonably assist Laurus in the completion of the
foreclosure sale. After the sale of the Neodesha Collateral becomes final,
Laurus will release Petrol of all remaining amounts owed or claims they may
have, and Laurus will reassign to Petrol their overriding royalty interests in
the mineral leases located at the Company 's Coal Creek Project.
As part of the Agreement, the Company will cancel all outstanding
warrants for purchases of securities issued to Laurus in connection with the
Outstanding Obligations and replace them with warrants to purchase 1,000,000
shares of common stock at an initial exercise price of $0.20 per share.
On June 9, 2008, Laurus filed a foreclosure action in the Wilson
County, Kansas district court. We expect the foreclosure action and sale to be
completed during the early part of the fourth quarter of 2008. The foreclosure
by Laurus described above will leave the Company with far fewer assets than it
currently has. There can be no assurance that the Company will be able to
continue operations and satisfy its obligations in the future.
Cash Flows. Since inception, we have financed cash flow requirements
through debt financing, the issuance of common stock and revenues generated from
the sale of oil and gas. We may experience net negative cash flows from
operations and may be required to obtain additional financing to fund operations
through common stock offerings and debt borrowings to the extent necessary to
provide working capital.
Critical Accounting Policies and Estimates
Our accounting estimates include bad debts on our receivables, amount
of depletion of our oil and gas properties subject to amortization, the asset
retirement obligation and the value of the options and warrants that we issue.
Our trade receivables have been fully collectible since inception and we only
have sales to a small base of customers. We believe that all of our receivables
are collectible. The depletion of our oil and gas properties is based in part on
the evaluation of our reserves and an estimate of our reserves. We obtain an
evaluation of the proved reserves from a professional engineering company and on
a quarterly basis we review the estimates and determine if any adjustments are
needed. If the actual reserves are less than the estimated reserves, we would
not fully deplete our costs. 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 Petrol. 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. The value we assign to the options and warrants that we
12
issue is based on the fair market value as calculated by the Black-Scholes
pricing model. To perform a calculation of the value of our options and
warrants, we determine the volatility of our stock. We believe our estimate of
volatility is reasonable and we review the assumptions used to determine this
whenever we have an equity instrument that needs a fair market value. Although
the offset to the valuation is in paid in capital, were we to have an incorrect
material volatility assumption, our expenses could be understated or overstated.
The preparation of our financial statements requires us to make assumptions and
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses, as well as the disclosure of contingent assets and liabilities. We
base our assumptions and estimates on historical experience and other sources
that we believe to be reasonable at the time. Actual results may vary from our
estimates due to changes in circumstances, weather, politics, global economics,
mechanical problems, general business conditions and other factors.
General Operations
Petrol's field development plans and strategies are employed throughout
its multiple project areas and incorporates several assessment stages. Each new
well is drilled through all possible CBM reservoirs and individually evaluated.
Upon a favorable evaluation of its overall production capacity the well will be
fully completed in as many gas producing intervals as possible and then
connected to our local gas gathering and water disposal pipelines.
When a proposed drilling site is identified, as a licensed operator in
the State of Kansas, Petrol is engaged in all aspects of well site operations.
As a state licensed operator we are responsible for permitting the well, which
includes obtaining permission from the Kansas Oil and Gas Commission relative to
spacing requirements and any other county, state and federal environmental
regulatory issues required at the time that the permitting process commences.
Additionally, Petrol formulates and delivers to all interest owners an operating
agreement establishing each participant's rights and obligations in that
particular well based on the location of the well and the ownership. In addition
to the permitting process, we as the operator are responsible for hiring the
driller, geologist and land men to make final decisions relative to the zones to
be targeted, confirming that we have good title to each leased parcel covered by
the spacing permit and to actually drill the well to the target zones. Petrol is
responsible for completing each successful well and connecting it to the most
appropriate section of the gas gathering system.
As the operator, we are also the caretaker of the well once production
has commenced. We are responsible for paying bills related to the drilling and
development of the well, billing working interest owners for their proportionate
expenses in drilling and completing the well, and selling the production from
the well. Once the production is sold, we anticipate that the purchaser thereof
carries out its own research with respect to ownership of that production and
sends out a division order to confirm the nature and amount of each interest
owned by each interest owner. Once a division order has been established and
confirmed by the interest owners, the production purchaser issues the checks to
each interest owner in accordance with its appropriate interest. From that point
forward, we as operator are responsible for maintaining the well and the well
site during the entire term of the production or until such time as we have been
replaced or the site appropriately abandoned.
Along with the drilling and completion of our production wells, our
subsidiary pipeline companies formulate, design and install a gas gathering and
compression system to transport the gas from wellhead to the high pressure
interstate pipeline tap and sales market. We have identified several major
interstate distribution pipelines that operate within and pass through the
counties in which we have lease holdings. These include pipelines owned and
operated by Southern Star, CMS Energy, Enbridge and Kinder Morgan. We have
initiated contact with these companies to ascertain the specific locations of
their pipelines, their requirements to transport gas from us (including volume
of gas and quality of gas), and the costs to connect to their pipelines. We
currently have agreements with Southern Star in our Petrol-Neodesha Project and
Enbridge in our Coal Creek Project
13
The price obtained for produced oil and gas is dependent on numerous
factors beyond our control, including domestic and foreign production rates of
oil and gas, market demand and the effect of governmental regulations and
incentives. To reduce the impact of these extraneous factors, we often enter
into forward sales contracts for a portion of the gas and oil we produce.
However, we do not have any delivery commitments for gas or oil from wells not
currently drilled or producing. Because the U.S. government's has been
encouraging increases in domestic production of energy, coupled with the high
demand for natural gas, we do not anticipate any difficulties in selling any oil
and gas we produce, once it has been delivered to a distribution facility.
The timing of most of our capital expenditures is discretionary.
Currently there are no material long-term commitments associated with any
capital expenditure plans or that are currently in the investigative planning
stage. Consequently, we have a significant degree of flexibility to adjust the
level of such expenditures as circumstances warrant. The level of our capital
expenditures will vary in future periods depending on energy market conditions
and other related economic factors. However, we expect to significantly reduce
our drilling activity due to our limited available cash.
Derivatives
To reduce our exposure to unfavorable changes in natural gas prices, we
have entered into a agreements to utilize derivatives in order to have a
fixed-price contract with respect to a significant portion of our production.
These contracts allow us to be able to predict with greater certainty the
effective natural gas prices to be received for hedged production and benefit
operating cash flows and earnings when market prices are less than the fixed
prices provided under the contracts. However, we will not benefit from market
prices that are higher than the fixed prices in our contracts for hedged
production. If we are unable to provide the quantity that we have contracted for
we will have to go to the open market to purchase the required amounts that we
have contracted to provide.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
Item 4T. Controls and Procedures.
We carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of June 30, 2008. This evaluation was carried
out under the supervision and with the participation of our sole executive
officer, Chief Executive Officer, Loren Moll and with the assistance of our
company accountant. Based upon that evaluation, they concluded that, as of June
30, 2008, our disclosure controls and procedures have not been identified and we
have not yet tested their effectiveness. Because of this lack of identification
and testing, we cannot assure the effectiveness of the controls and procedures.
There have been no significant changes in our internal controls over financial
reporting for the quarter ended June 30, 2008 that have materially affected or
are reasonably likely to materially affect such controls.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer, to allow
timely decisions regarding required disclosure.
14
The Company has established disclosure controls and procedures to
ensure that information disclosed in this MD&A and the related financial
statements was properly recorded, processed, summarized and reported to the
Company`s Board of Directors. A control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
There has been no change in the Company's disclosure controls the
quarter ended June 30, 2008 that has materially affected or is likely to
materially affect its control over financial reporting.
Management's Report on Internal Control over Financial Reporting
- ----------------------------------------------------------------
The CEO of the Company acknowledges that he is responsible for
designing internal controls over financial reporting or causing them to be
designed under their supervision in order to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Rule 240.13a-15(f)
or Rule 240.15d-15(f). This report shall not be deemed to be filed for purposes
of Section 18 of the Exchange Act or otherwise subject to the liabilities of
that section.
Management and the Board of Directors work to mitigate the risk of a
material misstatement in financial reporting, however, there can be no assurance
that this risk can be reduced to less than a remote likelihood of a material
misstatement.
Management has not yet identified the critical disclosure controls and
procedures associated with the Company's internal control over financial
reporting for the quarter ended June 30, 2008 and has not yet tested the
effectiveness of these disclosure controls and procedures and, therefore, cannot
yet deem these controls to be effective. Therefore, the Company has determined
that a material weakness exists related to the lack of identification and
testing of disclosure controls and procedures associated with the Company's
internal control over financial reporting for the quarter ended June 30, 2008.
This material weakness could materially affect the Company's control over
financial reporting.
Limitations on the Effectiveness of Internal Controls
- -----------------------------------------------------
Our management does not expect that our disclosure controls and
procedures or our internal control over financial reporting will necessarily
prevent all fraud and material error.
Weaver & Martin LLC, the Company's independent registered public
accounting firm, was not required to and has not issued a report concerning the
effectiveness of the Company's internal control over financial reporting as of
June 30, 2008.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
Petrol is a party to a foreclosure action filed in Wilson County,
Kansas district court by Laurus pursuant to a Foreclosure Agreement dated April
30, 2008. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Financing."
15
Petrol is and may become involved in various routine legal proceedings
incidental to its business. However, to Petrol's knowledge as of the date of
this report, there are no material pending legal proceedings to which Petrol is
a party or to which any of its property is subject.
Item 1A. Risk Factors.
There have been no material changes from the risk factors disclosed
in the "Risk Factors" section of our Annual Report on Form 10-K for the year
ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The information required by this Item 6 is set forth in the Index to
Exhibits accompanying this Quarterly Report on Form 10-Q.
16
SIGNATURES
Pursuant to the requirements 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.
PETROL OIL AND GAS, INC.
By: /s/ Loren Moll
------------------------------------
Loren Moll,
Chief Executive Officer
(On behalf of the
registrant and as
principal accounting officer)
Date: August 14, 2008
17
INDEX TO EXHIBITS
Exhibit
Number Exhibits
- ------------ ------------------------------------------------------------
10.1 Amendment to 2006 Stock Option Plan, incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on July 15, 2008.
------------------------------------------------------------
31.1 Certification of the Company's Chief Executive Officer and
principal accounting officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241).
32.1 Certification of the Company's Chief Executive Officer and
principal accounting officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
18