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 September 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
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(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
November 10, 2008 was 29,090,926.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Petrol oil and Gas, Inc.
Condensed Consolidated Balance Sheet
September 30, December 31,
2008 2007
------------ ------------
(Unaudited) (Audited)
Assets
Current assets:
Cash $ 558,594 $ 506,711
Accounts receivable 373,665 529,554
Prepaid expenses and other 42,495 120,295
------------ ------------
Total current assets 974,754 1,156,560
------------ ------------
Fixed assets:
Pipeline 1,522,423 1,522,423
Equipment and vehicles 405,941 388,762
------------ ------------
1,928,363 1,911,185
Less accumulated depreciation 616,007 487,954
------------ ------------
Net fixed assets 1,312,356 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 8,094,823 8,605,842
Deposits 3,000 3,000
------------ ------------
Total other assets 8,411,652 8,922,671
------------ ------------
$ 10,698,762 $ 11,502,462
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 112,307 $ 37,366
Accrued liabilities 1,149,934 649,031
Current portion of long term debt 26,656,901 26,639,094
------------ ------------
Total liabilities 27,919,142 27,325,491
------------ ------------
Asset retirement obligation 543,577 511,000
------------ ------------
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 27,667,087 27,220,866
Other comprehensive income (loss) -0- 77,800
Accumulated (deficit) (45,460,134) (43,661,785)
------------ ------------
(17,763,957) (16,334,029)
------------ ------------
$ 10,698,762 $ 11,502,462
------------ ------------
See notes to condensed consolidated financial statements.
2
Petrol Oil and Gas, Inc.
Condensed Consolidated Statement of Operations
(Unaudited)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
------------ ------------ ------------ ------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue
Oil and gas activities $ 1,107,472 $ 1,301,347 $ 3,363,056 $ 4,249,576
------------ ------------ ------------ ------------
Expenses:
Direct costs 481,758 187,794 1,354,303 1,687,861
Pipeline costs 8,439 206,644 41,734 758,363
General and administrative 771,523 421,226 1,437,004 1,384,179
Impairment of oil & gas
properties and pipelines -- 264,138 -- 9,076,165
Professional and consulting
fees 75,646 195,726 369,932 707,233
Depreciation, depletion and
amortization 225,404 468,824 649,513 1,714,278
------------ ------------ ------------ ------------
Total expenses 1,562,770 1,744,352 3,852,486 15,328,079
------------ ------------ ------------ ------------
Net operating (loss) (455,298) (443,005) (489,430) (11,078,503)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 1,347 -- 2,488 --
Loss on disposal of assets -- -- (26,775) --
Interest expense (12,366) (971,089) (1,284,632) (3,126,777)
------------ ------------ ------------ ------------
(11,019) (971,089) (1,308,919) (3,126,777)
Net (loss) $ (466,317) $ (1,414,094) $ (1,798,349) $(14,205,280)
============ ============ ============ ============
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) $ (0.05) $ (0.06) $ (0.49)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
3
Petrol Oil and Gas, Inc.
Condensed Consolidated Statement of Cash Flows
(unaudited)
For the Nine Months Ended
September 30,
----------------------------
2008 2007
------------ ------------
Cash flows from operating activities
Net (loss) $ (1,798,349) $(14,205,280)
Depreciation, depletion and amortization 639,072 1,376,468
Warrant accretion -- 752,110
Impairment of oil & gas properties -- 9,076,165
Warrants, options, and shares issued for services 446,221 174,728
Loss on disposal of assets 26,775 --
Accretion of asset retirement obligation 32,577 49,582
Adjustments to reconcile net (loss) to cash
used in operating activities:
Accounts receivable 155,889 (217,368)
Prepaid and other assets -- (69,530)
Accounts payable 74,941 (344,039)
Accrued liabilities 500,902 (35,737)
------------ ------------
Net cash provided by (used in) operating activities 78,028 (3,442,901)
------------ ------------
Cash flows from investing activities
Purchase of fixed assets (43,952) (35,650)
Additions to other assets -- (23,136)
Sale of oil and gas properties -- 744,000
Additions to oil and gas properties and deposits -- (468,490)
------------ ------------
Net cash provided from (used in) investing activities (43,952) 216,724
------------ ------------
Cash flows from financing activities
Proceeds from loans payable 42,469 23,452
Amortized loan fees -- 337,817
Payments on notes payable (24,662) (1,842,583)
------------ ------------
Net cash provided from financing activities 17,807 (1,481,314)
------------ ------------
Net increase (decrease) in cash 51,883 (4,707,491)
Cash - beginning 506,711 5,917,958
------------ ------------
Cash - ending $ 558,594 $ 1,210,467
============ ============
Supplemental disclosures:
Interest paid $ 784,632 $ 2,445,513
============ ============
Income taxes paid -- --
============ ============
Options issued for services $ 446,221 $ 174,728
============ ============
See notes to condensed consolidated financial statements.
4
Petrol Oil and Gas, Inc.
Notes to Condensed Financial Statements
Note 1 - Basis of Presentation
The unaudited condensed consolidated 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 nine months ended September, 2008, there was no activity in our
preferred or common stock.
In July of 2008, the Company issued 4,400,000 options to directors under the
2006 Stock Option Plan. The options have a term of 10 years and have exercise
prices ranging from $0.20 to $1.25. The options were valued using the
Black-scholes pricing model using the following variables: stock price of $0.14,
exercise price ranging from $0.20 to $1.25, volatility of 122%, and a risk-free
interest rate of 3.85%. The options were valued at $446,221 and expensed as
compensation expense.
There was no other option or warrant activity during the nine months ended
September 30, 2008.
A summary of stock options and warrants is as follows:
Options Weighted Warrants Weighted
Average Average
Outstanding - 01/01/08 760,000 $2.12 8,233,333 $2.28
Granted 4,400,000 0.54 -- --
Cancelled (50,000) 3.25 -- --
Exercised -- -- -- --
-------------------------------------------------
Outstanding - 9/30/08 5,110,000 $0.74 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.
September 30,
2008
---------
Asset retirement obligation -January 1, 2008 $ 511,000
Liabilities incurred during the year --
Liabilities settled during the year --
Accretion of expense 32,577
---------
Asset retirement obligations - September 30, 2008 $ 543,577
=========
5
Note 5 - Debt
Debt consists of the following:
September 30, 2008
-----------------------
Total notes payable $ 26,656,901
=======================
All of our debt has been classified as current as we were in default at
September 30, 2008.
Interest expense related to our debt was $1,284,632 for the nine months ended
September 30, 2008 and $3,126,777 for the nine months ended September 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.
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 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.
Note 6 - Fixed Price Sales Contracts
During 2008, we entered into various contracts with our customers to sell gas at
a fixed price. At September 30, 2008 we have no fixed price sales contracts.
6
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.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations for the Three Months Ended September 30, 2008 and 2007.
The following table summarizes selected items from the statement of
operations for the three months ended September 30, 2008 compared to the three
months ended September 30, 2007.
Three Months Ended
September 30,
-------------------------- Increase Percentage
2008 2007 (Decrease) Change
----------- ----------- ----------- -----------
Revenue $ 1,107,472 $ 1,301,347 $ (193,875) 14.9%
Expenses:
Direct costs 481,758 187,794 293,964 156.5%
Pipeline costs 8,439 206,644 (198,205) (95.9)%
General and administrative 771,523 421,226 305,297 83.2%
Impairment of oil and gas properties
and pipelines -- 264,138 (264,138) (100.0)%
Professional and consulting fees 75,646 195,726 (120,080) (61.4)%
Depreciation, depletion and amortization 225,404 468,824 (243,420) (51.9)%
----------- ----------- ----------- -----------
Total expenses 1,562,770 1,744,352 (181,582) (10.4)%
----------- ----------- ----------- -----------
Net operating (loss) (455,298) (443,005) (12,293) 2.8%
----------- ----------- ----------- -----------
Other income (expense):
Interest income 1,347 -- 1,347 N/A
Interest expense (12,366) (971,089) 958,723 (98.7)%
----------- ----------- ----------- -----------
Total other income (expense) (11,019) (971,089) 960,070 (98.9)%
Net income (loss) (466,317) $(1,414,094) $ 947,777 (67.0)%
=========== =========== =========== ===========
Revenues. Revenues for the three months ended September 30, 2008 were
$1,107,472 compared to revenues of $1,301,347 in the three months ended
September 30, 2007. This resulted in a decrease of $193,875 or 14.9%, 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 September 30, 2008 were $481,758,
an increase of $293,964 or 156.5%, from $187,794 for the three months ended
September 30, 2007. This increase is a result of a cessation of operation of the
Burlington properties located in the Coal Creek Project during the second
quarter of 2008, and changes to our compression system, resulting in reduced
compressor rentals.
Pipeline Costs. Pipeline costs for the three months ended September 30,
2008 were $8,439, a decrease of $198,205, or 95.9%, from $206,644 for the three
months ended September 30, 2007. This decrease is primarily the result of a
cessation of operation of the Burlington properties located in the Coal Creek
Project during the second quarter of 2008, and changes to our compression
system, resulting in reduced compressor rentals.
General and Administrative Expenses. General and administrative expenses
for the three months ended September 30, 2008 were $771,523, an increase of
$305,297, or 83.2%, from $421,226 for the three months ended September 30, 2007.
The increase in general and administrative expenses is primarily attributable to
a $446,221 compensation expense resulting from the issuance of stock options
during the three months ended September 30, 2008, offset by streamlining and
reduction of other expenses.
8
Professional and Consulting Fees. Professional and consulting fees for the
three months ended September 30, 2008 was $75,646, a decrease of $120,080, or
61.4%, from $195,726 for the three months ended September 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 September 30, 2008 was
$225,404, a decrease of $243,420 or 51.9%, from $468,824 for the three months
ended September 30, 2007. The decrease in depreciation, depletion and
amortization expense was a result of a significant decrease in fixed assets due
to the write off of the assets related to the Coal Creek Project.
Net Operating Loss. The net operating loss for the three months ended
September 30, 2008 was $455,298, versus a net operating loss of $443,005 for the
three months ended September 30, 2007.
Interest Expense. Interest expense for the three months ended September 30,
2008 was $12,366, a decrease of $958,723, or 98.7%, from $971,089 for the three
months ended September 30, 2007. The decrease in interest expense results from
(a) the accretion of warrants in 2007 and no remaining accretion in 2008 and (b)
the cessation of accrual of interest on debt owed to Laurus due to the terms of
the Foreclosure Agreement which provide for the release of any liability for
principal and interest on such debt upon foreclosure of the underlying
collateral, which foreclosure action was commenced in June 2008.
Results of Operations for the Nine Months Ended September 30, 2008 and 2007.
The following table summarizes selected items from the statement of
operations for the nine months ended September 30, 2008 compared to the nine
months ended September 30, 2007.
Nine Months Ended
September 30,
---------------------------- Increase Percentage
2008 2007 (Decrease) Change
------------ ------------ ------------ ------------
Revenue $ 3,363,056 $ 4,249,576 $ (886,520) (20.9)%
Expenses:
Direct costs 1,354,303 1,687,861 (333,558) (19.8)%
Pipeline costs 41,734 758,363 (716,629) (94.5)%
General and administrative 1,437,004 1,384,179 52,825 3.8%
Impairment of oil and gas properties
and pipelines -- 9,076,165 (9,076,165) 100.0%
Professional and consulting fees 369,932 707,233 (337,301) (47.7)%
Depreciation, depletion and amortization 649,513 1,714,278 (1,064,765) (62.1)%
------------ ------------ ------------ ------------
Total expenses 3,852,486 15,328,079 (11,475,593) (74.9)%
------------ ------------ ------------ ------------
Net operating (loss) $ (489,430) $(11,078,503) $ 10,589,073 (95.6)%
------------ ------------ ------------ ------------
Other income (expense):
Interest income 2,488 -- 2,488 N/A
Loss on disposal of assets (26,775) -- (26,775) N/A
Interest expense (1,284,632) (3,126,777) 1,842,145 (58.9)%
------------ ------------ ------------ ------------
Total other income (expense) (1,308,919) (3,126,777) 1,817,858 (58.1)%
Net income (loss) (1,798,349) $(14,205,280) $ 12,406,931 (87.3)%
============ ============ ============ ============
Revenues. Revenues for the nine months ended September 30, 2008 were
$3,363,056 compared to revenues of $4,249,576 in the nine months ended September
30, 2007. This resulted in a decrease of $886,520 or 20.9%, 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).
9
Direct Costs. Direct costs for the nine months ended September 30, 2008
were $1,354,303, a decrease of $333,558, or 19.8%, from $1,687,861 for the nine
months ended September 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 nine months ended September 30, 2008
were $41,734 a decrease of $716,629, or 94.5%, from $758,363 for the nine months
ended September 30, 2007. This decrease is 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 operation 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 located in the
Coal Creek Project during the second quarter of 2008, and changes to our
compression system, resulting in reduced compressor rentals.
General and Administrative Expenses. General and administrative expenses
for the nine months ended September 30, 2008 were $1,437,004, an increase of
$52,825 or 3.8%, from $1,384,179 for the nine months ended September 30, 2007.
The increase in general and administrative expenses is primarily attributable to
a $446,221 compensation expense resulting from the issuance of stock options
during the three months ended September 30, 2008, offset by streamlining and
reduction of other expenses.
Impairment of Oil and Gas Properties. During the nine months ended
September 30, 2007, we impaired our oil and gas properties by $9,076,165, based
on our reserve study of the present value of future cash flows discounted by
10%. The impairment is primarily attributable to the decrease in reserves.
Professional and Consulting Fees. Professional and consulting fees for the
nine months ended September 30, 2008 was $369,932, a decrease of $337,301, or
47.7%, from $707,233 for the nine months ended September 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 nine months ended September 30, 2008 was
$649,513, a decrease of $1,064,765, or 62.1%, from $1,714,278 for the nine
months ended September 30, 2007. The decrease in depreciation, depletion and
amortization expense 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 nine months ended
September 30, 2007 was $11,078,503, versus a net operating loss of $489,430 for
the nine months ended September 30, 2008.
Interest Expense. Interest expense for the nine months ended September 30,
2008 was $1,284,632, a decrease of $1,842,145, or 58.9%, from $3,126,777 for the
nine months ended September 30, 2007. The decrease in interest expense results
from (a) the accretion of warrants in 2007 and no remaining accretion in 2008
and (b) the cessation of accrual of interest on debt owed to Laurus due to the
terms of the Foreclosure Agreement which provide for the release of any
liability for principal and interest on such debt upon foreclosure of the
underlying collateral, which foreclosure action was commenced in June 2008.
In the nine months ended September 30, 2008, we incurred a loss on the
disposal of fixed assets of $26,775.
10
Liquidity and Capital Resources
During the nine months ended September 30, 2008 our cash position increased
by $51,883. During that period, our operating activities provided $78,028 of
cash mainly from operating expenses we incurred, and we made payments on notes
payable of $24,662. The following table summarizes total assets, accumulated
deficit, stockholders' equity and working capital at September 30, 2008 compared
to December 31, 2007.
Increase / (Decrease)
-------------------------------------
September 30, 2008 December 31, 2007 $ %
------------------- ------------------- ------------------ ------------------
Current assets $ 974,754 $ 1,156,560 $ (181,806) (15.72)%
=================== =================== ================== ==================
Current liabilities $ 27,919,142 $ 27,325,491 $ 593,651 2.2%
=================== =================== ================== ==================
Working capital (deficit) $(26,944,388) $(26,168,931) $ (775,457) 2.96%
=================== =================== ================== ==================
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 per8share. 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.
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.
11
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 September 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.
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 requires 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 fourth quarter of 2008. The foreclosure by Laurus described above
12
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. As we expand operational activities, we may experience
net negative cash flows from operations, pending receipt of sales or development
fees, 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
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
13
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
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 an agreement to utilize energy swaps in order to have a
fixed-price contract. This contract, which was terminated in September 2008,
allowed us 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.
At September 30, 2008, we have no fixed price sales contracts.
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 September 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 September 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 September 30, 2008 that
have materially affected or are reasonably likely to materially affect such
controls.
14
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.
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 September 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 September 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 September 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
September 30, 2008.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
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.
15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
The Company continues to be in default on the debt owed to Laurus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Financing."
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: November 13, 2008
17
INDEX TO EXHIBITS
Exhibit
Number Exhibits
- ------------- ------------------------------------------------------------
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