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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2005
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ________ to ________
Commission file number: 000-51488
PETROSEARCH ENERGY CORPORATION
(Exact name of small business issuer as specified in its charter)
NEVADA 20-2033200
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
675 BERING DRIVE, SUITE 200
HOUSTON, TX 77057
(Address of principal executive offices)
(713) 961-9337
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 27,997,761 SHARES OF $0.001 PAR VALUE
COMMON STOCK OUTSTANDING AS OF NOVEMBER 1, 2005.
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
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PETROSEARCH ENERGY CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
ITEM 3. CONTROLS AND PROCEDURES
PART II-- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURES
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
SEPTEMBER 30 DECEMBER 31,
2005 2004
ASSETS (UNAUDITED) (NOTE)
------ -------------- --------------
Current assets:
Cash $ 7,506,595 $ 1,100,568
Accounts receivable:
Joint owners-billed 1,372,947 935,622
Joint owners-unbilled 30,126 624,541
Oil and gas production sales 81,926 264,623
Prepaid expenses and other current assets 501,689 389,048
-------------- --------------
Total current assets 9,493,283 3,314,402
-------------- --------------
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved 7,368,272 5,490,447
Unproved, not subject to amortization 3,043,317 3,548,812
Other property and equipment 142,072 69,136
-------------- --------------
Total 10,553,661 9,108,395
Less accumulated depreciation, depletion and amortization (1,864,833) (2,164,936)
-------------- --------------
Total property and equipment, net 8,688,828 6,943,459
Prepaid oil and gas costs 400,054 82,280
Other assets 68,750 65,901
-------------- --------------
Total assets $ 18,650,915 $ 10,406,042
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long term debt $ 587,500 $ 2,890,000
Accounts payable 785,281 847,332
Accrued liabilities 116,052 1,338,641
-------------- --------------
Total current liabilities 1,488,833 5,075,973
-------------- --------------
Long-term debt, net of current portion 2,849,078 -
Deferred rent 17,017 -
-------------- --------------
Total liabilities 4,354,928 5,075,973
-------------- --------------
Stockholders' equity:
Preferred stock, par value $1.00 per share, 20,000,000 shares authorized:
Series A 8% convertible preferred stock, 1,000,000 shares
authorized; 483,416 shares issued and outstanding at September
30, 2005 and December 31, 2004 483,416 483,416
Series B convertible preferred stock, 100,000 shares auth-
orized; 43,000 shares issued and outstanding at
September 30, 2005 and December 31, 2004 43,000 43,000
Common stock, par value $0.001 per share, 100,000,000 shares
authorized; 27,997,761 and 18,792,120 shares issued and
outstanding at September 30, 2005 and December 31, 2004,
respectively 27,997 18,792
Additional paid-in capital 17,545,328 6,884,784
Deferred compensation (18,750) -
Accumulated deficit (3,785,004) (2,099,923)
-------------- --------------
Total stockholders' equity 14,295,987 5,330,069
-------------- --------------
Total liabilities and stockholders' equity $ 18,650,915 $ 10,406,042
============== ==============
<FN>
Note: The balance sheet at December 31, 2004 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes to unaudited consolidated condensed financial statements.
F-1
PETROSEARCH ENERGY CORPORATION
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2005 2004 2005 2004
----------- ----------- ------------ -----------
Oil and gas production revenues $ 240,005 $ 684,969 $ 1,617,520 $4,048,880
----------- ----------- ------------ -----------
Operating costs and expenses:
Lease operating and production
taxes 140,030 215,258 467,091 633,030
Depreciation, depletion and
amortization 54,738 504,280 540,684 993,032
General and administrative 784,005 673,866 2,159,950 2,393,260
----------- ----------- ------------ -----------
Total costs and expenses 978,773 1,393,404 3,167,725 4,019,322
----------- ----------- ------------ -----------
Operating income (loss) (738,768) (708,435) (1,550,205) 29,558
----------- ----------- ------------ -----------
Other income (expense):
Interest income 18,995 2,099 19,410 5,914
Interest expense (42,333) (8,250) (154,286) (24,063)
----------- ----------- ------------ -----------
Total other income (expense) (23,338) (6,151) (134,876) (18,149)
----------- ----------- ------------ -----------
Net income (loss) $ (762,106) $ (714,586) $(1,685,081) $ 11,409
=========== =========== ============ ===========
Basic net income (loss)
per share $ (0.03) $ (0.04) $ (0.07) $ 0.00
=========== =========== ============ ===========
Fully diluted net income
(loss)per share $ (0.03) $ (0.04) $ (0.07) $ 0.00
=========== =========== ============ ===========
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
F-2
PETROSEARCH ENERGY CORPORATION
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
TOTAL
SERIES A SERIES B ADDITIONAL STOCK-
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PAID-IN DEFERRED ACCUMULATED HOLDERS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
---------- ------- ------- -------- ------- ------- ------------ -------------- ------------ ------------
Balance at
December 31,
2004 18,792,120 $18,792 483,416 $483,416 43,000 $43,000 $ 6,884,784 $ - $(2,099,923) $ 5,330,069
Common stock
issued for
Cash 9,174,873 9,174 - - - - 10,600,545 - - 10,609,719
Compensation
awarded to
Board of 30,768 31 - - - - 59,969 (75,000) - (15,000)
directors
Amortization
of deferred
Compensation - - - - - - - 56,250 - 56,250
Issuance of
Warrants - - - - - - 88,422 - - 88,422
with debt
Cancellation - - - - - - (88,392) - - (88,392)
of warrants
Net loss - - - - - - - - (1,685,081) (1,685,081)
---------- ------- ------- -------- ------- ------- ------------ -------------- ------------ ------------
Balance at
September
30, 2005 27,997,761 $27,997 483,416 $483,416 43,000 $43,000 $17,545,328 $ (18,750) $(3,785,004) $14,295,987
========== ======= ======= ======== ======= ======= ============ ============== ============ ============
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
F-3
PETROSEARCH ENERGY CORPORATION
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
SEPTEMBER SEPTEMBER
30, 2005 30, 2004
------------ ------------
Cash flows from operating activities:
Net income (loss) $(1,685,081) $ 11,409
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of debt issuance costs 28,719 -
Amortization of deferred compensation 11,250 -
Depletion, depreciation and amortization expense 540,684 993,032
Reduction of subscription receivable in lieu of
compensation - 45,000
Common stock and warrants issued for services 45,000 360,359
Changes in operating assets and liabilities:
Accounts receivable 339,787 (2,125,546)
Related party receivable - (14,486)
Prepaid expenses and other assets (142,992) (828,866)
Accounts payable and accrued liabilities (1,361,071) 1,275,060
------------ ------------
Net cash used in operating activities (2,223,704) (284,038)
------------ ------------
Cash flows from investing activities:
Capital expenditures, including purchases and development
of properties (4,362,659) (3,095,748)
Purchase of prepaid credits for oil and gas properties (324,331) (491,814)
Proceeds from sale of overriding royalty interest - 100,000
Proceeds from sale of oil and gas property 2,072,002 -
------------ ------------
Net cash used in investing activities (2,614,988) (3,487,562)
------------ ------------
Cash flows from financing activities:
Proceeds from the sale of common stock 10,609,719 861,551
Proceeds from common stock commitments - 22,867
Proceeds from note payable 3,950,000 -
Repayment of note payable (3,315,000) -
Proceeds from collection of stock subscription receivable - 1,231,250
------------ ------------
Net cash provided by financing activities 11,244,719 2,115,668
------------ ------------
Net increase(decrease) in cash and cash equivalents 6,406,027 (1,655,932)
Cash and cash equivalents at beginning of period 1,100,568 1,860,464
------------ ------------
Cash and cash equivalents at end of period $ 7,506,595 $ 204,532
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 150,754 $ 8,250
============ ============
Income taxes paid $ - $ -
============ ============
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
F-4
PETROSEARCH ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
------------------------------
The accompanying unaudited interim financial statements have been prepared
without audit pursuant to the rules and regulations of the U.S. Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted, pursuant to such rules and regulations.
These unaudited consolidated condensed financial statements should be read
in conjunction with the audited financial statements and notes thereto of
Petrosearch Energy Corporation (the "Company") for the year ended December
31, 2004. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
of financial position, results of operations and cash flows for the interim
periods presented have been included. Operating results for the interim
periods are not necessarily indicative of the results that may be expected
for the respective full year.
2. INCOME TAXES
-------------
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. A
valuation allowance, if necessary, is provided against deferred tax assets,
based upon management's assessment as to their realization.
The difference between the 34% federal statutory income tax rate and
amounts shown in the accompanying interim financial statements is primarily
attributable to the utilization of net operating loss carryforwards and a
valuation allowance recorded against net deferred tax assets.
3. PURCHASE OF INTEREST IN OIL AND GAS PROPERTIES
----------------------------------------------
Effective September 28, 2005, the Company purchased a 21.25% working
interest in the Gruman #18-1 Well and Gruman Leases for $637,500 increasing
the Company's working interest in the properties to 85%. The purchase
provides additional PV-10 value of approximately $3,500,000 (based upon
independent engineering report as of July 1, 2005), made up of additional
proved developed reserves of 33,517 barrels of oil and 13,108 MCF of gas,
and additional proved undeveloped reserves of 56,238 barrels of oil and
12,654 MCF of gas. The purchase price represents $6.67 per barrel of oil
equivalent of the proved reserves purchased.
4. SALE OF OIL AND GAS PROPERTIES
-----------------------------------
Effective July 1, 2005, the Company's wholly owned subsidiary, TK
Petrosearch, L.L.C., sold its interest in the Blue Ridge Salt Dome Field
for $2,072,002 to the individual who has managed the TK PetroSearch, LLC
subsidiary. The assets sold account for $1,370,110 of the Company's PV-10
of proved reserves as of December 31, 2004, or approximately 10% of the
Company's total PV-10 value. The property had an estimated remaining 68,700
barrels of proved oil reserves at the time of the sale. The transaction has
been reflected in the accompanying financial statements as a reduction of
capitalized oil and gas properties as required by accounting principles
generally accepted in the United States of America. The following
represents the unaudited proforma effect on the consolidated statement of
operations for the nine months ended September 30, 2005 as if the
transaction occurred on January 1, 2005. The sale represents $30.16 per
barrel of oil of the proved reserves sold.
F-5
PETROSEARCH ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
4. SALE OF OIL AND GAS PROPERTIES, CONTINUED
-----------------------------------------------
PROFORMA PROFORMA
AS REPORTED ADJUSTMENTS (UNAUDITED)
------------- ------------- ------------
Oil and gas production revenues $ 1,617,520 $ (552,998) $ 1,064,522
Cost and expenses (3,167,725) 344,317 (2,823,408)
------------- ------------- ------------
Operating loss (1,550,205) (208,681) (1,758,886)
Other expense (134,876) - (134,876)
------------- ------------- ------------
Net loss $ (1,685,081) $ (208,681) $(1,893,762)
============= ============= ============
Basic and diluted net
loss per common share $ (0.07) $ (0.01) $ (0.08)
============= ============= ============
5. AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
----------------------------------------------------
On September 29, 2005, the Company entered into an amended and restated
revolving credit agreement to borrow up to $10,000,000 over a two-year
period to October 1, 2007, from a private, non-public entity. The
outstanding loan balance under the original revolving credit agreement
dated October 1, 2004, of $825,000 and accrued interest through the date of
the amended agreement, are deemed to be principal and interest outstanding
under the amended and restated revolving credit agreement. Proceeds of the
credit line are to be used to finance activity related to eight new
prospects including costs associated with acquisitions of oil and gas
leases, oil and gas drilling, reworking, production, transportation,
marketing and plugging activities under the leases, and all lender charges
and fees. Advances under the amended and restated revolving credit
agreement bear interest at a rate of the Wall Street Journal Prime Rate
plus three percent (3%) per year. Each advance of principal under the
amended facility is treated as a separate loan and is repayable in six (6)
interest only installments followed by up to twenty four (24) principal and
interest installments based upon a 30-month amortization. The Company will
be assessed a one quarter of one percent (.25%) standby fee on available
undrawn principal each quarter. The note matures on April 1, 2008. As of
September 30, 2005, the balance outstanding under the line of credit
agreement was $3,525,000, $587,500 of which is due in the next twelve
months.
F-6
PETROSEARCH ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
5. AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, CONTINUED
----------------------------------------------------------------
The loan is collateralized by a first lien on the particular oil and gas
leases acquired with the funds, but the Company is entitled to obtain
partial releases if the ratio of proved developed and proved undeveloped
reserves underlying the collateral base meets certain criteria. According
to the terms of the agreement, the unused available funds under the line of
credit will only be available for draw by the Company if at all times the
Company's proved developed reserves equal or exceed twenty-five percent
(25%) of the outstanding principal and interest indebtedness under the
agreement and if the principal balance of the note outstanding after the
requested draw is less than the sum of 1) the actual costs of the oil and
gas lease purchased and or funded, and 2) the sum of 75% of the Company's
proved developed reserves and 50% of the Company's proved undeveloped
reserves from all sources pledged as collateral.
Because the lender obtains its funds from the private capital markets and
or individuals who desire to participate in the lenders investment bank
activities, the lender does not have a guaranteed source of money in which
to fund this transaction with the Company. As a result, the lender has not
guaranteed that all proposed funding under this agreement will be available
if and when the Company elects to make draw requests.
As consideration for entering into the agreement, the lender will receive
an overriding royalty in each oil and gas lease acquired with facility
funds equal to 2% of the Company's acquired net revenue interest in the
lease. The overriding royalty interests are earned when the lender funds
have been utilized by the Company for direct and or indirect acquisition
expenses or drilling expenses. In addition, the lender received 100,000
warrants to purchase common stock of the Company at an exercise price of
$2.00 per share and an expiration date of November 1, 2007.
Under the terms of the credit facility, we are required to offer to the
lender the opportunity to participate in up to 100%, but in no case less
than 33.3% of any transaction that will be financed with full recourse debt
financing. The percentage offered to the lender is at the sole discretion
of the Company.
The Company allocates the proceeds received from debt with detachable
warrants using the relative fair value of the individual elements at the
time of issuance. The amount allocated to the warrants as a debt discount
was calculated at $88,422 and will be recognized as interest expense over
the period until the notes mature. In the event the debt is settled prior
to the maturity date, an expense will be recognized based on the difference
between the carrying amount and the amount of the payment.
6. STOCK WARRANTS
---------------
The Company periodically issues incentive stock warrants to officers,
executives, directors, consultants and advisory committee members to
provide additional incentives to promote the success of the Company's
business and to enhance the ability to attract and retain the services of
qualified persons. The issuance of such warrants are approved by the Board
of Directors. The exercise price of a warrant granted is determined by the
fair market value of the stock on the date of grant.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options and warrants
because, as discussed below, the alternative fair value accounting provided
for under FASB Statement No. 123, "Accounting for Stock-Based
Compensation", requires use of option valuation models that were not
developed for use in valuing employee stock options or warrants. Under APB
25, if the exercise price of the Company's employee stock options is
greater than or equal to the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
F-7
PETROSEARCH ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
6. STOCK WARRANTS, CONTINUED
---------------------------
A debt discount of $88,422 was recorded in the balance sheet in September,
2005, related to issuance of detachable warrants with debt. Compensation
expense of $-0- and $279,879 related to warrants was recognized during the
nine month periods ended September 30, 2005 and 2004, respectively.
Compensation expense of $-0- and $56,879 related to warrants was recognized
during the three month periods ended September 30, 2005 and 2004.
Proforma information regarding net income and earnings per share is
required by Statement 123 and 148, and has been determined as if the
Company had accounted for its employee stock warrants under the fair value
method of these Statements. For warrants granted during the nine months
ended September 30, 2005 and 2004, the fair value of such warrants was
estimated at the date of grant using a Black-Scholes option-pricing model
with the following assumptions:
SEPTEMBER SEPTEMBER
30, 2005 30, 2004
------------- ----------
Dividend yield - 0 - - 0 -
Expected volatility 180% 135 %
Risk free interest 2.25% - 2.50% 2.25%
Expected lives 2 - 4 years 3 years
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options or warrants that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
warrants have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock warrants.
For purposes of proforma disclosures, the estimated fair value of the
warrants is included in expense over the vesting period or expected life of
the warrant.
F-8
PETROSEARCH ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
6. STOCK WARRANTS, CONTINUED
---------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
----------- ------------ ------------ ------------
Net income (loss), as
reported ($762,106) $ (714,586) $(1,685,081) $ 11,409
Plus stock-based
compensation included in - 56,879 - 279,879
net income, as reported
Less stock-based
compensation calculated in (25,160) (806,935) (855,335) (4,180,493)
accordance with SFAS 123 ----------- ------------ ------------ ------------
Proforma net loss $ (787,266) $(1,464,642) $(2,540,416) $(3,889,205)
=========== ============ ============ ============
Basic and fully diluted
net income (loss) per $ (0.03) $ (0.04) $ (0.07) $ 0.00
common share, as reported =========== ============ ============ ============
Basic and fully diluted
proforma net loss per $ (0.03) $ (0.08) $ (0.10) $ (0.22)
common share =========== ============ ============ ============
A summary of the Company's warrant activity and related information for the nine
months ended September 30, 2005 follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES UNDER EXERCISE EXERCISE
WARRANT PRICE PRICE
------------- ----------- ---------
Balance outstanding at
December 31, 2004 7,333,892 $0.98-$9.75 $ 3.77
Issued 1,260,000 $1.95-$2.00 $ 1.95
Cancelled (153,847) $ 0.98 $ 0.98
-------------
Balance outstanding at
September 30, 2005 8,440,045 $0.98-$9.75 $ 3.58
=============
F-9
PETROSEARCH ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
6. STOCK WARRANTS, CONTINUED
---------------------------
All outstanding stock warrants are exercisable at September 30, 2005,
except for warrants to purchase 307,500 shares of common stock that were
issued to employees in May 2005 which do not vest until December 2005 and
1,818,869 warrants with an exercise price of $1.95 which become exercisable
in November 2005. A summary of outstanding stock warrants at September 30,
2005 follows:
NUMBER OF REMAINING WEIGHTED
COMMON STOCK EXPIRATION CONTRACTED EXERCISE AVERAGE
EQUIVALENTS DATE LIFE (YEARS) PRICE EXERCISE PRICE
------------ -------------- ------------ ---------- --------------
1,415,485 September 2006 0.92 $0.98-1.63 $ 1.27
1,076,923 November 2006 1.17 $ 9.75 $ 9.75
211,538 February 2007 1.42 $ 9.75 $ 9.75
30,769 March 2007 1.50 $ 9.75 $ 9.75
300,000 April 2007 1.59 $ 9.75 $ 9.75
161,538 May 2007 1.67 $6.50-9.75 $ 7.28
76,923 July 2007 1.75 $5.20-6.50 $ 6.24
269,131 September 2007 1.92 $4.88-5.20 $ 5.14
100,000 November 2007 2.17 $ 2.00 $ 2.00
150,000 March 2008 2.50 $ 1.95 $ 1.95
20,000 August 2008 2.87 $ 1.95 $ 1.95
4,627,738 November 2008 3.17 $ 1.95 $ 1.95
7. RELATED PARTY TRANSACTIONS
----------------------------
During the nine months ended September 30, 2005, a vendor owned by the
spouse of a director of the Company provided drilling services totaling
$316,755. The balance owed to this vendor was $-0- at September 30, 2005.
The director's spouse is also a 15 - 30% working interest owner in the Fort
Bend County Prospect (Blue Ridge) which we recently sold. Accounts
receivable from the spouse for joint interest billings was $194,502 as of
September 30, 2005.
8. NON-CASH INVESTING AND FINANCING ACTIVITIES
-----------------------------------------------
During the nine months ended September 30, 2005 and 2004, the Company
engaged in non-cash financing and investing activities as follows:
2005 2004
------- --------
Transfer of vehicle for reduction of liability $15,346 $ -
======= ========
Reduction of prepaid services for development
of oil and gas properties $ 6,557 $328,513
======= ========
Increase in accounts payable for property costs $93,794 $723,445
======= ========
Transfer of overriding royalty interest for debt
Issuance costs $89,609 $ -
======= ========
Issuance of warrants with debt financing $88,422 $ -
======= ========
Cancellation of warrants for reduction of note
Receivable $88,392 $ -
======= ========
Issuance of common stock for deferred
board compensation $15,000 $ -
======= ========
F-10
PETROSEARCH ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
9. EARNINGS PER SHARE
--------------------
The Company has adopted SFAS No. 128, which provides for calculation of
"Basic" and "Diluted" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing net income available to common
shareholders by the weighted average common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of an entity similar to fully
diluted earnings per share.
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the three and nine months ended
September 30, 2005 and 2004:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Basic EPS:
Net income (loss) $ (762,106) $ (714,586) $(1,685,081) $ 11,409
Less: Preferred stock
Dividends (9,668) (20,750) (29,005) (62,250)
------------ ------------ ------------ ------------
Net loss available to common
stockholders(numerator) $ (771,774) $ (735,336) $(1,714,086) $ (50,841)
============ ============ ============ ============
Weighted average shares of
common stock (denominator) 27,967,327 17,715,926 24,364,002 17,487,303
============ ============ ============ ============
Basic net income (loss)
per share $ (0.03) $ (0.04) $ (0.07) $ (0.00)
============ ============ ============ ============
Diluted EPS:
Income available to common
stockholders $ (771,774) $ (735,336) $(1,714,086) $ (50,841)
Plus assumed conversions - - - 62,250
------------ ------------ ------------ ------------
Net income (loss) used for
diluted EPS (numerator) $ (771,774) $ (735,336) $(1,714,086) $ 11,409
============ ============ ============ ============
Weighted average shares of
common stock 27,967,327 17,715,926 24,364,902 17,487,303
Plus effect of dilutive
securities:
Warrants - - - 1,093,269
Convertible preferred stock - - - 212,368
------------ ------------ ------------ ------------
Weighted average shares used
for diluted EPS (denominator) 27,967,327 17,715,926 24,364,902 18,792,940
============ ============ ============ ============
Diluted net income
(loss) per share $ (0.03) $ (0.04) $ (0.07) $ 0.00
============ ============ ============ ============
F-11
PETROSEARCH ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
9. EARNINGS PER SHARE, CONTINUED
--------------------------------
For the three and nine month periods ended September 30, 2005, potential
dilutive securities had an anti-dilutive effect and were not included in
the calculation of diluted net loss per common share. For the nine months
ended September 30, 2005, these securities included in-the-money warrants
for the purchase of 868,376 common shares and preferred stock convertible
into 94,218 common shares. For the three months ended September 30, 2005,
these securities included in-the-money warrants for the purchase of 851,282
common shares and preferred stock convertible into 94,218 common shares.
For the three months ended September 30, 2004, these securities included
warrants for the purchase of 1,569,231 common shares and preferred stock
convertible into 157,301 common shares.
10. SUBSEQUENT EVENT
-----------------
On October 18, 2005, the Company entered into an agreement to purchase a
100% working interest in 1780 acres of leases in the Quinduno Field located
in Roberts County, Texas in the Anadarko Basin from Quinduno Energy, L.L.C.
Closing is scheduled for November 15, 2005, pending completion of the due
diligence period.
The agreement provides for the payment of the purchase price of $2,000,000
cash and 3,000,000 shares of unregistered common shares of the Company to
occur in three phases as the project progresses. Should the project not
proceed past the first phase, Petrosearch's maximum obligation would be
$750,000 in cash and 1,000,000 unregistered common shares plus the cost of
capital expenditures for the first phase which are estimated to be
$2,900,000. Upon completion of the entire project, the seller will back in
for a 10% working interest after Petrosearch has been repaid all capital
expenditure costs plus $9.5 million. Based on the valuation of the
acquisition of $9.5 million, this purchase represents $3.37 per barrel of
oil equivalent of the proved reserves purchased.
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements contained herein and the information incorporated by reference herein
may be forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements
can be identified by the use of forward-looking terminology such as, but not
limited to, "may," "will," "expect," "anticipate," "estimate," "would be,"
"believe," or "continue" or the negative or other variations of comparable
terminology. We intend such forward-looking statements to be covered by the
safe harbor provisions applicable to forward-looking statements contained in
Section 21E of the Exchange Act. Such statements (none of which is intended as a
guarantee of performance) are subject to certain assumptions, risks and
uncertainties, which could cause our actual future results, achievements or
transactions to differ materially from those projected or anticipated. Such
risks and uncertainties are set forth herein.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events, or performance and underlying assumptions and
other statements, which are other than statements of historical facts. These
statements are subject to uncertainties and risks including, but not limited to,
product and service demands and acceptance, changes in technology, economic
conditions, the impact of competition and pricing, and government regulation and
approvals. Petrosearch cautions that assumptions, expectations, projections,
intentions, or beliefs about future events may, and often do, vary from actual
results and the differences can be material. Some of the key factors which could
cause actual results to vary from those Petrosearch expects include changes in
natural gas and oil prices, the timing of planned capital expenditures,
availability of acquisitions, uncertainties in estimating proved reserves and
forecasting production results, operational factors affecting the commencement
or maintenance of producing wells, the condition of the capital markets
generally, as well as our ability to access them, and uncertainties regarding
environmental regulations or litigation and other legal or regulatory
developments affecting our business.
Our expectations, beliefs and projections are expressed in good faith and are
believed to have a reasonable basis, including without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties. There can be no assurance, however,
that our expectations, beliefs or projections will result, be achieved, or be
accomplished. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We
undertake no duty to update these forward-looking statements.
OVERVIEW
We were founded on the belief that, despite the steady decline of U.S.
hydrocarbon reserves during the past three decades, the consolidation and
restructuring of the upstream oil and gas industry, which includes exploration
and production, have left a significant number of valuable oil and gas prospects
available for acquisition and development throughout North America.
In order to identify and target such prospects for exploration and development,
we continue to implement our business plan and business model, which includes
locating and empowering independent oil and gas professionals and organizations
who have high quality projects and who wish to remain involved in the
development and exploitation of those projects, but lack the business resources
required to do so. Our role is to supply the capital, along with the technical,
operational and administrative support and management oversight, needed to
develop the projects.
Management believes we can provide shareholder value with the implementation of
our business plan which encompasses high quality financial and oil and gas
relationships, agreements for the development of oil and gas projects, a vast
inventory of opportunities, prudent financings, and a commitment to low
administrative expenses.
1
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have primarily financed our operating and investing cash
flow needs through private offerings of equity securities, sales of crude oil
and natural gas, and the use of debt instruments such as corporate bonds and
revolving credit facilities. The proceeds from, and the utilization of, all
these methods have been and Management believes will continue to be, sufficient
to keep the operations funded and the business plan moving forward. We plan to
continue to utilize these methods to access capital in order to implement our
business plan, which we believe will be an effective vehicle to enlist more
independent oil and gas professionals to participate with us and will attract
high quality projects.
PRIVATE PLACEMENT
In April 2005, we completed sales of $12.6 million of our common stock in
private offerings. We received net proceeds of approximately $11.9 million
which are to be used for general corporate purposes, including the drilling of
projects in our prospect inventory. These private placements contributed to our
cash balance in excess of $7.5 million as of September 30, 2005.
REVOLVING CREDIT AGREEMENT
On September 29, 2005, the Company entered into an amended and restated
revolving credit agreement to borrow up to $10,000,000 over a two-year period to
October 1, 2007, from a private, non-public entity. The outstanding loan balance
under the original revolving credit agreement dated October 1, 2004, of $825,000
and accrued interest through the date of the amended agreement, are deemed to be
principal and interest outstanding under the amended and restated revolving
credit agreement. Proceeds of the credit line are to be used to finance
activity related to eight new projects including costs associated with
acquisitions of oil and gas leases, oil and gas drilling, reworking, production,
transportation, marketing and plugging activities under the leases, and all
lender charges and fees. Advances under the amended and restated revolving
credit agreement bear interest at a rate of the Wall Street Journal Prime Rate
plus three percent (3%) per year. Each advance of principal under the amended
facility is treated as a separate loan and is repayable in six (6) interest only
installments followed by up to twenty four (24) principal and interest
installments based upon a 30-month amortization. The Company will be assessed a
one quarter of one percent (.25%) standby fee on available undrawn principal
each quarter. The note matures on April 1, 2008.
The loan is collateralized by a first lien on the particular oil and gas leases
acquired with the funds, but the Company is entitled to obtain partial releases
if the ratio of proved developed and proved undeveloped reserves underlying the
collateral base meets certain criteria. According to the terms of the agreement,
the unused available funds under the line of credit will only be available for
draw by the Company if at all times the Company's proved developed reserves
equal or exceed twenty-five percent (25%) of the outstanding principal and
interest indebtedness under the agreement and if the principal balance of the
note outstanding after the requested draw is less than the sum of 1) the actual
costs of the oil and gas lease purchased and or funded, and 2) the sum of 75% of
the Company's proved developed reserves and 50% of the Company's proved
undeveloped reserves from all sources pledged as collateral.
Under the terms of the credit facility, we are required to offer to the lender
the opportunity to participate in up to 100%, but in no case less than 33.3% of
any transaction that will be financed with full recourse debt financing. The
percentage offered to the lender is at the sole discretion of the Company.
Because the lender obtains its funds from the private capital markets and or
individuals who desire to participate in the lenders investment bank activities,
the lender does not have a guaranteed source of money in which to fund this
transaction with the Company. As a result, the lender has not guaranteed that
all proposed funding under this agreement will be available if and when the
Company elects to make draw requests. As of September 30, 2005, the balance
outstanding under the line of credit agreement was $3,525,000, $587,500 of which
is due in the next twelve months.
2
SALE OF PROPERTY
In June 2005 we entered into an option agreement to sell all of the assets of
our TK Petrosearch subsidiary for a cash purchase price of approximately
$2,140,000. The option agreement was exercised on August 3, 2005 with the
effective date of the transfer being July 1, 2005. The assets sold account for
$1,370,110 of our PV-10 proved reserves as of December 31, 2004, or
approximately 10% of our total proved reserve value. The sale represents $30.16
per barrel of oil of the proved reserves sold.
PROJECT FINANCING AND RIGHT OF FIRST REFUSAL
In addition to our sources of corporate financing, we have utilized capital from
an institutional partner, Rock Energy Partners, L.P., on a project-by-project
basis. In April 2004, we entered into an agreement with Rock, as further
amended in May 2004, whereby Rock has the right of first refusal to fund up to
100% of our drilling obligations. The terms of the agreement with Rock provide
that we will receive a reversionary interest from 50% to 12.5% which may vary by
prospect, after payout to Rock. At present, Rock's capital investment in our
projects totals approximately $12,900,000. Management continues to present
projects to Rock as they become available. Rock has agreed to participate in
three of the Company's projects already committed, started or completed by Rock
under this agreement include exploratory wells in Jefferson County, Mississippi;
Colorado County, Texas; and Sheridan County, Montana.
OTHER FINANCING OPPORTUNITIES
We are currently in discussions with several investment groups which could
result in additional sources of capital in the future.
DRILLING PARTNERSHIPS
We continue to strive to develop relationships with institutional or high net
worth individuals to participate in our prospects which we believe will reduce
our capital risk and increase the diversity of the projects in which we use our
own capital. We intend to establish these drilling partnership relationships
with terms that are standard in the oil and gas industry.
CURRENT PROJECTS AND CAPITAL REQUIREMENTS
PROJECTS ASSOCIATED WITH REVISED CREDIT AGREEMENT
STARK COUNTY, NORTH DAKOTA - Our Gruman 18-1 well is completed in the Lodgepole
formation and currently produces oil at a rate of approximately 100 boepd.
Mechanical problems with the high rate pump in the well are depressing monthly
average volumes to an average rate of approximately 35 boepd. Subject to
obtaining the required regulatory approvals we plan to drill a 9,900 foot
injection well into the base of the productive reef during the 4th Quarter of
2005 or 1st Quarter of 2006 for the purpose of re-pressuring the reservoir and
increasing the production rate from the well. Upon the drilling of a successful
injection well the proved undeveloped reserves would be reclassified to proved
developed reserves.
In September 2005, we exercised our preferential right to purchase a 21.25%
working interest in the Gruman 18-1 well from a non-operating interest owner,
increasing our working interest to 85%. This increased our net revenue interest
in the well from 46.8% to 63.8%.
TENSAS PARISH, LOUISIANA - This is a multiple oil development project (4-5
wells) on approximately 2,000 acres of leasehold. The project is an updip
development of the Lower Tuscaloosa Massive Sand in the Rodney Island Field. The
initial well is a step-out location updip of 25 wells that have recovered 5.4
MMbo and 6.5 Bcf from the target location, one of the main oil productive
formations in the area. The field was prematurely abandoned in 1995 before it
had reached the economic limit as a result of the redirection of the Mississippi
River which covered the surface locations of the wells. Because the target
bottom hole location (approximately 9,500 feet vertical depth) is under the
river, the initial well was directionally drilled at a fifty-degree angle from a
surface location 5,500 feet to the southeast of the target bottom hole location.
The required total drilled footage was approximately 11,700 feet. We are
currently finishing the completion of the initial well. The Company owns a 25%
working interest before payout and 18.75% after payout in the first well. The
Company owns a 18.75% working interest in all subsequent wells before and after
payout.
3
Our internal engineering and geological study of the Massive sand in the project
indicates that the initial well has targeted recoverable reserves of
approximately 350,000 barrels of oil and 2 million cubic feet of natural gas.
We estimate that an additional 3-4 developmental wells will be drilled
representing targeted recoverable reserves for all wells of 1.4 million barrels
of oil and 800 million cubic feet of natural gas from the field.
COLORADO COUNTY, TEXAS - Tait Projects - This natural gas prospect has the
potential of up to 5 locations on 1,250 net acres. The primary targets are two
zones in the Upper Wilcox, one at 9,900 feet and one at 10,200 feet. Petrosearch
has a 10% working interest in this project.
BURLESON COUNTY, TEXAS - This is a multi-well natural gas project in the
Giddings Austin Chalk Field that includes a mix of 15 development and step-out
locations. The project is currently leasing acreage and will lease up to a
maximum of about 10,000 acres. The locations are proposed dual lateral
horizontal wells with target zones in the Austin Chalk and the Georgetown
formations at a vertical depth of about 10,000 feet and a total measured depth
of about 13,000 feet. Petrosearch will have up to a 37.5% working interest
depending upon its leasehold contribution to the project.
CENTRAL MISSISSIPPI - We have identified three Tuscaloosa prospects in the
Mississippi Inland Salt Basin. Prospect #1 is a channel sand at 6,250 feet.
Seismic data indicates a closure of approximately 400 acres with a potential of
five locations. Tuscaloosa Prospect #2 is a rollover anticline in a downthrown
fault block at 6,550 feet. Seismic data indicates a closure of approximately
150 acres with a potential of two locations. Prospect #3 is a faulted anticline
in an upthrown fault block at 6,750 feet. Seismic data indicates a closure of
approximately 550 acres with a potential of six locations. Leases are being
acquired and seismic data on the prospects is being reprocessed. We currently
own 100% of the three prospects and plan to spud the first well in December
2005.
The Capital requirement for the projects associated with the revised credit
agreement (described above) is $17.4 million, of which approximately $11 million
will be spent in 2005-2006.
OTHER OPERATIONS/PROSPECTS
ROBERTS COUNTY, TEXAS - We have entered into an agreement to purchase 100%
working interest in 1780 acres of leases in the Quinduno Field, located in
Roberts County, Texas in the Anadarko Basin. The Ryder Scott Company has
estimated the property's proved reserves to be 2.59 million barrels of oil
(MMbo) and 1.4 billion cubic feet (Bcf) of natural gas. In accordance with SEC
guidelines, using flat prices as of September 30, 2005 of $66.23 per barrel of
oil and $14.32 per Mcf of gas (after adjustment), estimated Future Net Revenues
(FNR) after capital expenditures for development from proved reserves is $101.7
million and the FNR discounted at 10% or present value (PV-10) is $45.5 million.
These proved reserves will be extracted using conventional waterflood
technology. We intend to initiate the waterflood project within the next 6
months. Total development capital requirements for the entire project are
estimated to be $17.5 million.
We continue to strive to develop and evaluate new prospects. Currently we are in
various stages of negotiation for several significant projects/prospects.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes and the other financial information appearing elsewhere in
this filing.
The factors that most significantly affect our results of operations are: (i)
the sale prices of crude oil and natural gas; (ii) the amount of production
sales; and (iii) the amount of lease operating expenses. Sales of production and
level of borrowings are significantly impacted by our ability to maintain or
increase production and reserves from existing oil and gas properties through
exploration and development activities.
4
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
REVENUES
Consolidated oil and gas production revenues for the nine months ended September
30, 2005 were $1,617,520 versus $4,048,880 for the nine months ended September
30, 2004. The decrease was primarily due to significantly lower production from
our North Dakota well and the sale of our interests in the Blue Ridge Field.
Beginning in April 2004, our North Dakota Lodgepole reef well started to decline
due to pressure depletion, and production continued to decline from
approximately 16,000 barrels of oil net to our share per month in March, 2004,
to less than 2,000 barrels of oil net to our share per month in September, 2005.
However, we plan to drill a 9,900 foot injection well into the base of the
productive reef during the fourth quarter of 2005 or first quarter of 2006 for
the purpose of re-pressuring the reservoir and increasing the production of the
well.
The decrease in revenue is also attributed to the sale of our Blue Ridge Field
property in Fort Bend County, Texas effective July 1, 2005 which previously
accounted for an average of 1,845 barrels of oil per month of production.
Our revenue will principally be dependent upon the success of the acquisition
and development of future quality prospects as well as the market price for
crude oil and natural gas.
We have not previously utilized any hedging instruments and have no plans to do
so in the foreseeable future.
LEASE OPERATING AND PRODUCTION TAX EXPENSE
Lease operating and production tax expense for the nine months ended September
30, 2005, and September 30, 2004, were $467,091 and $633,030, respectively.
These expenses relate to the costs that are incurred to operate and maintain our
wells and related production equipment, including the costs applicable to the
operating costs of support equipment and facilities. The decrease in lease
operating expense and production taxes is due to the significant decrease in
revenues from the nine months ended September 30, 2004 to the nine months ended
September 30, 2005.
DEPLETION, DEPRECIATION AND AMORTIZATION
Costs for depletion, depreciation and amortization for the nine month periods
ended September 30, 2005, and September 30, 2004, were $540,684 and $993,032,
respectively. This decrease can be attributed to lower production in the nine
month period ended September 30, 2005 compared with the same period in 2004.
The decrease resulting from lower production was partially offset by the effects
of the unamortized cost basis in 2005 being higher than the unamortized cost
basis in 2004.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September 30,
2005, and September 30, 2004, were $2,159,950 and $2,393,260 respectively. The
decrease of $233,310 was due to several reasons: (a) in the first quarter of
2004 the Company was a startup company in the early stages of implementing a
merger which caused increases in legal and accounting costs; and (b) a
difference in management philosophy in the first quarter of 2004 as opposed to
the management philosophy for the same period in 2005. In the first quarter 2004
the Company had just established significant production in North Dakota with the
belief that there were many more of those discoveries and management felt the
need to increase the Company's resources to establish an infrastructure that
would handle rapid growth. For the same period in 2005, management's philosophy
has been more focused on reducing the company's capital risk, operating and
general and administrative expenses. Specific areas of general and
administrative expenses that have decreased from the nine months ended September
30, 2004 to the same period in 2005 are professional services, legal expenses,
accounting and travel.
5
NET LOSS FROM OPERATIONS
We generated a net loss from operations of $1,550,205 or $(0.06) per share for
the nine months ended September 30, 2005, compared to a net income from
operations of $29,558 or $0.00 per share, for the nine months ended September
30, 2004. The $1,579,763 variance is related mainly to the fact that revenues
decreased a total of $2,431,360 from the same period in 2004 to 2005. Although
total costs and expenses decreased approximately $851,597 from 2004 to the same
period in 2005, the loss of revenue was much more significant. The decrease in
revenue was due primarily to the decrease in the production of our North Dakota
well (as discussed herein) due to pressure depletion.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
REVENUES
Consolidated oil and gas production revenue for the quarter ended September 30,
2005 was $240,005 versus $684,969 for the quarter ended September 30, 2004. The
decrease was primarily due to significantly lower production from our North
Dakota well as a result of pressure depletion beginning in 2004 and the sale of
our interests in the Blue Ridge Field. However, we plan to drill a 9,900 foot
injection well into the base of the productive reef during the fourth quarter of
2005 or first quarter of 2006 for the purpose of re-pressuring the reservoir and
increasing the production of the well.
The decrease in revenue can also be attributed to the sale of our Blue Ridge
Field property in Fort Bend County, Texas effective July 1, 2005 which
previously accounted for an average of 1,845 barrels of oil per month of
production.
Our revenue will principally be dependent upon the success of the acquisition
and development of future quality prospects as well as the market price for
crude oil and natural gas.
We have not previously utilized any hedging instruments and have no plans to do
so in the foreseeable future.
LEASE OPERATING AND PRODUCTION TAX EXPENSE
Lease operating and production tax expense for the quarters ended September 30,
2005 and 2004 were $140,030 and $215,258, respectively. These expenses relate
to the costs that are incurred to operate and maintain our wells and related
production equipment, including the costs applicable to the operating costs of
support equipment and facilities. The decrease in lease operating expense and
production taxes is due to the significant decrease in revenues from the three
months ended September 30, 2004 to the three months ended September 30, 2005.
DEPLETION, DEPRECIATION AND AMORTIZATION
Costs for depletion, depreciation and amortization for the quarters ended
September 30, 2005, and 2004, were $54,738 and $504,280 respectively. This
decrease can be attributed to lower production in the third quarter of 2005
compared with the third quarter of 2004, partially offset by the effects of the
unamortized cost basis in 2005 being higher than the unamortized cost basis in
2004.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarters ended September 30, 2005,
and 2004, were $784,005 and $673,866, respectively. The increase can be
attributed to the hiring of several technical and financial employees during
2005.
6
NET LOSS/INCOME FROM OPERATIONS
We generated a net operating loss of $738,768 or $(0.03) per share, for the
quarter ended September 30, 2005, compared to net operating loss of $708,435 or
$(0.04) per share, for the quarter ended September 30, 2004. The $30,333
variance is related mainly to the fact that revenues decreased a total of
$444,964 from the same period in 2004 to 2005, offset by a decrease in total
costs and expenses of $414,631 from 2004 to the same period in 2005. The
decrease in revenue was due primarily to the decrease in the production of our
North Dakota well (as discussed herein) due to pressure depletion.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements during the fiscal quarter ended
September 30, 2005.
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of September 30,
2005, that being the date of our most recently completed fiscal quarter. This
evaluation was carried out under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, these management executives concluded that our disclosure controls
and procedures are effective in timely alerting management to material
information relating to us required to be included in our periodic SEC filings.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed our reports filed
or submitted under the Exchange Act is 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 and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
During our most recently completed fiscal quarter ended September 30, 2005,
there were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to affect, our internal control
over financial reporting.
The term "internal control over financial reporting" is defined as a process
designed by, or under the supervision of, the registrant's principal executive
and principal financial officers, or persons performing similar functions, and
effected by the registrant's board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
1. Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
registrant;
2. Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
registrant are being made only in accordance with authorizations of
management and directors of the registrant; and
3. Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the registrant's assets
that could have a material effect on the financial statements.
7
PART II--OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
There have been no reportable events in the quarter ended September
30, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no sales of unregistered equity securities during the
quarter ended September 30, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There has been no default upon senior securities during the quarter
ended September 30, 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There has been no submission of any matters to a vote of security
holders during the quarter ended September 30, 2005.
ITEM 5. OTHER INFORMATION
None
8
ITEM 6. EXHIBITS
(a) EXHIBITS
- -----------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -----------------------------------------------------------------------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
- -----------------------------------------------------------------------
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
- -----------------------------------------------------------------------
32.1 Section 1350 Certification of Chief Executive Officer
- -----------------------------------------------------------------------
32.2 Section 1350 Certification of Chief Financial Officer
- -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
9
SIGNATURES
- ----------
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PETROSEARCH ENERGY CORPORATION
Date: NOVEMBER 14, 2005
By: s/s Richard Dole
------------------
RICHARD DOLE
CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN
10