Filed Pursuant to Rule 424(b)(3)
Registration No. 333-125539
Prospectus Supplement No. 1
to Prospectus dated June 8, 2006
PETROSEARCH ENERGY CORPORATION
16,108,524 SHARES
We are supplementing the prospectus dated June 8, 2006, to provide information
contained in our ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDING DECEMBER 31,
2006, a copy of which is attached hereto.
This Prospectus Supplement is not complete without, and may not be delivered or
utilized except in connection with, the Prospectus dated June 8, 2006, with
respect to the resale of the 16,108,524 shares of common stock, including any
amendments or supplements thereto.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ
CAREFULLY THIS ENTIRE PROSPECTUS, INCLUDING THE SECTION CAPTIONED "RISK FACTORS"
BEGINNING ON PAGE 2, BEFORE MAKING A DECISION TO PURCHASE OUR STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS SUPPLEMENT IS APRIL 5, 2007.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2006
[ ] 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
Securities Registered Under Section 12(b) Of The Exchange Act:
Title Of Each Class n/a
Name Of Each Exchange On Which Registered n/a
Securities Registered Pursuant to 12(g) of the Exchange Act:
Title Of Each Class
Common Stock, $0.001Par Value
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act ____
Check whether the issuer: (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
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 Issuer's revenues for the year ended December 31, 2006 were $1,232,958.
The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 15, 2007, based upon the last reported sales prices on the
OTCBB, was $54,400,477.
As of March 15, 2007, there were approximately 38,773,499 shares of Common Stock
outstanding.
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases Of Equity Securities 8
Item 6. Management's Discussion and Analysis or Plan of Operation 9
Item 7. Financial Statements 19
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 19
Item 8A. Controls and Procedures 19
Item 8B. Other Information 19
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of The Exchange Act 19
Item 10. Executive Compensation 23
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 25
Item 12. Certain Relationships and Related Transactions, and Director Independence 26
Item 13. Exhibits 26
Item 14. Principal Accountant Fees and Services 27
PART I
ITEM 1 BUSINESS
Petrosearch Energy Corporation (the "Company"), a Nevada corporation formed in
November 2004, is an independent crude oil and natural gas exploration and
production company. We are the successor of Petrosearch Corporation, a Texas
corporation formed in August 2003. (All references to capitalization and
business operations herein apply to our current capitalization and operating
history, including our predecessor, Petrosearch Texas.) We are a resource based
energy company with operations focused in three core areas of the lower 48
states of the United States with existing production in North Dakota, Texas and
Oklahoma. A majority of our effort over the next 12 months will focus on
growth through the drill bit in our three Core Areas:
- The Barnett Shale project through our participation in DDJET Limited
LLP;
- The Texas Panhandle water flood of which we operate; and
- Development of the Garwood field in the Wilcox trend of South Texas
that we operate.
Our goal is to develop additional production and reserves from our existing
resource base.
We are the successor to the business of Petrosearch Corporation, a Texas
corporation that was formed in August 2003. In November 2004, shareholders of
Petrosearch Corporation approved a 6.5-to-1 reverse stock split which took
effect immediately prior to its merger with the Company on December 30, 2004.
The effect of the merger, among other things, was to re-domicile to Nevada.
Upon the completion of the merger, shareholders of Petrosearch Corporation were
issued shares of our common and preferred stock representing 100% of the then
issued and outstanding common and preferred shares.
Our common shares have been publicly traded on the OTC Bulletin Board under the
symbol "PTSG" since November, 2005. Our principal offices are located at 675
Bering Drive, Houston, Texas 77057, and our telephone number is 713-961-9337.
Our website is www.petrosearch.com.
-------------------
BUSINESS PLAN
We are a resource based energy company with operations focused in three core
areas of the lower 48 states of the United States. Our strategic goal is to
build intrinsic shareholder value through focused operations in our three core
property areas while maintaining a low cost structure at every level of our
Company. We intend to bring additional production and revenues from our
existing high quality resource base. We also continue to identify and evaluate
other potential opportunities that would complement our current business plan
and create economic value.
Over the past two years, we have assembled an inventory of high quality drilling
opportunities in our core focus areas. We have a budget of approximately $20
million for lease acquisition and drilling in our Barnett Shale partnership over
the next two years; we have 2 additional development locations on our SW
Garwood, Wilcox properties; and we have 23 producing locations for development
on our Texas panhandle waterflood. In the Barnett Shale project we have
accumulated a significant leasehold position inside our 2 million acre, 8-county
Contract Area and a multi-rig drilling program is planned for the area over the
next several years. We have embarked on an aggressive program to exploit this
inventory for the benefit of our shareholders.
As of December 31, 2006 we have $29,424,306 of PV-10 for proved reserves
associated with our properties, which do not include reserves associated with
our Barnett Shale project. We are also focused on maintaining a low cost
structure throughout our business by maintaining tight control on our corporate
overheads and operating costs in our properties.
EMPLOYEES
As of December 31, 2006, we had nine full-time employees, of which three are in
executive positions. None of our employees are represented by a union and we
consider our employee relations to be good.
1
ITEM 2 PROPERTIES
CORE PROPERTIES:
BARNETT SHALE PROJECT -- Our Barnett Shale Project is part of the Barnett Shale
natural gas play in the Fort Worth Basin, which is arguably one of the most
exciting plays to emerge in the lower 48 in the past decade. In December 2006,
through our wholly owned subsidiary, Barnett Petrosearch LLC, we joined in the
formation of a partnership, DDJET Limited LLP ("Partnership), for the
development of the integrated venture. We own a 5.54% interest in the
Partnership along with partners Metroplex Barnett Shale LLC (a wholly owned
subsidiary of Exxon Mobil Corporation), which will direct operations, and Cinco
County Barnett Shale LLC (a privately held Dallas-based company).
The Partnership's assets include all leases acquired to-date within an 8-county
contract area, comprising approximately 2 million acres that was established
under a previous agreement among affiliates of the three partners. Partnership
assets also include associated facilities that include nearly 100 miles of
pipeline and an option on a separate pipeline right-of-way. Approximately 80
miles of pipeline facilities have been completed and are operational. We believe
our ownership of these pipeline assets is a decided strategic advantage in this
urban area. An aggressive leasing program within the 8-county contract area and
a multi-rig drilling program is planned for 2007, 2008 and beyond.
As of March 15, 2007, two Partnership wells, both in Ellis County, have been
completed and are selling gas through the Partnership-owned pipeline. The
cumulative production rate of these two completed wells has met our
expectations. An additional three wells, in Ellis and Tarrant Counties, have
been drilled; completion of these wells is expected within the second quarter of
2007. A sixth well has been drilled but operations have been suspended due to
mechanical difficulties pending arrival of an appropriate rig, and the seventh
is being drilled as of March 15, 2007. Both wells are in Ellis County. As no
wells had been completed in the Barnett Shale as of December 31, 2006, our
reserve estimates do not include any proved reserves from Barnett wells;
however, we anticipate substantial proved reserve additions in 2007 from this
project.
In order to finance our participation in the Partnership, on February 1, 2007 we
executed a Note and Warrant Purchase Agreement with an institutional investor,
RCH Petro Investors, L.P., for the sale of a $10,000,000, 8% Senior Secured
Convertible Promissory Note and a four-year warrant to purchase 5,000,000 shares
of common stock at an exercise price of $1.40 per share.
SW GARWOOD, COLORADO COUNTY, TEXAS - The Wilcox Trend, SW Garwood field has had
three wells drilled with one of these in the process of being completed. Two
additional locations are on current leases. The initial well on this prospect,
the Pintail #1, completed in the Upper Wilcox in December 2004, paid out in
April of 2006. As of payout, we began participating in the production from the
well with a 16% working interest. The well is currently producing approximately
875 Mcfpd and 18 bopd.
The second well, the Pintail Flats #1, was completed and fracture stimulated in
May, 2005 from 15,950 feet to 16,010 feet in the Lower Wilcox. In July 2006 we
re-completed and fracture stimulated an up-hole zone at 15,135 feet. The well
flowed back frac fluids with a 2000 Mcfpd gas rate into the sales line as of
August 3, 2006. The well is currently flowing 240 Mcfpd and we are currently
analyzing several options to improve well performance. We have a 16% working
interest in the well after payout. The well has four additional potentially
productive zones in the Lower Wilcox and five additional potentially productive
zones in the Upper Wilcox.
A third well, the Kallina 46 #1, began drilling in June, 2006 and reached its
targeted depth of 16,230 feet on August 6, 2006. Data available while drilling
and from open hole logs indicated several potentially productive Wilcox sands
from 10,400 feet to 16,100 feet. Gross prospective interval was believed to
exceed 250 feet of pay. The first target zone at 16,100 feet was tested and
found to be non-commercial. We have perforated a second set of Wilcox sands "up
the hole" from between 15,030 feet and 15,178 feet and testing is in progress.
We have an 87.5% working interest in the Kallina lease and the Kallina 46 #1
well before payout and a 75.5% interest after payout.
In order to finance the Kallina #46-1 well and future wells on the Kallina
lease, we signed a Securities Purchase Agreement and Secured Term Note with
Laurus Master Fund, Ltd. ("Laurus") for Laurus to provide financing for the
drilling of the Kallina 46 #1 well and payment of the future completion costs
for the Kallina 46 #1 well which is in process of being completed. We formed
a subsidiary, Garwood Petrosearch Inc., ("Garwood") to hold our
2
interest in the Kallina Lease and the Kallina 46 #1 well. Also, as a part of
the financing arrangement, Garwood issued Laurus a Warrant to acquire, upon
payout of the Note indebtedness, 45% of Garwood's outstanding common stock such
that upon exercise of the Warrant, Garwood would be owned 55% by us and 45% by
Laurus and the sole asset is the Kallina lease.
In the SW Garwood Project, in addition to the working interest in the wells
noted above, we currently own a 16% after payout working interest in 960 acres
of undeveloped leases; and an 87.5% before payout and 75.5% after payout working
interest in 438 acres. We believe these wells are in an excellent location in
the trend. Significant discoveries by other oil and gas firms are nearby in the
same sand sequences. These discoveries are either now being exploited by
Petrohawk Energy Corp. and Cabot Oil & Gas less than one half mile west of our
westerly lease line.
NORTH TEXAS/PANHANDLE WATER FLOOD PROJECT - In November 2005, we acquired a 100%
working interest in 1,755 acres in the Quinduno Field in Roberts County, Texas,
in the Anadarko Basin. The project is focused on infill drilling and the
implementation of a water flood on the property. Our leases at Quinduno have a
large established resource base of over 23 million barrels of original oil in
place. Since its discovery in 1953, approximately 5.1 million barrels have been
produced using primary production.
One infill well has been drilled to date. We have an ongoing program to enter
each of the 20 wells that have not been plugged. So far, we have entered seven
of these older wells to determine their mechanical status and establish
potential productivity. Two of these wells have been equipped and are now
capable of producing. We have prepared a detailed study and development plan for
the field. As of December 31, 2006, our independent engineers, Ryder Scott, have
estimated our share of proved oil reserves extractable by water flood at 1.6
million barrels of oil equivalent. Slightly deeper than the water flood zone,
the Moore County Limestone formation has undrilled exploration potential that
may be tested in a future well.
To provide adequate water for injection, in November, 2006 we executed a water
supply agreement with a landowner in the leasehold, which allows us to draw
water from the aquifer underlying the landowner's property, and in that same
month we received approval from the Panhandle Groundwater Authority to use the
aquifer as a source of groundwater, up to 5,000 barrels per day. We have applied
to the Texas Railroad Commission to amend a previously granted saltwater
injection permit to include groundwater injection and are awaiting approval. At
present we are in negotiations with potential industry partners to finance and
jointly develop this important asset.
OTHER PROJECT AREAS:
GRUMAN PROSPECT, STARK COUNTY, NORTH DAKOTA - On March 28, 2006, we spudded the
Gruman 18-3 well intended to be either an increased density well if it proved to
be up dip of the Gruman 18-1 producing well or a water injection well if it was
down dip. The well reached total depth of 9,890 feet on April 14, 2006, and was
completed as an injection well. In October 2006, we undertook certain remedial
work on the Gruman 18-1 which has improved the production on the well. The well
is currently producing 85 bopd and 50 Mcfpd We are currently assessing the
positive impact on the long term production.
On February 1, 2007, we began injecting produced water into the Gruman 18-3
well. The result has been to reduce the cost of operating the Gruman 18-1 by
eliminating the need to truck produced water to a disposal facility. We are
considering supplementing this injection with water from the Dakota in the
second quarter of 2007 for pressure maintenance in the mound. We have
established that the Gruman 18-3 is in pressure communication with the Gruman
18-1. Further testing or stimulation may be necessary to achieve the desired
future injection rates.
Proved developed reserves in the prospect to our share of the well as of
December 31, 2006, were 252 Mbo and 54.4 MMcf of natural gas, as estimated by a
third party engineering firm, McCartney Engineering, LLC.
MISSISSIPPI TUSCALOOSA PROSPECTS -- We have identified five Tuscaloosa oil
prospects in the Mississippi Inland Salt Basin, in Yazoo County, comprising a
maximum of 2,295 acres and up to 18 potential drilling locations. We are in
initial discussions with a potential industry partner to co-develop these
prospects with us. Once a joint venture is established, we plan to initially
drill 8 locations, ranging from 6,150 feet to 7,500 feet in depth. Approximately
55% of the entire prospect acreage has been leased. Seismic data on the
prospects has been reprocessed and confirmed our original geological analysis.
We currently own 100% of the prospect.
3
RODNEY ISLAND, TENSAS PARISH, LOUISIANA - In October 2005, we took over
operations of the Harper Z-1 well on the Rodney Island prospect from the
previous operator after casing was set and cemented. As the current operator and
with the agreement of the other working interest owners, we initiated litigation
in February 2006 against the previous operator for non-payment of their share of
drilling and completion costs. Settlement discussions to resolve the dispute are
in progress.
Downhole mechanical difficulties hindered our attempt to complete the well,
which was directionally drilled to a measured depth of 11,701 feet (vertical
depth = 9,373 feet) and logged approximately 19 feet of oil pay in the
Tuscaloosa Massive Sand. Our program for sidetracking the well to improve
wellbore conditions has been finalized. Timing of the project completion is
indeterminate due to the ongoing litigation.
Ryder Scott estimates proved reserves net to our share as of December 31, 2005
to be 19 Mbo and 9 MMcf. We have a 25% working interest before payout in the
Harper Z-1 well and 18.75% working interest after payout. We have an 18.75%
working interest in any additional wells.
OIL AND NATURAL GAS RESERVES
Our estimate of proved reserves is based on the quantities of oil and gas which
geological and engineering data demonstrate, with reasonable certainty, to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. The accuracy of any reserve estimate is a function of the
quality of available data, engineering and geological interpretation, and
judgment. For example, we must estimate the amount and timing of future
operations, development activities and costs, and work-over costs, all of which
may in fact vary considerably from actual results. In addition, as prices and
costs change from year to year, the estimate of proved reserves also changes.
Any significant variance in these assumptions could materially affect the
estimated quantity and value of our reserves.
Despite the inherent imprecision in these engineering estimates, our reserves
are used throughout our financial statements. For example, since we use the
unit-of-production method to amortize our oil and gas properties, the quantity
of reserves could significantly impact our depreciation, depletion and
amortization expense and accretion expense. Our oil and gas properties are also
subject to a "ceiling" limitation based in part on the quantity of our proved
reserves. Finally, these reserves are the basis for our supplemental oil and gas
disclosures. For the vast majority of our reserves, we engage independent
petroleum engineering firms to prepare our estimates of proved hydrocarbon
liquid and gas reserves. These reserve estimates have not previously been filed
with any other Federal authority or agency.
The following tables set forth summary information with respect to our proved
reserves as of December 31, 2006, as estimated by compiling reserve information,
which was prepared by the engineering firms of Ryder Scott Company, McCartney
Engineering, LLC and internally generated engineering estimates (internal
estimates make up less than 1% of our proved reserve estimates).
------------------------------------------------------------------------
PRE-TAX PRESENT
NET RESERVES VALUE OF FUTURE
NET REVENUES
------------------ ---------------------------------- ----------------
CATEGORY OIL (BBLS) GAS (MCF) BOE(1)
------------------ ---------- ---------- ---------- ----------------
DECEMBER 31, 2006
------------------ ---------- ---------- ---------- ----------------
PROVED DEVELOPED 263,604 557,409 356,506 $ 9,640,628
------------------ ---------- ---------- ---------- ----------------
PROVED UNDEVELOPED 1,494,037 752,000 1,619,370 $ 19,783,678
------------------ ---------- ---------- ---------- ----------------
------------------ ---------- ---------- ---------- ----------------
TOTAL PROVED 1,757,641 1,309,409 1,975,876 $ 29,424,306
------------------------------------------------------------------------
(1) Estimated using a conversion ratio of 1.0 Bbl/6.0 Mcf (thousand cubic
feet).
Total PV-10 value decreased to $29,424,306 as of December 31, 2006 from
$46,452,324 as of December 31, 2005. The two main factors that caused the
decrease in both reserve quantities and PV-10 value from 2005 to 2006 were
related to our Texas Panhandle waterflood project. The reasons were as follows:
1) the price of natural gas used to calculate the PV-10 value decreased from
$13.08 to $5.24 as of the years ended December 31, 2005 and 2006, respectively;
and 2) our independent reserve engineer made an internal decision in their
reserve
4
estimation process for the year ended December 31, 2006 to place greater
confidence on different areas of available data related to the waterflood as
compared to the year end 2005 reserve estimate. This shift in focus on other
data by the independent reserve engineer caused a decrease in the estimate of
our Proved Undeveloped reserves in the Texas Panhandle project of approximately
570,000 barrels of oil equivalent.
We note that reserve and cash flow estimates utilize experience and judgment as
well as actual data, but actual results are often different than the estimate.
Reserve engineering is a subjective process of estimating underground
accumulations of crude oil, condensate and natural gas that cannot be measured
in an exact manner, and the accuracy of any reserve estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. The quantities of oil and natural gas that are ultimately
recovered, production and operating costs, the amount and timing of future
development expenditures and future oil and natural gas sales prices may differ
from those assumed in these estimates. Therefore, the pre-tax 10% Present Value
of Future Net Revenues amounts shown above should not be construed as the
current market value of the oil and natural gas reserves attributable to our
properties.
In accordance with the guidelines of the Securities and Exchange Commission, the
engineers' estimates of future net revenues from our properties and the pre-tax
10% Present Value of Future Net Revenues thereof are made using oil and natural
gas sales prices in effect as of the effective dates of such estimates and are
held constant throughout the life of the properties, except where such
guidelines permit alternate treatment, including the use of fixed and
determinable contractual price escalations.
PRODUCTIVE WELLS
The following table sets forth the total number of our active well bores and
working interests (WI) that we maintain in each well as of March 15, 2007.
- ---------------------------------------------
NO. OF WI WI
WELLS (OIL) (GAS)
- ----------------------- ------ ----- -----
Gruman 18-1 1 85% 85%
- ----------------------- ------ ----- -----
Gordon 1-18 1 95% N/A
- ----------------------- ------ ----- -----
Quinduno(1) 2 100% 100%
- ----------------------- ------ ----- -----
Barnett Shale(3) 2 5.54% 5.54%
- ----------------------- ------ ----- -----
Pintail #1 1 16% 16%
- ----------------------- ------ ----- -----
REP Pintail Flats(2) 1 16% 16%
- ----------------------- ------ ----- -----
Corbett N. 13 #1 1 10% 10%
- ----------------------- ------ ----- -----
TOTAL PRODUCTIVE WELLS 9
- ---------------------------------------------
(1) Project in which the Company's working interest reduces to 90% (as
described herein ITEM 2 - North Texas/Panhandle Water Flood Project)
(2) Well in SW Garwood Prospect, Colorado County, Texas, in which we have a
reversionary back-in interest after payout
(3) WI is a partnership interest in DDJET Limited LLP
5
ACREAGE
The following table summarizes our gross and net developed and undeveloped
natural gas and crude oil wells and acreage under lease as of March 15, 2007:
- -----------------------------------------------------------------
WELLS ACREAGE
- ------------------------------------- ----------- -------------
STATE GROSS NET GROSS NET
- --------------------- -------------- ----- ---- ------ -----
DEVELOPED ACREAGE:
- --------------------- -------------- ----- ---- ------ -----
Texas:
Garwood Gas 2 .16 1,280 205
Maddox (Quinduno) 19 Oil, 1 Gas 20 20 1,755 1,755
Barnett Shale Gas 2 .554 1,127 63
- --------------------- -------------- ----- ---- ------ -----
North Dakota Oil (1) 1 .85 280 238
- --------------------- -------------- ----- ---- ------ -----
Oklahoma:
Gordon 1-18 Oil 1 .95 610 579
Corbett N.#13-1 Gas 1 .10 552 55
- --------------------- -------------- ----- ---- ------ -----
TOTAL DEVELOPED 27 5,604 2,895
- --------------------- -------------- ----- ---- ------ -----
UNDEVELOPED ACREAGE:
- --------------------- -------------- ----- ---- ------ -----
Louisiana 2,000 500
- --------------------- -------------- ----- ---- ------ -----
Texas
Barnett Shale 18,205 1,019
Tait 1,250 125
Garwood 438 383
- --------------------- -------------- ----- ---- ------ -----
Mississippi:
Dome Pickens 725 725
Buena Vista 386 386
- --------------------- -------------- ----- ---- ------ -----
Oklahoma 4,026 3,720
- --------------------- -------------- ----- ---- ------ -----
TOTAL UNDEVELOPED 27,030 6,858
- --------------------- -------------- ----- ---- ------ -----
TOTAL 32,634 9,753
- -----------------------------------------------------------------
OPERATOR ACTIVITIES
We currently operate all but one of our producing properties, and generally seek
to become the operator of record on properties we drill or acquire. We have a
non-operated partnership interest in our Barnett Shale project.
DRILLING ACTIVITIES
The following table sets forth our drilling activities for the last three fiscal
years. Our working interests in theproductive wells owned as of December 31,
2006, range from a direct working interest of 100% to after payout working
interest of 16%, as well as one non-operated interest of 10%. In 2005, we
drilled one additional well not shown on the table due to the fact it is not yet
completed. This well is the Harper Z-1 in Rodney Island, Tensas Parish. The
Phillips-Burkley #1 well is to be plugged and abandoned, and the Rodney Island
well isscheduled for a sidetrack of the initial well once issues with the
previous Operator have been resolved (as described herein). In 2006, we
drilled an exploratory well in Colorado County, which is being completed as
ofthe date of this filing and we participated in the drilling of 6 wells in the
Barnett Shale Project, two of which have been completed and are currently
selling gas and the remaining four are awaiting completion.
6
------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------ ----------------------------
2006 2005 2004
------------------ ------- --------- --------
Development Wells:
------------------ ------- --------- --------
Productive 1 4 (1) 5
------------------ ------- --------- --------
Non-Productive 1 -0- -0-
------------------ ------- --------- --------
TOTAL 2 4 5
------------------ ------- --------- --------
------------------ ------- --------- --------
Exploratory Wells:
------------------ ------- --------- --------
Productive 1 1 (2) 4
------------------ ------- --------- --------
Non-Productive 1 4 10
------------------ ------- --------- --------
TOTAL 2 4 14
------------------ ------- --------- --------
------------------ ------- --------- --------
Total Wells:
------------------ ------- --------- --------
Productive 2 5 9
------------------ ------- --------- --------
Non-Productive 2 3 10
------------------ ------- --------- --------
TOTAL 4 8 19
------------------------------------------------
(1) Four wells associated with our former Blue Ridge property, sold effective
July 1, 2005.
(2) We have a 16% working interest after payout in this well, the REP Pintail
Flats.
NET PRODUCTION, UNIT PRICES AND COSTS
The following table presents certain information with respect to oil, gas and
condensate production attributable to interests in all of our fields. Including
the average sales prices received and average production costs during the fiscal
periods ended December 31, 2006 and December 31, 2005
----------------------------------------------------------------
2006 2005
------------------------------------------------ ------ ------
Average sales price per barrel of oil equivalent $60.14 $50.34
------------------------------------------------ ------ ------
Lifting costs per barrel of oil equivalent* $11.10 $11.19
----------------------------------------------------------------
* Excludes the costs of re-entry into wells to assess non-producing assets
DESCRIPTION OF OFFICE PROPERTIES
We currently have two office locations, one in Houston and one in Dallas, Texas.
The addresses are as follows:
675 BERING DRIVE, SUITE 200 4925 GREENVILLE AVENUE, SUITE 670
HOUSTON, TX 77057 DALLAS, TEXAS 75206
On August 1, 2005, we leased our Dallas location, comprised of approximately
2,100 square feet of office space which is held under a sixty-four month lease
at a rate of approximately $2,800 per month (with payments which began December
2005). Since July 15, 2005, our principle executive offices have been
approximately 3,700 square feet of office space at 675 Bering Drive, Houston,
Texas. We hold this space under a five-year lease agreement at a lease rate of
approximately $5,000 per month. We believe these properties are adequate for
our corporate office needs.
ITEM 3. LEGAL PROCEEDINGS
We are currently not a party to any material pending legal proceeding.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the OTCBB under the symbol "PTSG." The following
table sets forth the quarterly high and low of sales prices per share for the
common stock for the last two fiscal years. Our fiscal year ended December 31,
2006.
COMMON STOCK PRICE RANGE
- -----------------------------------
QUARTER HIGH LOW
- --------------------- ----- -----
1st Quarter 2005 $2.75 $1.05
- --------------------- ----- -----
2nd Quarter 2005 $2.20 $1.13
- --------------------- ----- -----
3rd Quarter 2005 $1.83 $0.90
- --------------------- ----- -----
4th Quarter 2005 $1.49 $0.72
- --------------------- ----- -----
1st Quarter 2006 $1.85 $0.87
- --------------------- ----- -----
2nd Quarter 2006 $1.63 $ .82
- --------------------- ----- -----
3rd Quarter 2006 $1.18 $ .41
- --------------------- ----- -----
4th Quarter 2006 $1.09 $ .39
- -----------------------------------
On March 15, 2007, the last sales price for the common stock as reported on the
OTCBB was $1.35. On March 15, 2007, there were approximately 2,466 stockholders
of record of the common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is:
Corporate Stock Transfer
3200 Cherry Creek South Drive
Suite 430
Denver, CO 80209
DIVIDEND POLICY
We have not paid, and do not currently intend to pay cash dividends on our
preferred or common stock in the foreseeable future. Our current policy is to
retain all earnings, if any, to provide funds for operation and expansion of our
business. The declaration of dividends, if any, will be subject to the
discretion of the Board of Directors, which may consider such factors as our
results of operation, financial condition, capital needs and acquisition
strategy, among others. As of December 31, 2006, no dividends have been
declared.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth all equity compensation plans as of December 31,
2006:
- --------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- --------------------- ------------------------ ---------------------- -------------------------
C>
Equity compensation
plans approved by N/A N/A N/A
security holders
- --------------------- ------------------------ ---------------------- -------------------------
Equity compensation
plans not approved by 14,147,690 $1.88 N/A
security holders
- --------------------- ------------------------ ---------------------- -------------------------
TOTAL 14,147,690 $1.88 N/A
- --------------------------------------------------------------------------------------------------
8
RECENT SALES OF UNREGISTERED SECURITIES
All previous sales of unregistered securities have been previously disclosed in
Form 10-QSB's and Form 8-Ks.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In 2006, our main focus was continuing on with our plan of improving the quality
of our portfolio of oil and gas assets, as well as putting financings together
to enable us to economically develop these assets. We believe we have
successfully high graded our portfolio completing the acquisition of assets that
have multiple year growth potential and have secured cost effective financings
for two of our three core projects. Our inventory of assets also allows for us
to effectively align our financing needs with the capital needs of the project,
therefore allowing us to efficiently manage the amount and timing of our capital
expenditures. Our three main assets are resource plays, which allow us to
re-invest our capital into our projects to enhance the rates of return, revenue
growth and reserve growth. We have also completed the disposition of non-core
assets that did not meet our risk/reward parameters.
We believe we were successful in 2006 at creating an extremely high-graded
portfolio of oil and gas assets coupled with economical financings which will
enable us to continue to focus on the development of our high quality properties
in 2007. Management believes the development of our core assets should have a
significant impact on our production, revenues and cash flows in 2007.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our audited
consolidated financial statements and the related notes to the financial
statements included in this Form 10-KSB.
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.
FOR THE YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31,
2005
REVENUES
Consolidated oil and gas production revenues for the year ended December 31,
2006 were $1,232,958 versus $1,701,043 for the year ended December 31, 2005.
This decrease is primarily the result of the sale of our Blue Ridge Field
property in Fort Bend County, Texas, effective July 1, 2005, which accounted for
$552,998 of revenue during 2005. In addition to a decline in production from the
sale of our Blue Ridge Field, we also experienced a decline in production from
our Gruman 18-1 well in Stark County, North Dakota which can be attributed to
pressure depletion. In 2005, production from this well was 19,816 BOE, and in
2006 production decreased to 14,410 BOE. In an attempt to increase the
production of the well, we drilled an injection well, the Gruman 18-3 in 2006
and in February 2007 began injecting water into the Gruman 18-3 well. Some
results from the injection process are expected within 6-9 months. In addition,
in October 2006, we undertook certain remedial work on the Gruman 18-1 which has
improved the production of the well. We are currently assessing the positive
impact of this work on the long term production. The effects of the decreased
production in 2006 on the Gruman 18-1 were substantially reduced by an
approximately 24% increase in average oil prices in 2006 over 2005.
9
Our future revenue will be principally dependent upon the success of the
development of our current quality prospects and projects as well as the market
price for crude oil and natural gas. We plan to focus a majority of our current
working capital resources on the Barnett Shale resource project and are in late
stage negotiations to provide financing and technical expertise to our Texas
Panhandle project. 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 years ended December 31, 2006
and December 31, 2005 were $653,265 and $581,313, 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. Although there was a significant
decrease in production from 2005 to 2006, the lease operating expenses increased
because in November 2005 we added approximately 30 existing wells associated
with our Quinduno Field Prospect, Roberts County, Texas that require lease
operating costs to be incurred even though the wells have minimal production.
These existing, but non-productive wells are vital to the success of the
waterflood project that will be needed to realize the reserves in the Quinduno
Field.
DEPLETION, DEPRECIATION AND AMORTIZATION
Costs for depletion, depreciation and amortization for the years ended December
31, 2006, and December 31, 2005, were $391,347 and $563,252, respectively.
Depletion expense per barrel of oil equivalent was $18.51 and $15.24 for the
years ended December 31, 2006 and 2005 respectively. The decrease in total
depletion was a result of the significant decrease in production from 2006 to
2005 (19,549 boe and 35,676 boe for the years ending December 31, 2006 and 2005,
respectively). Depletion is calculated using the percentage of units of
production over the total proved reserves. Therefore, being that our total
units produced decreased, our depletion percentage of proved properties subject
to amortization of depletion decreased. This resulting decrease in depletion was
partially offset by the increase in properties subject to amortization to
$23,462,639 as of December 31, 2006 from $11,849,520 at December 31, 2005.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the years ended December 31, 2006, and
December 31, 2005, were $2,766,235 and $3,268,088, respectively. This
significant decline of $501,853 or 15% in one year can be attributed to
management's efforts to cut costs in 2006. In 2006, the Company experienced a
decline in the number of employees which resulted in lower payroll expense in
2006 as compared to 2005. In addition, in 2006 there was a decline in services
provided by third party management and technical consultants as these services
were primarily performed in-house in 2006. Other areas where management cut
costs in 2006 were in the areas of travel and office expense. The decrease in
general and administrative expenses can also be attributed to lower bad debt
expense in 2006 as compared to 2005. The decrease in general and administrative
expense was partially offset by an increase in stock based compensation to key
employees in the amount of $240,000 and an increase in legal fees incurred
during the normal course of business.
NET LOSS FROM OPERATIONS
We generated a net operating loss of $2,577,889 for the year ended December 31,
2006, compared to a net operating loss of $2,711,610 for the year ended December
31, 2005. The $133,721 decrease in the net operating loss is related mainly to
the Company's effort in reducing general and administrative costs as well as the
decrease in depletion as discussed above. The effect of these decreases in costs
was offset by the sale of our Blue Ridge Field asset which resulted in lower
revenue.
As explained above, our main focus during 2006 and 2005 was to improve the
quality of our portfolio of our oil and gas assets and dispose of assets that
did not meet our risk/reward parameters. Our current portfolio reflects these
goals. We believe we were successful in 2005 and 2006 in creating an extremely
high-graded portfolio of oil and gas assets and a sound infrastructure, which
will enable us to focus on the development of our high quality properties in
2007 which we anticipate, will have a positive impact on our production,
revenues and cash flows.
10
OTHER INCOME (EXPENSE)
The increase in interest expense from $240,452 in 2005 to $801,067 in 2006 is
attributable to a higher debt level in 2006 and amortization of financing costs
for new debt arrangements in 2006.
The $1,000,000 of other income during 2006 is the result of the sale of our
investment in equity securities having a basis of $-0- at the time of sale.
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 convertible notes 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 carry out our
business plan.
CONVERTIBLE SECURITIES
Subsequent to our fiscal year end, on February 1, 2007, we executed a Note and
Warrant Purchase Agreement for the sale of a $10,000,000 8% Senior Secured
Convertible Promissory Note and a four year warrant to purchase 5,000,000 shares
of our common stock at an exercise price of $1.40 per share for total gross
proceeds to us of $10,000,000. We completed the transaction and received
funding on February 7, 2007. Upon closing, we issued the Convertible Note and
the Warrant, and executed a Pledge and Security Agreement and a Registration
Rights Agreement.
PRIVATE EQUITY PLACEMENTS
In December 2006, we completed sales of $3.2 million of our common stock in a
private offering. We received net proceeds of approximately $3.0 million which
were to be used for general corporate purposes
In February 2006, we completed sales of $2.7 million of our common stock in a
private offering. We received net proceeds of approximately $2.56 million which
were to be used for general corporate purposes, including the drilling of
projects in our prospect inventory.
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 were to be used for general corporate purposes, including the drilling of
projects in our prospect inventory.
PROJECT FINANCINGS
In November 2006, we signed a Securities Purchase Agreement and Secured Term
Note with Laurus Master Fund, Ltd to provide financing for the drilling of our
Kallina 46 #1 well and payment of the future completion costs for the Kallina
46 #1 well. We formed a subsidiary, Garwood Petrosearch Inc., to hold our
interest in the Kallina Lease and the Kallina 46 #1 well. Also, as a part of
the financing arrangement, Garwood issued Laurus a Warrant to acquire, upon
payout of the Note indebtedness, 45% of Garwood's outstanding common stock such
that upon exercise of the Warrant, Garwood would be owned 55% by us and 45% by
Laurus. The collateral for this financing is specifically recourse to the
Kallina 46 #1 well and the associated lease acreage only.
REVOLVING CREDIT AGREEMENT
On October 16, 2006, we amended our existing revolving credit facility with
Fortuna Energy, LP. The principal available under the revolving borrowing base
remains $10,000,000, with a current outstanding balance of $3,732,500 as of
March 15, 2007. Under the terms of the transaction, Fortuna advanced us
$780,000 for the purpose of paying amounts due for the Barnett Shale Project.
As part of the financing, we provided Fortuna additional collateral. In
addition, we agreed to issue to Fortuna 475,000 five year warrants with a strike
price of $0.92 per share. The Warrants will contain a "put" provision which
will allow Fortuna to "put" the warrants to the Company at a price of $0.65 per
share for two (2) years, which "put" period shall commence 180 days after the
issuance of the
11
Letter Agreement. Additionally, as part of the transaction, we agreed to issue
100,000 new warrants, which expire 5 years from the date of issue, at a price of
$0.92 per share to replace 100,000 warrants previously issued to Fortuna at a
price of $2.00 per share, which were previously set to expire on November 1,
2007. We do not intend to draw down any more funds from this credit facility.
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 accounted
for $1,370,110 of our PV-10 proved reserves as of December 31, 2004, or
approximately 10% of our total proved reserve value at that date.
DRILLING PARTNERSHIPS
We continue to strive to develop relationships with institutional or high net
worth individuals to participate in our prospects. Management believes this
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.
FORWARD LOOKING STATEMENT AND INFORMATION
This document contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are subject
to risks and uncertainties and are based on the beliefs and assumptions of
management and information currently available to management. The use of words
such as "believes," "expects," "anticipates," "intends," "plans," "estimates,"
"should," "likely" or similar expressions, indicates a forward-looking
statement.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. Future results may differ materially from
those expressed in the forward-looking statements. Many of the factors that will
determine these results are beyond our ability to control or predict.
Stockholders are cautioned not to put undue reliance on any forward-looking
statements, which speak only to the date made. For those statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
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.
12
CAUTIONARY NOTE TO U.S. INVESTORS
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION PERMITS OIL AND GAS
COMPANIES, IN THEIR FILINGS WITH THE SEC, TO DISCLOSE ONLY PROVED RESERVES THAT
A COMPANY HAS DEMONSTRATED BY ACTUAL PRODUCTION OR CONCLUSIVE FORMATION TESTS TO
BE ECONOMICALLY AND LEGALLY PRODUCIBLE UNDER EXISTING ECONOMIC AND OPERATING
CONDITIONS. WE USE CERTAIN TERMS HEREIN, SUCH AS "PROBABLE", "POSSIBLE",
"RECOVERABLE", AND "RISKED," AMONG OTHERS, THAT THE SEC'S GUIDELINES STRICTLY
PROHIBIT US FROM INCLUDING IN FILINGS WITH THE SEC. READERS ARE URGED TO
CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US WHICH ATTEMPT
TO ADVISE INTERESTED PARTIES OF THE ADDITIONAL FACTORS WHICH MAY AFFECT OUR
BUSINESS.
For a discussion of some additional factors that may cause actual results to
differ materially from those suggested by the forward-looking statements, please
read carefully the information under "Risk Factors" section below. The
identification in this document of factors that may affect future performance
and the accuracy of forward-looking statements is meant to be illustrative and
by no means exhaustive. All forward-looking statements should be evaluated with
the understanding of their inherent uncertainty.
We operate in a very competitive and rapidly changing environment. New risks
emerge from time to time and it is not possible for our management to predict
all risks, nor can we assess the impact of all risks on our business or the
extent to which any risk, or combination of risks, may cause actual results to
differ from those contained in any forward-looking statements. All
forward-looking statements included in this Form 10-KSB are based on information
available to us on the date of the Form 10-KSB. Except to the extent required
by applicable laws or rules, we undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained throughout
this Form 10-KSB.
RISK FACTORS
An investment in our Common Stock involves a high degree of risk. You should
carefully consider the risks described below before deciding to purchase shares
of our Common Stock. If any of the events, contingencies, circumstances or
conditions described in the risks below actually occurs, our business, financial
condition or results of operations could be seriously harmed. The trading price
of our Common Stock could, in turn, decline and you could lose all or part of
your investment.
RISKS RELATED TO THE COMPANY
OUR LIMITED HISTORY MAKES AN EVALUATION OF US AND OUR FUTURE EXTREMELY
DIFFICULT, AND PROFITS ARE NOT ASSURED.
We have a limited operating history, having begun commercial drilling operations
in August 2003. There can be no assurance that we will be profitable in the
future or that the shareholders' investments in us will be returned to them in
full, or at all, over time. In view of our limited history in the oil and gas
exploration business, an investor must consider our business and prospects in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development. There can be no assurance that
we will be successful in undertaking any or all of the activities required for
successful commercial drilling operations. Our failure to undertake
successfully such activities could materially and adversely affect our business,
prospects, financial condition and results of operations. In addition, there
can be no assurance that our exploration and production activities will produce
oil and gas in commercially viable quantities, if any at all. There can be no
assurance that sales of our oil and gas production will ever generate
significant revenues, that we will ever generate additional positive cash flow
from our operations or that we will be able to achieve or sustain profitability
in any future period.
WE HAVE EXPERIENCED RECENT SUBSTANTIAL OPERATING LOSSES AND MAY INCUR ADDITIONAL
OPERATING LOSSES IN THE FUTURE.
During the twelve month period ended December 31, 2006 we incurred a net loss of
$2,321,925. In the event we are unable to increase our gross margins, reduce
our costs and/or generate sufficient additional revenues to offset our increased
costs, we may continue to sustain losses and our business plan and financial
condition will be materially and adversely affected.
13
THE TRADING PRICE OF OUR COMMON STOCK ENTAILS ADDITIONAL REGULATORY
REQUIREMENTS, WHICH MAY NEGATIVELY AFFECT SUCH TRADING PRICE.
The trading price of our common stock is below $5.00 per share. As a result of
this price level, trading in our common stock would be subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, as amended. These rules require additional disclosure by broker-dealers
in connection with any trades generally involving any non-NASDAQ equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. Such rules require the delivery, before any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must determine the suitability of the penny
stock for the purchaser and receive the purchaser's written consent to the
transaction before sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
our common stock. As a consequence, the market liquidity of our common stock
could be severely affected or limited by these regulatory requirements.
WE ARE DEPENDENT ON KEY PERSONNEL.
We depend to a large extent on the services of certain key management personnel,
including our executive officers and other key consultants, the loss of any of
which could have a material adverse effect on our operations. Specifically, we
rely on Mr. Richard Dole, Chairman, President and CEO, to maintain the strategic
direction of the Company. We also rely on Mr. Wayne Beninger, Chief Operating
Officer, to oversee the technical evaluation of projects as well as operations
of the Company. Although Messrs. Dole and Beninger currently serve under
employment agreements, there is no assurance that they will continue to be
employed by us. We do not maintain, nor do we plan to maintain, key-man life
insurance with respect to any of our officers or directors.
WE ARE SUBJECT TO POTENTIAL LIABILITY FROM OPERATIONS.
We are subject to potential liability from our operations, such as injuries to
employees or third parties, which are inherent in the management of oil and gas
programs. While we intend to obtain and maintain appropriate insurance coverage
for these risks, there can be no assurance that our operations will not expose
us to liabilities exceeding such insurance coverage or to liabilities not
covered by insurance.
WE MAY EXPERIENCE POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS.
Our future revenues may be affected by a variety of factors, many of which are
outside our control, including (a) the success of project results; (b) swings in
availability of drilling services needed to implement projects and the pricing
of such services; (c) a volatile oil and gas pricing market which may make
certain projects that we undertake uneconomic; (d) the ability to attract new
independent professionals with prospects in a timely and effective manner; and
(e) the amount and timing of operating costs and capital expenditures relating
to conducting our business operations and infrastructure. As a result of our
limited operating history and the emerging nature of our business plan, it is
difficult to forecast revenues or earnings accurately, which may fluctuate
significantly from quarter to quarter.
WE PARTICIPATE IN OIL AND GAS LEASES WITH THIRD PARTIES.
We may own less than 100% of the working interest in certain leases acquired by
us, and other parties will own the remaining portion of the working interest.
Financial risks are inherent in any operation where the cost of drilling,
equipping, completing and operating wells is shared by more than one person. We
could be held liable for the joint activity obligations of the other working
interest owners such as nonpayment of costs and liabilities arising from the
actions of the working interest owners. In the event other working interest
owners do not pay their share of such costs, we would likely have to pay those
costs. In such situations, if we were unable to pay those costs, we could
become insolvent.
14
WE MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE, WHICH COULD CAUSE
DILUTION TO ALL SHAREHOLDERS.
We may seek to raise additional equity capital in the future. Any issuance of
additional shares of our common stock will dilute the percentage ownership
interest of all shareholders and may dilute the book value per share of our
common stock.
EXPANSION OF OUR EXPLORATION PROGRAM WILL REQUIRE CAPITAL FROM OUTSIDE SOURCES.
We do not currently have the financial resources to explore and drill all of our
currently identified prospects. Absent raising additional capital or entering
into joint venture agreements, we will not be able to increase our exploration
and drilling operations at the projected rate. This could limit the size of our
business. There is no assurance that capital will be available in the future to
us or that capital will be available under terms acceptable to us. We will need
to raise additional money, either through the sale of equity securities (which
could dilute the existing stockholders' interest), through the entering of joint
venture agreements (which, while limiting our risk, could reduce our ownership
interest in particular assets), or from borrowings from third parties (which
could result in additional assets being pledged as collateral and which would
increase our debt service requirements).
WE DEPEND ON INDUSTRY VENDORS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE SERVICES.
We are and will continue to be largely dependent on industry vendors for the
success of our oil and gas exploration projects. These contracted services
include, but are not limited to, accounting, drilling, completion, workovers
(remedial down hole work on a well) and reentries (entering an existing well and
changing the direction and/or depth of a well), geological evaluations,
engineering, leasehold acquisitoin (landmen), operations, legal, investor
relations/public relations, and prospect generation. We could be harmed if we
fail to attract quality industry vendors to participate in the drilling of
prospects which we identify or if our industry vendors do not perform
satisfactorily. We often have, and will continue to have, little control over
factors that would influence the performance of our vendors.
WE RELY ON THIRD PARTIES FOR PRODUCTION SERVICES AND PROCESSING FACILITIES.
The marketability of our production depends upon the proximity of our reserves
to, and the capacity of, facilities and third party services, including oil and
natural gas gathering systems, pipelines, trucking or terminal facilities, and
processing facilities. The unavailability or lack of capacity of such services
and facilities could result in the shut-in of producing wells or the delay or
discontinuance of development plans for properties. A shut-in or delay or
discontinuance could materially adversely affect our financial condition. In
addition, federal and state regulation of oil and natural gas production and
transportation affect our ability to produce and market oil and natural gas on a
profitable basis.
WE MAY NOT OPERATE ALL PROJECTS.
We may not operate all properties in which we have an interest; as a result, we
may have limited ability to exercise influence over, and control the risks
associated with, operations of these properties. The failure of a well operator
to adequately perform operations, an operator's breach of the applicable
agreements or an operator's failure to act in ways that are in our best interest
could reduce our production and revenues. The success and timing of our
development activities on properties operated by others therefore depend upon a
number of factors outside of our control, including the operator's timing and
amount of capital expenditures; expertise and financial resources; inclusion of
other participants in drilling wells; and use of technology.
THERE IS LIMITED LIQUIDITY IN OUR SHARES.
There is a limited market for our shares of common stock and an investor may not
be able to liquidate his or her investment regardless of the necessity of doing
so. The prices of our shares are highly volatile. This could have an adverse
effect on developing and sustaining the market for our securities. If the
market price of our common stock declines significantly, you may be unable to
resell your common stock at or above the public offering price. We cannot
assure you that the market price of our common stock will not fluctuate or
decline significantly, including a decline below the public offering price, in
the future. In addition, the stock markets in general can experience
considerable price and volume fluctuations.
15
GENERAL RISKS OF THE OIL AND GAS BUSINESS
WE ARE SUBJECT TO DRILLING AND OPERATIONAL HAZARDS.
The oil and gas business involves a variety of operating risks, including
blowouts, cratering and explosions, mechanical and equipment problems,
uncontrolled flows of oil and gas or well fluids, fires, marine hazards with
respect to offshore operations, formations with abnormal pressures, pollution
and other environmental risks, and natural disasters. Any of these events could
result in loss of human life, significant damage to property, environmental
pollution, impairment of our operations and substantial losses. Locating
pipelines near populated areas, including residential areas, commercial business
centers and industrial sites, could increase these risks. In accordance with
customary industry practice, we will maintain insurance against some, but not
all, of these risks and losses. The occurrence of any of these events not fully
covered by insurance could have a material adverse effect on our financial
position and results of operations.
WE HAVE COMPETITION FROM OTHER COMPANIES.
A large number of companies and individuals engage in drilling for gas and oil,
and there is competition for the most desirable prospects. We will encounter
intense competition from other companies and other entities in the sale of our
gas and oil production. We could be competing with numerous gas and oil
companies which may have financial resources significantly greater than ours.
Further, the quantities of gas and oil to be delivered by us may be affected by
factors beyond our control, such as the inability of the wells to deliver at the
necessary quality and pressure, premature exhaustion of reserves, changes in
governmental regulations affecting allowable production and priority allocations
and price limitations imposed by federal and state regulatory agencies.
THE UNAVAILABILITY OR HIGH COST OF DRILLING RIGS, EQUIPMENT, SUPPLIES, PERSONNEL
AND OILFIELD SERVICES COULD MATERIALLY ADVERSELY IMPACT US.
Drilling activity in the area of our proposed initial activities is extremely
high. Increased drilling activity in these areas could decrease the availability
of rigs and our access to oilfield services. Either shortages or increases in
the cost of drilling rigs, equipment, supplies or personnel could delay or
adversely affect our operations. There can be no assurance that we will be able
to obtain the necessary equipment or services may not be available to us at
economical prices.
OIL AND GAS PRICES ARE VOLATILE.
Declines in oil and gas prices may materially adversely affect our financial
condition, liquidity, ability to obtain financing and operating results. Lower
oil and gas prices also may reduce the amount of oil and gas that we can produce
economically. High oil and gas prices could preclude acceptance of our business
model. Depressed prices in the future would have a negative effect on our
future financial results. Historically, oil and gas prices and markets have
been volatile, with prices fluctuating widely, and they are likely to continue
to be volatile. Prices for oil and gas are subject to wide fluctuations in
response to relatively minor changes in supply of and demand, market uncertainty
and a variety of additional factors that are beyond our control. These factors
include, the domestic and foreign supply of oil, the level of consumer product
demand, weather conditions, political conditions in oil producing regions,
including the Middle East, the ability of the members of the Organization of
Petroleum Exporting Countries to agree to and maintain oil price and production
controls, the price of foreign imports, actions of governmental authorities,
domestic and foreign governmental regulations, the price, availability and
acceptance of alternative fuels; and overall economic conditions. These factors
and the volatile nature of the energy markets make it impossible to predict with
any certainty future oil and gas prices. Our inability to respond appropriately
to changes in these factors could negatively affect their profitability.
WE MAY HAVE WRITEDOWNS OF OUR ASSETS DUE TO PRICE VOLATILITY.
SEC accounting rules require us to review the carrying value of our oil and gas
properties on a quarterly basis for possible write-down or impairment. Under
these rules, capitalized costs of proved reserves may not exceed a ceiling
calculated at the present value of estimated future net revenues from those
proved reserves. Capital costs in excess of the ceiling must be permanently
written down. A decline in oil and natural gas prices could cause a write down
which would negatively affect our net income.
16
ESTIMATES OF OIL AND GAS RESERVES ARE UNCERTAIN AND MAY VARY SUBSTANTIALLY FROM
ACTUAL PRODUCTION.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of
expenditures, including many factors beyond our control. Our oil and gas
reserves set forth in this Form 10-KSB represent the estimated quantities of oil
and gas based on reports prepared by third party reserve engineers. There is a
reasonable certainty of recovering the proved reserves as disclosed in those
reports. Information relating to our proved oil and gas reserves is based
upon engineering data which demonstrates, with reasonable certainty, to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the quality
of available geological, geophysical, engineering and economic data, the
precision of the engineering and judgment. As a result, estimates of different
engineers often vary. The estimates of reserves, future cash flows and present
value are based on various assumptions, including those prescribed by the SEC
relating to oil and natural gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds, and are inherently imprecise.
WE ARE SUBJECT TO GOVERNMENTAL REGULATIONS.
Gas and oil operations in the United States are subject to extensive government
regulation and to interruption or termination by governmental authorities on
account of ecological and other considerations. The Environmental Protection
Agency of the United States and the various state departments of environmental
affairs closely regulate gas and oil production effects on air, water and
surface resources. Furthermore, proposals concerning regulation and taxation of
the gas and oil industry are constantly before Congress. It is impossible to
predict future proposals that might be enacted into law and the effect they
might have on us. Thus, restrictions on gas and oil activities, such as
production restrictions, price controls, tax increases and pollution and
environmental controls may have a material adverse effect on us.
THE OIL AND GAS INDUSTRY IS SUBJECT TO HAZARDS RELATED TO POLLUTION AND
ENVIRONMENTAL ISSUES.
Hazards in the drilling and/or the operation of gas and oil properties, such as
accidental leakage or spillage, are sometimes encountered. Such hazards may
cause substantial liabilities to third parties or governmental entities, the
payment of which could reduce distributions or result in the loss of our leases.
Although it is anticipated that insurance will be obtained by third-party
operators for our benefit, we may be subject to liability for pollution and
other damages due to environmental events which cannot be insured against due to
prohibitive premium costs, or for other reasons. Environmental regulatory
matters also could increase substantially the cost of doing business, may cause
delays in producing oil and gas or require the modification of operations in
certain areas.
WE MAY EXPERIENCE RAPID INCREASES IN OUR OPERATING COSTS.
The gas and oil industry historically has experienced periods of rapid cost
increases from time to time. Increases in the cost of exploration and
development would affect our ability to acquire equipment and supplies.
Increased drilling activity could lead to shortages of equipment and material
which would make timely drilling and completion of wells impossible. The costs
of producing oil and gas and conducting field operations may also be subject to
rapid cost changes that are not in our control. There is no assurance that over
the life of any project there will not be fluctuating or increasing costs in
doing business.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States, or GAAP. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We analyze our estimates, including those related to oil and gas
properties, income taxes, commitments and contingencies and stock based
compensation, and base our estimates on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Actual
results may differ from these estimates. We believe the following critical
accounting policies are subject to significant judgments and estimates used in
the preparation of our financial statements:
Oil and Gas properties. The Company uses the full cost method of accounting for
oil and gas operations. Accordingly, all costs, including nonproductive costs
and certain overhead costs associated with acquisition,
17
exploration and development of oil and gas properties, are capitalized. Net
capitalized costs are limited to the future net revenues, after income taxes,
discounted at 10% per year, from proven oil and gas reserves plus the cost of
the properties not subject to amortization. Such capitalized costs, including
the estimated future development costs and remediation costs, if any, are
depleted by an equivalent units-of-production method, converting gas units (Mcf)
to oil units (barrels) at the ratio of six Mcf of gas to one barrel of oil.
Also, with full cost accounting, no gain or loss is recognized upon the disposal
of oil and gas properties, unless such dispositions significantly alter the
relationship between capitalized costs and proven oil and gas reserves. Oil and
gas properties not subject to amortization consist of the cost of undeveloped
leaseholds and other geological and exploration costs, and totaled $6,309,169 at
December 31, 2006. These costs are reviewed periodically by management for
impairment, with the impairment provision included in the cost of the oil and
gas properties subject to amortization. Factors considered by management in its
impairment assessment include drilling results, re-evaluations of properties,
terms of oil and gas leases not held by production and available funds for
exploration and development.
Reserve Estimates. Our estimates of oil and natural gas reserves, by necessity,
are projections based on geological and engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that are difficult to measure.
The accuracy of any reserve estimate is a function of the quality of available
data, engineering and geological interpretation and judgment. Estimates of
economically recoverable oil and natural gas reserves and future net cash flows
necessarily depend upon a number of variable factors and assumptions, such as
historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions governing future oil and natural gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and natural
gas attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net cash flows
expected there from may vary substantially. Any significant variance in the
assumptions could materially affect the estimated quantity and value of the
reserves, which could affect the carrying value of our oil and gas properties
and/or the rate of depletion of the oil and gas properties. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and such variances may be material.
Income taxes. The Company uses the asset and liability method of accounting for
income taxes, under which deferred tax assets and liabilities are recognized for
the future tax consequences of (1) temporary differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities,
and (2) operating loss and tax credit carryforwards. Deferred income tax assets
and liabilities are based on enacted tax rates applicable to the future period
when those temporary differences are expected to be recovered or settled. The
effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income during the period the rate change is enacted. Deferred tax
assets are recognized in the year in which realization becomes determinable.
Periodically, management performs a forecast of its taxable income to determine
whether it is more likely than not that a valuation allowance is needed, looking
at both positive and negative factors. A valuation allowance for our deferred
tax assets is established, if in management's opinion, it is more likely than
not, that some portion will not be realized. At December 31, 2006, a valuation
allowance of $2,416,055 has been provided for deferred tax assets.
Commitments and contingencies. Liabilities for loss contingencies arising from
claims, assessments, litigation or other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably
estimated. Management does not see any circumstances that would require the
Company to record a loss contingency; therefore, to date no commitments or
contingencies have been recorded.
Stock based compensation. Effective January 1, 2006, we adopted the provisions
of Statement of Financial Accounting Standards No. 123 (revised 2004) -
Share-Based Payment ("SFAS 123(R)"), which requires the measurement and
recognition of compensation expense for all share-based payment awards
(including stock options) made to employees and directors based on the estimated
fair value. Compensation expense for equity-classified awards is measured at
the grant date based on the fair value of the award and is recognized as an
expense in earnings over the requisite service period using a graded vesting
method. Total share-based compensation expense for equity-classified awards,
was $240,000 during the year ended December 31 2006. As of December 31, 2006,
there is no estimated unrecognized compensation expense from unvested stock
options.
We use the Black-Scholes valuation model to determine the fair value of each
option award. Expected volatilities are based on the historical volatility of
our stock over a period consistent with that of the expected terms of the
18
options. The expected terms of the options are estimated based on factors such
as vesting periods, contractual expiration dates, historical trends in our stock
price and historical exercise behavior. The risk-free rates for periods within
the contractual life of the options are based on the yields of U.S. Treasury
instruments with terms comparable to the estimated option terms. Prior to our
adoption of the provisions of SFAS 123(R), we previously accounted for the Plans
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," ("APB 25"), and related interpretations and disclosure
requirements established by SFAS 123 - Accounting for Stock-Based Compensation,
as amended by SFAS No. 148 - Accounting for Stock-Based Compensation -
Transition and Disclosure.
OFF BALANCE SHEET ARRANGEMENTS
None
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item 7 is included in this report beginning on
page F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting
and financial disclosure.
ITEM 8A. CONTROLS AND PROCEDURES
Richard D. Dole, our Chief Executive Officer, and David J. Collins, our Chief
Financial Officer, have concluded that our disclosure controls and procedures
are appropriate and effective. They have evaluated these controls and
procedures as of December 31, 2006. There were no changes in our internal
controls over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
ITEM 8B. OTHER INFORMATION
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth our Directors and executive officers as of
December 31, 2006.
- -----------------------------------------------------------
NAME AGE POSITION
- --------------- --- -------------------------------------
Richard D. Dole 61 Director, Chairman, President and CEO
- --------------- --- -------------------------------------
Wayne Beninger. 53 Chief Operating Officer
- --------------- --- -------------------------------------
David Collins . 38 Chief Financial Officer
- --------------- --- -------------------------------------
Gerald Agranoff 60 Director
- --------------- --- -------------------------------------
Richard Majeres 40 Director
- -----------------------------------------------------------
RICHARD D. DOLE, DIRECTOR, CHAIRMAN OF THE BOARD, PRESIDENT AND CEO
Mr. Dole joined us as a Director in July 2004, and assumed the positions of
Chairman, President and CEO in December 2004. Mr. Dole previously served as
Vice President and Chief Financial Officer for Burlington
19
Resources International from 1998 to 2000. Since that time he has been active in
consulting and financial services. He was a co-founder of Benefits Access
Solutions, LLC, a company formed to provide financial services and benefit
options to employees and members of corporate organizations. He was also
co-founder and managing partner of Innovation Growth Partners, LLC, a firm that
provided management and consulting services to early stage companies. Mr. Dole's
extensive industry experience includes being National Partner-in-Charge of
Business Process Solutions at KPMG. Prior to that he was with Coopers & Lybrand
(now PriceWaterhouse Coopers) where he served as Assurance and Business Advisory
Partner for nearly 20 years and also served in numerous senior management roles,
including National Chairman for the Energy and Natural Resources Industry
practices for over 15 years and as the Vice Chairman for the U.S. Process
Management business unit. From August 2003 to July 2004, Mr. Dole was also a
member of the Board of Directors of Westport Resources Corporation (NYSE: WRC),
a member of its audit committee and a designated financial expert. He currently
serves as a director of Double Eagle Petroleum Company (DBLE, NASDAQ Global
Select Market) and chairs the audit committee and is the designated financial
expert. Mr. Dole graduated from Colorado State University.
WAYNE BENINGER, CHIEF OPERATING OFFICER
Mr. Beninger joined us as Chief Operating Officer in May 2005. Prior to May
2005, Mr. Beninger served as President of Southwest Oil & Gas Management, Inc.
("SOGMI") which he founded in 1997 to provide oil and gas property evaluation
services, geologic prospect review, contract operating services, technical
support for initial public offerings and strategic planning solutions for
domestic and international projects. Prior to Mr. Beninger joining the Company,
SOGMI provided a significant amount of our engineering and geological services
for all projects. From 1995 to 1997, Mr. Beninger was the Vice President for
Strategic Planning with WRT Energy Corporation. From 1982 to 1995 he was first
employed by, and then was a partner in, The Scotia Group, a domestic and
international consulting firm where he provided petroleum engineering and
geological services for companies and projects in the majority of active
petroleum basins in both the U.S. and overseas. He has been active in the oil
and gas industry since 1976. Mr. Beninger holds undergraduate degrees in both
petroleum engineering and geology from the University of Southern California and
has a number of industry publications to his credit. He is a member of the
Society of Petroleum Engineers, Pi Epsilon Tau (petroleum engineering honorary
fraternity) and Sigma Gamma Epsilon (geologic honorary fraternity).
DAVID COLLINS, VICE PRESIDENT, CHIEF FINANCIAL OFFICER
Mr. Collins joined Petrosearch Corporation as a Vice President and the Chief
Financial Officer in October 2003. Previously, he served as the Controller of
Kazi Management VI, LLC, a diversified investment and management organization
actively involved in energy, retail food chains, aquaculture and biotechnology
from February 2002 to October 2003. At Kazi Management VI, he was responsible
for the financial operations of multiple accounting offices across the United
States, as well as fourteen international and domestic Companies. Mr. Collins
was also the Chief Financial Officer of ZK Petroleum, an independent oil
producer in South Texas. Prior to Kazi Management VI, he served as an
independent analyst for The March Group in St. Thomas, U.S.V.I. from February
2001 to January 2002. Mr. Collins previously held the position of Chief
Financial Officer of Federation Logistics, LLC in the New York metropolitan area
from November 1994 to January 2001. Mr. Collins graduated from Villanova
University in 1990 with a Bachelor's degree in Accountancy. He became a
Certified Public Accountant and began his career in the Financial Services
Division of Ernst and Young in New York City. At Ernst and Young, he performed
audits of Fortune 500 Companies.
GERALD N. AGRANOFF, DIRECTOR
Gerald N. Agranoff joined us as a Director in May 2004. Mr. Agranoff has been
counsel to the firm of Kupferman & Kupferman, L.L.P. in New York since 2004 and
has been a general partner of SES Family Investment and Trading Partnership,
L.P., an investment partnership since 2004. Mr. Agranoff has also been a
member of Inveraray Capital Management L.L.C., the investment manager of
Highlander Fund B.V. and Highlander Partners (USA) L.P since 2002. He is also a
director and the chair of the audit committee of Triple Crown Media Inc (symbol,
TCMI). Active in Wall Street financial transactions for over two decades, his
specialties include taxation, investments and corporate finance. From 1975
through 1981, Mr. Agranoff was engaged exclusively in the private practice of
law in New York and was an adjunct-instructor at New York University's Institute
of Federal Taxation. Previously, he served as attorney-advisor to a Judge of the
United States Tax Court. He holds an L.L.M. degree in Taxation from New York
University and J.D. and B.S. Degrees from Wayne State University.
RICHARD MAJERES, DIRECTOR
Richard Majeres joined us as a Director in May 2004. In December 2000, Mr.
Majeres was one of the founding partners of the Houston public accounting firm
Ubernosky & Majeres, PC, which currently operates as Ubernosky,
20
Passmore & Majeres, LLP, offering tax, audit, accounting and management
consulting services. Mr. Majeres has served as a partner of this firm since its
inception in December 2000. From January 1999 to November 2000, Mr. Majeres was
a partner at Cox & Lord, PC. Mr. Majeres graduated from Bemidji State
University, Bemidji, Minnesota in 1989 with a bachelor's degree in accounting.
Upon graduation, he served as a field auditor with the Federal Energy Regulatory
Commission of the Department of Energy. Mr. Majeres became a certified public
accountant in 1992. He has extensive experience with oil and gas entities,
including exploration and development partnerships and corporations and
currently focuses a majority of his efforts on the Firm's audit practice.
BOARD OF DIRECTORS AND ITS COMMITTEES
During the fiscal year ended December 31, 2006 the Board of Directors held 14
meetings. Mr. Dole is our only Director who is also an Officer. Our Board of
Directors currently has an Audit Committee and a Compensation Committee which
are comprised of independent directors Richard Majeres and Gerald Agranoff.
AUDIT COMMITTEE
Our Audit Committee is made up of our two independent Board members, Mr. Richard
Majeres and Mr. Gerald Agranoff. Mr. Majeres is the Chairman of the Audit
Committee and is designated the Financial Expert. During the fiscal year ended
December 31, 2006 the Audit Committee held 4 meetings.
COMPENSATION COMMITTEE
Subsequent to our fiscal year end on March 23, 2007 our Board of Directors
approved the formation of a Compensation Committee made up of our two
independent Directors, Mr. Gerald Agranoff and Mr. Richard Majeres. Mr.
Agranoff was designated the Chairman of the Compensation Committee.
SECURITY HOLDERS RECOMMENDATIONS TO BOARD OF DIRECTORS
We do not currently have a process for security holders to send communications
to the Board of Directors. However, we welcome comments and questions from our
shareholders. Shareholders can direct communications to our Chief Executive
Officer, Richard D. Dole, at our executive offices, 675 Bering Drive, Suite 200,
Houston, Texas 77057. While we appreciate all comments from shareholders, we
may not be able to individually respond to all communications. We attempt to
address shareholder questions and concerns in our press releases and documents
filed with the SEC so that all shareholders have access to information about us
at the same time. Mr. Dole collects and evaluates all shareholder
communications. If the communication is directed to the Board of Directors
generally or to a specific director, Mr. Dole will disseminate the
communications to the appropriate party at the next scheduled Board of Directors
meeting. If the communication requires a more urgent response, Mr. Dole will
direct that communication to the appropriate executive officer. All
communications addressed to our directors and executive officers will be
reviewed by those parties unless the communication is clearly frivolous.
Our Bylaws provide that nominations of persons for election to the Board of
Directors of the corporation may be made at a meeting of stockholders by or at
the direction of the Board of Directors or by any stockholder of the corporation
entitled to vote in the election of directors at the meeting who complies with
the following notice procedures, as set forth in the Bylaws:
Nominations of persons for election to the Board of Directors may be made
at a meeting of the shareholders at which directors are to be elected (a)
by or at the direction of the Board of Directors, or (b) by any shareholder
of the Company who is a shareholder of record at the time of the giving of
such shareholders notice provided for in Paragraph 3.3 (of the Bylaws), who
shall be entitled to vote at such meeting in the election of directors and
who complies with the requirements of Paragraph 3.3 (of the Bylaws). Such
nominations, other than those made by or at the direction of the Board of
Directors shall be preceded by timely advance notice in writing to the
Secretary. To be timely, a shareholder's notice shall be delivered to, or
mailed and received at, the principal executive offices of the Company (1)
with respect to an election to be held at the annual meeting of the
shareholders of the Company, not later than the close of business on the
90th day prior to the first anniversary of the preceding year's annual
meeting; provided, however, in the event that the date of the annual
meeting is more than 30 days before or more than 60 days after such
anniversary date, notice by the shareholder to be timely must be so
delivered not later than the close of business on the later of the 90th day
prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Company; and (2) with
21
respect to an election to be held at a special meeting of shareholders of
the Company for the election of directors not later than the close of
business on the 10th day following the day on which notice of the date of
the special meeting was mailed to shareholders of the Company as provided
in Paragraph 2.4 (of the Bylaws) or public disclosure of the date of the
special meeting was made, whichever first occurs. Any such shareholder's
notice to the Secretary shall set forth (x) as to each person whom the
shareholder proposes to nominate for election or re-election as a director,
(i) the name, age, business address and residence address of such person;
(ii) the principal occupation or employment of such person; (iii) the
number of shares of each class of capital stock of the Company's
beneficially owned by such person; (iv) the written consent of such person
to having such person's name placed in nomination at the meeting and to
serve as a director if elected; (v) any other information relating to such
person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, pursuant to Regulation 14A
under the Exchange Act, and (vi) as to the shareholder giving the notice,
(i) the name and address, as they appear on the Company's books of such
shareholder, and (ii) the number of shares of each class of voting stock of
the Company which are then beneficially owned by such shareholder. The
presiding officer of the meeting of shareholders shall determine whether
the requirements of Paragraph 3.3 (of the Bylaws) have been met with
respect to any nomination or intended nomination. If the presiding officer
determines that any nomination was not made in accordance with the
requirements of Paragraph 3.3 (of the Bylaws), he shall so declare at the
meeting and the defective nomination shall be disregarded. Notwithstanding
the foregoing provisions , a shareholder shall also comply with all
applicable requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in Paragraph 3.3 of the
Bylaws. For (purposes of the notice provisions of the Bylaws), public
disclosure shall be deemed to first be given to shareholders when
disclosure of such date of the meeting of shareholders is first made in a
press release reported by the Dow Jones News Services, Associated Press or
comparable national news service, or in a document publicly filed by the
Company with the Securities and Exchange Commission pursuant to Sections
13, 14 or 15(d) of the Exchange Act.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own beneficially more than ten percent of
our common stock, to file reports of ownership and changes of ownership with the
Securities and Exchange Commission. Based solely on the reports we have
received and on written representations from certain reporting persons, we
believe that the directors, executive officers, and greater than ten percent
beneficial owners have complied with all applicable filing requirements.
CODE OF ETHICS
Effective August 19, 2005, the Board of Directors adopted a Code of Ethics for
our directors, officers and employees. A copy of our Code of Ethics was filed
with our Form SB-2 registration statement filed with the SEC on June 6, 2005.
22
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
following individuals for the two most recently completed fiscal years ended
December 31, 2006. No other compensation was paid to our named executive
officers other than the compensation set forth below. The compensation
reflected in this section has been awarded by us and our predecessor,
Petrosearch Texas.
- --------------------------------------------------------------------------------------------------------------------------------
NON-EQUITY NONQUALIFIED
NAME AND STOCK OPTION INCENTIVE DEFERRED ALL
PRINCIPAL TITLE YEAR SALARY BONUS AWARDS AWARDS PLAN COMPENSATION OTHER TOTAL
POSITION (B) ($) ($) ($) ($) COMPENSATION EARNINGS COMPENSATION ($)
(A) (C) (D) (E) (F) ($) ($) ($) (J)
(G) (H) (I)
- ----------- --------- ----- --------- -------- --------- --------- ------------- ------------- ------------- ---------
Chairman,
Richard CEO and 2006 $180,000 -0- $160,000 -0- -0- -0- -0- $340,000
Dole(1) President 2005 $180,000 -0- -0- -0- -0- -0- -0- $180,000
- ----------- --------- ----- --------- -------- --------- --------- ------------- ------------- ------------- ---------
David CFO 2006 $180,000 -0- $80,000 -0- -0- -0- -0- $260,000
Collins(2) 2005 $180,000 -0- -0- $55,855 -0- -0- -0- $235,855
- ----------- --------- ----- --------- -------- --------- --------- ------------- ------------- ------------- ---------
Wayne COO 2006 $250,000 $50,000 -0- -0- -0- -0- -0- $300,000
Beninger(3) 2005 $135,416 $25,000 -0- $310,907 -0- -0- -0- $471,323
- ----------- --------- ----- --------- -------- --------- --------- ------------- ------------- ------------- ---------
Former
Eric V.P., 2006 $45,000 -0- -0- -0- -0- -0- -0- $45,000
Brown(4) Finance 2005 $180,000 -0- -0- $274,750 -0- -0- -0- $454,750
- --------------------------------------------------------------------------------------------------------------------------------
Notes to Summary Compensation Table:
(1) Mr. Dole was appointed as a Director in July 2004. On December 30,
2004, Mr. Dole assumed the roles of Chairman of our Board of
Directors, President and Chief Executive Officer. Mr. Dole became an
employee of the Company as of January 1, 2005. Mr. Dole entered into
an employment agreement with the Company in November 2004 for an
initial term of two years which calls for compensation of $15,000 per
month.
(2) Mr. Collins was appointed Chief Financial Officer in September, 2004.
Mr. Collins became an employee of the Company as of January 1, 2005.
Mr. Collins entered into an employment agreement with the Company May
1, 2005, for an initial term of two years which calls for compensation
of $15,000 per month.
(3) Mr. Beninger was appointed Chief Financial Officer and became an
employee of the Company as of May 1, 2005. Mr. Beninger entered into
an employment agreement with the Company May 1, 2005, for an initial
term of two years which calls for compensation of $20,830 per month
salary and $50,000 per year bonus.
(4) Mr. Brown was appointed Vice President of Finance on December 30,
2004. Mr. Brown became an employee of the Company as of January 1,
2005. Mr. Brown entered into an employment agreement with the Company
May 1, 2005, for a term of two years which called for compensation of
$15,000 per month. Mr. Brown resigned from his position on March 15,
2006 at which time is employment agreement was mutually terminated.
EMPLOYMENT AGREEMENTS
The employment contracts in existence with officers and key personnel include
employment contracts with each of Richard Dole (Chairman, President and CEO),
David Collins (Chief Financial Officer) and Wayne Beninger, (Chief Operating
Officer). Mr. Dole's Employment Agreement became effective on November 14, 2004
and had an initial term of 2 years, of which has since expired and still in
effect on a month to month basis. Employment Agreements with Messrs Collins and
Beninger became effective May 1, 2005 and have an initial term of 2 years.
The employment contracts with Messrs. Dole, Collins, and Beninger provide for an
initial employment term of two years and month to month thereafter. Each of the
employment contracts provides for termination by the Company upon death or
disability, with six month severance payments. Each of the employment contracts
permits termination by the Company for cause, which includes malfeasance, misuse
of funds, insubordination, a material uncured breach or conviction for a felony
or crime of moral turpitude. The agreements may be voluntarily terminated by
the employee at any time, with no severance payment. Additionally, the
respective employees may elect to terminate their employment contract and
receive severance pay upon a material uncured breach by the Company or a change
in control, if within forty five days of the change in control the employee is
not offered a position with the identical
23
salary for a period equal to the then remaining term plus one year. For
purposes of each agreement, a change in control is defined as a change in the
majority of the Board of Director positions accompanying the acquisition of
voting securities by a third party (other than directly from the Company)
equivalent to forty percent of the voting control of the Company (other than a
subsidiary or employee benefit plan), or accompanying a sale of all of the
assets or a merger (other than involving a subsidiary). Upon termination for
cause, the employee is not entitled to severance pay. A termination without
cause while a contract is pending, other than due to a change in control,
entitles the employees other than Mr. Dole to compensation through the end of
the contract term plus an additional three months. A termination without cause
of Mr. Dole or non-renewal of Mr. Dole's agreement gives rise to a severance pay
obligation equal to twelve months. Upon a termination coupled with a change in
control where the particular employee is not offered a position for the
identical salary, and in the case of Messrs. Dole and Beninger, the same
position, the employee is entitled to severance compensation equal to the face
period of the employment contract then pending at termination (e.g. a 1-year
contract would give rise to twelve months severance pay).
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
- -------------------------------------------------------------------------------------------------------------------------------
OPTION AWARDS STOCK AWARDS
------------------------------------------------------------------- -----------------------------------------------
Equity
Equity Incentive
Incentive Plan
Equity Plan Awards:
Incentive Awards: Market or
Plan Number of Market Number of Payout
Number of Number of Awards: Shares or Value of Unearned Value of
Securities Securities Number of Units of Shares or Shares, Unearned
Name Underlying Underlying Securities Option Option Stock Units of Units Shares,
Unexercised Unexercised Underlying Exercise Expiration that have Stock that or Other Units
Options (#) Options (#) Unexercised Price ($) Date not have not Rights or Other
Exercisable Unexercisable Unearned Vested Vested that Rights
Options (#) ($) have not that
(#) Vested have not
($) Vested
($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
- --------- ------------ -------------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Richard 61,538 -0- -0- $6.50 7/26/2007 -0- -0- -0- -0-
Dole 230,769 -0- -0- $5.20 9/15/2007 -0- -0- -0- -0-
2,687,738 -0- -0- $1.95 11/15/2008 -0- -0- -0- -0-
- --------- ------------ -------------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Wayne 19,231 -0- -0- $9.75 2/24/2007 -0- -0- -0- -0-
Beninger 365,000 -0- -0- $1.95 11/15/2008 -0- -0- -0- -0-
- --------- ------------ -------------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
David 92,308 -0- -0- $0.98 11/15/2008 -0- -0- -0- -0-
Collins 76,923 -0- -0- $1.63 11/15/2008 -0- -0- -0- -0-
50,000 -0- -0- $1.95 11/15/2008 -0- -0- -0- -0-
- --------- ------------ -------------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Richard 61,538 -0- -0- $6.50 7/26/2007 -0- -0- -0- -0-
Majeres 50,000 -0- -0- $1.95 3/25/2008 -0- -0- -0- -0-
- --------- ------------ -------------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Gerald 61,538 -0- -0- $6.50 7/26/2007 -0- -0- -0- -0-
Agranoff 50,000 -0- -0- $1.95 3/25/2008 -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
DIRECTOR COMPENSATION
For the year ending December 31, 2006, the Board of Directors approved
compensation of $30,000 cash to independent board members, Gerald Agranoff and
Richard Majeres, for their services for 2006.
- ---------------------------------------------------------------------------------------------------------------
Non-Equity Nonqualified
Fees Earned Stock Option Incentive Plan Deferred All Other
Name or Paid in Awards ($) Awards Compensation Compensation Compensation Total ($)
(a) Cash ($) (c) ($) ($) Earnings ($) ($) (h)
(b) (d) (e) (f) (g)
- ---------------- ------------- ---------- ------- --------------- ------------- ------------- ----------
Gerald Agranoff $30,000 -0- -0- -0- -0- -0- $30,000
- ---------------- ------------- ---------- ------- --------------- ------------- ------------- ----------
Richard Majeres $30,000 -0- -0- -0- -0- -0- $30,000
- ---------------------------------------------------------------------------------------------------------------
24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER
The following table sets forth certain information at March 15, 2007 with
respect to the beneficial ownership of shares of common stock by (i) each person
known to us who owns beneficially more than 5% of the outstanding shares of
common stock, (ii) each of our Directors, (iii) each of our Executive Officers
and (iv) all of our Executive Officers and Directors as a group. Unless
otherwise indicated, each stockholder has sole voting and investment power with
respect to the shares shown. As of March 15, 2007, we had 38,773,495 shares of
common stock issued and outstanding.
- ---------------------------------------------------------------------------------
AMOUNT AND
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL NATURE OF PERCENTAGE OF
OWNER BENEFICIAL COMMON STOCK (1)
OWNERSHIP
- -------------- -------------------------------- ------------- ----------------
Common Stock Richard D. Dole 3,245,430(2) 7.77%
Chairman, President and CEO
675 Bering Drive, Suite 200
Houston, Texas 77057
- -------------- -------------------------------- ------------- ----------------
Common Stock Wayne Beninger 631,923(3) 1.61%
Chief Operating Officer
675 Bering Drive, Suite 200
Houston, Texas 77057
- -------------- -------------------------------- ------------- ----------------
Common Stock David J. Collins 859,417(4) 2.20%
Vice President and
Chief Financial Officer
675 Bering Drive, Suite 200
Houston, Texas 77057
- -------------- -------------------------------- ------------- ----------------
Common Stock Gerald Agranoff 121,795(6) 0.31%
Director
675 Bering Drive, Suite 200
Houston, Texas 77057
- -------------- -------------------------------- ------------- ----------------
Common Stock Richard Majeres 203,943(7) 0.52%
Director
675 Bering Drive, Suite 200
Houston, Texas 77057
- -------------- -------------------------------- ------------- ----------------
- -------------- -------------------------------- ------------- ----------------
ALL OFFICERS AND DIRECTORS AS A 5,062,508 12.43%
GROUP (TOTAL OF 5)
- -------------- -------------------------------- ------------- ----------------
- -------------- -------------------------------- ------------- ----------------
Common Stock Wellington Trust Company, NA 2,033,084(9) 5.24%
75 State Street
Boston, MA 02109
- ---------------------------------------------------------------------------------
(1) Under Rule 13d-3 promulgated under the Exchange Act, a beneficial owner of a
security includes any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise has or shares: (i) voting
power, which includes the power to vote, or to direct the voting of shares; and
(ii) investment power, which includes the power to dispose or direct the
disposition of shares. Certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the shares
(for example, upon exercise of an option) within 60 days of the date as of which
the information is provided. In computing the percentage ownership of any
person, the amount of shares is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of these
acquisition rights. As a result, the percentage of outstanding shares of any
person as shown in this table does not necessarily reflect the person's actual
ownership or voting power with respect to the number of shares of common stock
actually outstanding on March 15, 2007. As of March 15, 2007 there were
38,773,495 shares of our common stock issued and outstanding.
25
(2) Includes 265,385 shares of common stock held directly and 2,980,045 shares
issuable upon the exercise of warrants to purchase additional shares of common
stock. Excludes 950,000 warrants issued to Mr. Dole that have been gifted to
his children, to which Mr. Dole disavows beneficial ownership.
(3) Includes 247,692 shares of common stock held directly and 384,231 shares
issuable directly upon the exercise of warrants to purchase additional shares of
common stock.
(4) Includes 640,186 shares directly and 219,231 shares issuable directly upon
the exercise of warrants to purchase additional shares of common stock.
(6) Includes 10,257 shares held directly and 111,538 shares issuable upon the
exercise of warrants to purchase additional shares of common stock.
(7) Includes 92,405 shares held directly by Mr. Majeres and 111,538 shares
issuable upon the exercise of warrants to purchase additional shares of common
stock.
(9) Includes 2,033,084 shares held by Wellington Trust Company, NA
_____________________________
We are not aware of any arrangements that could result in a change of control.
The disclosure required by Item 201(d) of Regulation S-B is set forth in ITEM 5
herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
None of the following persons has any direct or indirect material interest in
any transaction to which we were or are a party since the beginning of our last
fiscal year, or in any proposed transaction to which we propose to be a party:
(A) any of our directors or executive officers;
(B) any nominee for election as one of our directors;
(C) any person who is known by us to beneficially own, directly or indirectly,
shares carrying more than 5% of the voting rights attached to our common
stock; or
(D) any member of the immediate family (including spouse, parents, children,
siblings and in-laws) of any of the foregoing persons named in paragraph
(A), (B) or (C) above.
DIRECTOR INDEPENDENCE
Two of our Board of Directors are independent Directors pursuant to the
standards applicable to Regulation S-B. Mr. Gerald Agranoff and Mr. Richard
Majeres are the independent Board members
ITEM 13. EXHIBITS
Exhibit 14.1 - Code of Ethics (Incorporated by reference to our Form
SB-2 registration statement filed on June 6, 2005.
Exhibit 21.1 - List of Subsidiaries
Exhibit 23.1 - Consent of McCartney Engineering LLC, March 26, 2007
Exhibit 23.2 - Consent of Ryder Scott Company, March 30, 2007
26
Exhibit 31.1 - Certification of Chief Executive Officer of Petrosearch Energy
Corporation required by Rule 13a-14(1) or Rule 15d - 14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification of Chief Financial Officer of Petrosearch Energy
Corporation required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification of Chief Executive Officer of Petrosearch Energy
Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
Section 1350 of 18 U.S.C. 63.
Exhibit 32.2 - Certification of Chief Financial Officer of Petrosearch Energy
Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
Section 1350 of 18 U.S.C. 63.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees paid or accrued for
professional services rendered by Ham, Langston & Brezina for the audit of our
annual financial statements for fiscal year 2006 and fiscal year 2005 and the
aggregate fees paid or accrued for audit-related services and all other services
rendered by Ham, Langston & Brezina for fiscal year 2006 and fiscal year 2005.
2006 2005
----------- ------------
Audit fees $ 76,000 $ 69,000
Audit-related fees 0 2,000
Tax fees 18,800 9,805
All other fees 1,500 27,309
----------- ------------
Total $ 96,300 $ 108,114
=========== ============
The category of "Audit fees" includes fees for our annual audit, quarterly
reviews and services rendered in connection with regulatory filings with the
SEC, such as the issuance of comfort letters and consents.
The category of "Audit-related fees" includes employee benefit plan audits,
internal control reviews and accounting consultation.
The category of "Tax fees" includes consultation related to corporate
development activities.
All above audit services, audit-related services and tax services were
pre-approved by the Audit Committee, which concluded that the provision of such
services by Ham, Langston & Brezina was compatible with the maintenance of that
firm's independence in the conduct of its auditing functions.
27
SIGNATURES
In accordance with the requirements of Section 13 of 15(d) of the Exchange Act,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on April 2, 2007.
PETROSEARCH ENERGY CORPORATION
By /s/ Richard D. Dole
-------------------
Richard D. Dole
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this Form
10-KSB has been signed below by or on behalf of the following persons in the
capacities and on the dates stated.
Signature Title Date
By /s/ Richard D. Dole President, Chief Executive Officer April 2, 2007
- ---------------------- and Chairman of the Board
Richard D. Dole
By /s/ David J. Collins Chief Financial Officer April 2, 2007
- ----------------------- and Principal Financial Officer
David J. Collins
By /s/ Gerald Agranoff Director April 2, 2007
- -----------------------
Gerald Agranoff
By /s/ Richard Majeres Director April 2, 2007
- ----------------------
Richard Majeres
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Stockholders
Petrosearch Energy Corporation
We have audited the accompanying consolidated balance sheets of Petrosearch
Energy Corporation and subsidiaries as of December 31, 2006 and 2005 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Petrosearch Energy Corporation and subsidiaries as of December 31, 2006 and
2005, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Ham, Langston & Brezina, L.L.P.
Houston, Texas
March 30, 2007
F-1
PETROSEARCH ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
ASSETS 2006 2005
- ------ ------------ ------------
Current assets:
Cash $ 3,715,618 $ 4,052,844
Accounts receivable:
Joint owners-billed, net of allowance of $83,073 421,081 1,342,386
Joint owners-unbilled 15,213 1,958
Oil and gas production sales 146,408 9,345
Prepaid expenses and other current assets 829,104 517,482
------------ ------------
Total current assets 5,127,424 5,924,015
------------ ------------
Property and equipment:
Oil and gas properties, full cost method of accounting:
Properties subject to amortization 23,462,639 11,849,520
Properties not subject to amortization 6,309,169 3,513,597
Other property and equipment 149,348 147,047
------------ ------------
Total 29,921,156 15,510,164
Less accumulated depreciation, depletion and amortization (2,357,347) (1,966,000)
------------ ------------
Total property and equipment, net 27,563,809 13,544,164
Prepaid oil and gas costs 14,507 81,603
Other assets 656,790 66,462
------------ ------------
Total assets $33,362,530 $19,616,244
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,863,531 $ 908,168
Current portion of long-term debt Kallina 298,806 -
Trade note payable 409,819 -
Accounts payable 1,062,679 561,546
Accrued liabilities 1,532,196 750,036
Warrant liability 317,752 -
------------ ------------
Total current liabilities 5,484,783 2,219,750
------------ ------------
Long-term debt, net of current portion 2,066,074 2,537,251
Long-term debt, net of current portion - Kallina 6,963,694 -
Other long-term obligations 906,996 670,456
------------ ------------
Total liabilities 15,421,547 5,427,457
------------ ------------
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 December 31, 2006 and 2005 483,416 483,416
Series B convertible preferred stock, 100,000 shares authorized;
43,000 shares issued and outstanding at December 31, 2006 and 2005 43,000 43,000
Common stock, par value $0.001 per share, 100,000,000 shares
Authorized; 37,927,070 and 28,497,761 shares issued and outstanding
at December 31, 2006 and 2005 37,927 28,497
Additional paid-in capital 23,928,090 18,089,828
Unissued common stock 771,429 545,000
Accumulated deficit (7,322,879) (5,000,954)
------------ ------------
Total stockholders' equity 17,940,983 14,188,787
------------ ------------
Total liabilities and stockholders' equity $33,362,530 $19,616,244
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
PETROSEARCH ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
------------ ------------
Oil and gas production revenues $ 1,232,958 $ 1,701,043
------------ ------------
Operating costs and expenses:
Lease operating and production taxes 653,265 581,313
Depreciation, depletion and amortization 391,347 563,252
General and administrative 2,766,235 3,268,088
------------ ------------
Total costs and expenses 3,810,847 4,412,653
------------ ------------
Operating loss (2,577,889) (2,711,610)
------------ ------------
Other income (expense):
Interest income 73,585 51,031
Interest expense (801,067) (240,452)
Gain on sale of securities 1,000,000 -
Change in value of warrant liability (16,554) -
------------ ------------
Total other income (expense) 255,964 (189,421)
------------ ------------
Net loss $(2,321,925) $(2,901,031)
============ ============
Basic and diluted net loss per common share $ (0.08) $ (0.11)
============ ============
Weighted average common shares 31,253,819 25,409,348
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PETROSEARCH ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
TOTAL
SERIES A SERIES B ADDITIONAL UNISSUED STOCK-
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PAID-IN COMMON ACCUMULATED HOLDERS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK 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
Common stock
issued and
committed for
oil and gas
properties 500,000 500 - - - - 544,500 545,000 - 1,090,000
Compensation
awarded to
Board of
Directors 30,768 31 - - - - 59,969 - - 60,000
Issuances of
warrants
with debt - - - - - - 88,422 - - 88,422
Cancellation
of warrants - - - - - - (88,392) - - (88,392)
Net loss - - - - - - - - (2,901,031) (2,901,031)
------------------------------------------------------------------------------------------------------------------
Balance at
December 31,
2005 28,497,761 $28,497 483,416 $483,416 43,000 $43,000 $18,089,828 $ 545,000 $ (5,000,954) $14,188,787
==================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
PETROSEARCH ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
TOTAL
SERIES A SERIES B ADDITIONAL UNISSUED STOCK-
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PAID-IN COMMON ACCUMULATED HOLDERS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
---------- ------- -------- -------- -------- ------- ----------- ---------- ------------- ------------
Balance at
December 31,
2005 28,497,761 $28,497 483,416 $483,416 43,000 $43,000 $18,089,828 $ 545,000 $ (5,000,954) $14,188,787
Common stock
issued for cash 8,368,576 8,369 4,787,768 771,429 5,567,566
Issuance of
common stock
committed 500,000 500 544,500 (545,000) -
Common stock
issued for
employee
compensation 300,000 300 239,700 240,000
Common stock
issued for
services 82,500 83 54,501 54,584
Exercise of
warrants 178,233 178 174,491 174,669
Issuance of
warrants to
lender 37,302 37,302
Net loss (2,321,925) (2,321,925)
----------------------------------------------------------------------------------------------------------------
Balance at
December 31,
2006 37,927,070 $37,927 483,416 $483,416 43,000 $43,000 $23,928,090 $ 771,429 $ (7,322,879) $17,940,983
================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
PETROSEARCH ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
------------- ------------
Cash flows from operating activities:
Net loss $ (2,321,925) $(2,901,031)
Adjustments to reconcile net loss to net cash used in operating activities:
Depletion, depreciation and amortization expense 391,347 563,252
Write off of prepaid oil and gas costs - 60,000
Stock based compensation 294,584 60,000
Amortization of deferred rent (5,082) 77
Amortization of debt discount and financing costs 161,887 48,283
Accretion of asset retirement obligation 28,505 -
Change in value of warrant liability 16,554 -
Bad debt expense - 145,443
Gain on sale of securities (1,000,000) -
Changes in operating assets and liabilities:
Accounts receivable 488,455 368,664
Prepaid expenses and other assets (960,403) (235,055)
Accounts payable and accrued liabilities 853,423 (599,672)
Trade note payable 409,819 -
------------- ------------
Net cash used in operating activities (1,642,836) (2,490,039)
------------- ------------
Cash flows from investing activities:
Capital expenditures, including purchases and development of properties (14,141,190) (7,815,083)
Purchase of prepaid credits for oil and gas properties, net - (59,323)
Proceeds from sale of property 509,015 2,072,002
Proceeds from sale of equity securities 1,000,000 -
------------- ------------
Net cash used in investing activities (12,632,175) (5,802,404)
------------- ------------
Cash flows from financing activities:
Proceeds from the sale of common stock 5,760,616 10,609,719
Proceeds from exercise of warrants 174,669 -
Proceeds from notes payable 10,880,000 3,950,000
Repayment of notes payable (2,877,500) (3,315,000)
------------- ------------
Net cash provided by financing activities 13,937,785 11,244,719
------------- ------------
Net (decrease) increase in cash and cash equivalents (337,226) 2,952,276
Cash and cash equivalents at beginning of year 4,052,844 1,100,568
------------- ------------
Cash and cash equivalents at end of year $ 3,715,618 $ 4,052,844
============= ============
Supplemental disclosures of cash flow information:
Interest paid $ 546,031 $ 227,192
============= ============
Income taxes paid $ - $ -
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
PETROSEARCH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------
ORGANIZATION
------------
Petrosearch Energy Corporation (the "Company"), a Nevada Corporation formed
in November 2004, is an independent oil and gas company based in Houston,
Texas, with a second office in Dallas, Texas. The Company is a resource
based exploration and development company with operations focused in three
core areas of the lower 48 states of the United States with existing
production in Texas, North Dakota and Oklahoma. The three core areas of
operation include a Barnett Shale project through the participation in
DDJET Limited LLP, the development of a Texas Panhandle water flood project
and the exploitation of the Wilcox trend in the SW Garwood Field of South
Texas.
PRINCIPLES OF CONSOLIDATION
-----------------------------
The consolidated financial statements presented herein include the accounts
of the Company and its wholly-owned subsidiaries. In addition, during 2006,
the consolidated financial statements of the Company include its pro-rata
share of the accounts of the DDJET Limited LLP Partnership, in which the
company has a 5.54 percent ownership interest. All significant
inter-company accounts and transactions have been eliminated.
ACCOUNTING ESTIMATES
---------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. Our most significant financial estimates are based on remaining
proved natural gas and oil reserves. Estimates of proved reserves are key
components of our depletion rate for natural gas and oil properties and our
full cost ceiling test limitation. In addition, estimates are used in
computing taxes, preparing accruals of operating costs and production
revenues, asset retirement obligations and fair value of stock options and
the related compensation expense. See Note 14 - Supplemental Oil and Gas
Information (Unaudited) for more information relating to estimates of
proved reserves. Because there are numerous uncertainties inherent in the
estimation process, actual results could differ materially from these
estimates.
BUSINESS SEGMENTS
------------------
The Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") 131, "Disclosures about Segments of an
Enterprise and Related Information" establishes standards for reporting
information about operating segments. Operating segments are defined as
components of an enterprise that engage in activities from which it may
earn revenues and incur expenses. Operating segments have separate
financial information and this information is regularly evaluated by the
chief decision maker for the purpose of allocating resources and assessing
performance.
Segment reporting is not applicable for us as each of our operating areas
has similar economic characteristics and each meets the criteria for
aggregation as defined in SFAS 131. All of our operations involve the
exploration, development and production of natural gas and oil, and all of
our operations are located in the United States. We have a single,
company-wide management team that administers all properties as a whole
rather than as discrete operating segments. We track only basic operational
data by area, and do not maintain comprehensive financial statement
information by area. We measure financial performance as a single
enterprise and not on an area-by-area basis. Throughout the year, we freely
allocate capital resources on a project-by-project basis across our entire
asset base to maximize profitability without regard to individual areas or
segments.
F-7
OIL AND GAS PROPERTIES
-------------------------
The Company follows the full cost method of accounting for crude oil and
natural gas properties. Under this method, all direct costs and certain
directly related internal costs associated with acquisition of properties
and successful, as well as unsuccessful, exploration and development
activities are capitalized. Depreciation, depletion and amortization of
capitalized crude oil and natural gas properties and estimated future
development costs, excluding unproved properties, are based on the
unit-of-production method based on proved reserves. Net capitalized costs
of crude oil and natural gas properties, as adjusted for asset retirement
obligations, net of salvage value, are limited, by country, to the lower of
unamortized cost or the cost ceiling, defined as the sum of the present
value of estimated future net revenues from proved reserves based on
unescalated prices discounted at 10 percent, plus the cost of properties
not being amortized, if any, plus the lower of cost or estimated fair value
of unproved properties included in the costs being amortized, if any, less
related income taxes. Excess costs are charged to proved property
impairment expense. No gain or loss is recognized upon sale or disposition
of crude oil and natural gas properties, except in unusual circumstances.
The following table reflects the depletion expense incurred from oil and
gas properties during the years ended December 31, 2006 and 2005:
2006 2005
-------- --------
Depletion Expense $361,933 $543,654
======== ========
Depletion expense per BOE produced $ 18.51 $ 15.24
======== ========
At December 31, 2006 and 2005, unproved oil and gas properties not subject
to amortization included $6,309,169 and $3,513,597, respectively, of
property acquisition, exploration and development costs that are not being
amortized. These costs will begin to be amortized when they are evaluated
and proved, reserves are discovered, impairment is indicated or when the
lease terms expire. Unproved leasehold costs consist of interest in leases
located in Mississippi, Oklahoma and Texas.
The following table reflects the periods when costs were incurred for
unproved oil and gas properties costs:
2004 2005 2006 TOTAL
-------- -------- ---------- ----------
Property acquisition costs $309,961 $431,334 $2,872,847 $3,614,142
Exploration costs - - 2,695,027 2,695,027
------------------------------------------
Total $309,961 $431,334 $5,567,874 $6,309,169
==========================================
Unproved properties represent costs associated with properties on which the
Company is performing exploration activities or intends to commence such
activities. These costs are reviewed periodically for possible impairments
or reduction in value based on geological and geophysical data. If a
reduction in value has occurred, costs being amortized are increased.
OTHER PROPERTY AND EQUIPMENT
-------------------------------
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of 3 to 5 years
for office furniture and equipment and transportation and other equipment.
Additions or improvements that increase the value or extend the life of an
asset are capitalized. Expenditures for normal maintenance and repairs are
expensed as incurred. Disposals are removed from the accounts at cost less
accumulated depreciation and any gain or loss from disposition is reflected
in operations. Depreciation expense for other property and equipment for
the years ended December 31, 2006 and 2005 was $29,414 and $19,598,
respectively.
F-8
ASSET RETIREMENT OBLIGATIONS
----------------------------
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement Obligations
("SFAS 143"). This statement applies to obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction and development of the assets. SFAS 143 requires that the fair
value of a liability for a retirement obligation be recognized in the
period in which the liability is incurred. For oil and gas properties, this
is the period in which an oil or gas well is acquired or drilled. The asset
retirement obligation is capitalized as part of the carrying amount of the
Company's oil and gas properties at its discounted fair value. The
liability is then accreted each period until the liability is settled or
the well is sold, at which time the liability is reversed.
A reconciliation of the Company's asset retirement obligation liability is
as follows:
As of December 31,
2006 2005
----------- ----------
Beginning asset retirement obligation $ 633,455 -
Liabilities incurred 76,826 $ 633,455
Liabilities settled (30,056) -
Revisions in estimated cash flows 166,347 -
Accretion expense 28,505 -
----------- ----------
Ending asset retirement obligation $ 875,077 $ 633,455
=========== ==========
CASH AND CASH EQUIVALENTS
----------------------------
For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less when
purchased to be cash equivalents.
RECEIVABLES
-----------
The Company routinely assesses the recoverability of all material trade and
other receivables to determine their collectibility. Many of the Company's
receivables are from joint interest owners on properties of which the
Company is the operator. Thus, the Company may have the ability to withhold
future revenue disbursements to recover any non-payment of joint interest
billings. Generally, the Company's crude oil and natural gas receivables
are collected within two months. The Company accrues a reserve on a
receivable when, based on the judgment of management, it is probable that a
receivable will not be collected and the amount of any reserve may be
reasonably estimated. As of December 31, 2006 and 2005, the Company
provided an allowance of $83,073 for doubtful accounts for trade
receivables or joint interest owner receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made, which is the case for financial instruments
outstanding as of December 31, 2006 and 2005. The Company assumes the book
value of those financial instruments that are classified as current
approximates fair value because of the short maturity of these instruments.
For non-current financial instruments, the Company uses quoted market
prices or, to the extent that there are no available quoted market prices,
market prices for similar instruments.
RESTORATION, REMOVAL AND ENVIRONMENTAL LIABILITIES
------------------------------------------------------
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws regulate the discharge of materials into
the environment and may require the Company to remove or mitigate the
environmental effects of the disposal or release of petroleum substances at
various sites. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that have no future
economic benefit are expensed.
F-9
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessments and/or remediation is probable, and the costs can
be reasonably estimated. Such liabilities are generally undiscounted unless
the timing of cash payments for the liability or component are fixed or
reliably determinable. As of December 31, 2006, the Company believes it has
no such liabilities.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
------------------------------------------------------
Financial instruments which subject the Company to concentrations of credit
risk include cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents with major financial institutions
selected based upon management's assessment of the banks' financial
stability. Balances regularly exceed the $100,000 federal depository
insurance limit. The Company has not experienced any losses on deposits.
The Company performs ongoing credit evaluations and, generally, requires no
collateral from its customers or other joint interest owners. As of
December 31, 2006, 53%, 20%, and 17% of accounts receivable from oil and
gas sales were from three customers.
As of December 31, 2006, 43%, 30%, and 17% of accounts receivable from
joint interest owners were from three joint interest owners.
During the years ended December 31, 2006 and 2005, respectively, 77% and
94% of the Company's revenue was received from two and three customers as
follows:
2006 2005
---------- ----------
Customer A $ 787,839 $ 879,542
Customer B - 552,998
Customer C 160,605 172,540
Others 284,514 95,963
---------- ----------
Total $1,232,958 $1,701,043
========== ==========
The Company had no other single customer that accounted for 10% or more of
revenues in 2006 or 2005. Due to the nature of the demand of its products,
crude oil and natural gas, the Company believes that it is not dependent on
any single customer.
REVENUE RECOGNITION
--------------------
We use the entitlements method of accounting for the recognition of natural
gas and oil revenues. Under this method of accounting, income is recorded
based on our net revenue interest in production or nominated deliveries. We
recognize and record sales when production is delivered to a specified
pipeline point, at which time title and risk of loss are transferred to the
purchaser. Our arrangements for the sale of natural gas and oil are
evidenced by written contracts with determinable market prices based on
published indices. We continually review the creditworthiness of our
purchasers in order to reasonably assure the timely collection of our
receivables. Historically, we have experienced no material losses on
receivables.
EARNINGS (LOSS) PER SHARE
----------------------------
The Company provides basic and dilutive earnings (loss) per common share
information for each year presented. The basic net loss per common share is
computed by dividing the net loss by the weighted average number of common
shares outstanding. Diluted net loss per common share is computed by
dividing the net loss, adjusted on an "as if converted" basis, by the
weighted average number of common shares outstanding plus potential
dilutive securities. For the years ended December 31, 2006 and 2005,
potential dilutive securities, assuming the Company had net income, that
had an anti-dilutive effect and were not included in the calculation of
diluted net loss per common share consisted of warrants for the purchase of
63,210 and 651,281 common shares, respectively, and convertible preferred
stock convertible into 94,218 common shares.
F-10
STOCK BASED COMPENSATION
--------------------------
Prior to January 1, 2006 the Company used SFAS No. 123, "Accounting for
Stock-Based Compensation" which established financial accounting and
reporting standards for stock-based employee compensation plans. It defined
a fair value based method of accounting for an employee stock option or
similar equity instrument and encouraged all entities to adopt that method
of accounting for all of their employee stock compensation plans and
include the cost in the income statement as compensation expense. However,
it also allowed an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed
by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees". During 2005, the Company accounted for
compensation cost for stock option plans in accordance with APB Opinion No.
25.
On January 1, 2006, the Company adopted SFAS 123(R), "Share-Based Payment"
using the "modified prospective method" as defined by SFAS 123 (R). SFAS
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized as stock-based compensation
expense in the Company's Consolidated Statement of Operations based on
their fair values. Proforma disclosure is no longer an alternative.
Accordingly, the Company now recognizes compensation expense for all stock
options.
CAPITALIZED INTEREST
---------------------
The Company capitalizes interest on expenditures made in connection with
exploration and development projects that are not subject to current
amortization. Interest is capitalized only for the period that activities
are in progress to bring these projects to their intended use. Interest
capitalized in 2006 and 2005 was $120,802 and $46,630, respectively.
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.
OTHER INCOME
-------------
On May 5, 2006 the Company sold 1,500,000 shares of Texcom Stock for a
total of $1,000,000. The Company acquired the shares in November 2003
pursuant to a merger and a sale of a subsidiary.
OFF BALANCE SHEET ARRANGEMENTS
------------------------------
From time-to-time, the Company enters into off-balance sheet arrangements
and transactions that can give rise to off-balance sheet obligations. As of
December 31, 2006, the off-balance sheet arrangements and transactions that
the Company has entered into include two operating lease agreements for
office space. The Company does not believe that these arrangements are
reasonably likely to materially affect its liquidity or availability of, or
requirements for, capital resources.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
The following discussions provide information about new accounting
pronouncements that have been issued by the FASB:
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS 157 defines fair value, establishes a framework for measuring fair
value and requires enhanced disclosures regarding fair value measurements.
SFAS 157 does not add any new fair value measurements, but it does change
current practice and is intended to increase consistency and comparability
in such measurement. The provisions of SFAS 157 are effective for financial
statements issued for fiscal years beginning after November 15, 2007.
F-11
Any amounts recognized upon adoption as a cumulative effect adjustment will
be recorded to the opening balance of retained earnings in the year of
adoption. The Company is currently evaluating the impact of adopting SFAS
157 on its financial statements and does not expect the interpretation to
have a material impact on its results of operations or financial position.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109"
("FIN 48"), which clarifies the accounting for uncertainty in tax positions
taken or expected to be taken in a tax return, including issues relating to
financial statement recognition and measurement. FIN 48 provides that the
tax effects from an uncertain tax position can be recognized in the
financial statements only if the position is "more-likely-than-not" to be
sustained if the position were to be challenged by a taxing authority. The
assessment of the tax position is based solely on the technical merits of
the position, without regard to the likelihood that the tax position may be
challenged. If an uncertain tax position meets the "more-likely-than-not"
threshold, the largest amount of tax benefit that is more than 50 percent
likely to be recognized upon ultimate settlement with the taxing authority,
is recorded. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006, with the cumulative effect of the change
in accounting principle recorded as an adjustment to opening retained
earnings. Consistent with the requirements of FIN 48, the Company adopted
FIN 48 on January 1, 2007. The Company is currently evaluating the impact
of adopting FIN 48 and does not expect the interpretation to have a
material impact on its results of operations or financial position.
2. 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 had managed the TK PetroSearch, LLC
subsidiary. 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 year ended December 31,
2005 as if the transaction occurred on January 1, 2005. The sale represents
$30.16 per barrel of oil of the proved reserves sold.
PROFORMA PROFORMA
AS REPORTED ADJUSTMENTS (UNAUDITED)
------------- ------------- -------------
Oil and gas production revenues $ 1,701,043 $ (552,998) $ 1,148,045
Costs and expenses 4,412,653 359,162 4,053,491
-------------------------------------------
Operating loss (2,711,610) (193,836) (2,905,446)
Other expenses (189,421) (189,421)
-------------------------------------------
Net loss $ (2,901,031) $ (193,836) $( 3,094,867)
===========================================
Basic and diluted net loss per common share $ (0.11) $ (0.01) $ (0.12)
===========================================
In November 2006, the Company sold its interests in Burleson County, Texas
for proceeds of $509,015. 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. Proformas are not included as this was not a
producing property.
3. INTERESTS IN OIL AND GAS PROPERTIES
----------------------------------------
BARNETTSHALE PROJECT, 8 COUNTIES, TEXAS
-------------------------------------------
Effective December 15, 2006, the Company's wholly owned subsidiary, Barnett
Petrosearch LLC ("Barnett"), joined in the formation of a Partnership,
DDJET Limited LLP, ("Partnership") for the development of Barnett Shale
properties in the Fort Worth Basin, Texas. Barnett owns a 5.54% interest in
the Partnership along with partners, Metroplex Barnett Shale LLC (a wholly
owned subsidiary of Exxon Mobil Corporation), which will direct operations,
and Cinco County Barnett Shale LLC, (a privately held Dallas-based
company). The decision to hold the Company's ownership interest in the oil
and gas leases and
F-12
infrastructure assets of the Barnett Shale project in a partnership was to
ensure the alignment of the interests of all the owners and to simplify the
operations relative to the project.
The Partnership's assets include all leases acquired to date within an
8-county contract area, under a previous agreement among affiliates of the
three partners, along with associated facilities including nearly 100 miles
of pipeline and options on separate pipeline rights of way. Pursuant to the
Partnership agreement the Company takes its gas in-kind and is billed
separately each month for its proportionate share of the leasing, drilling
and completion costs as if our interest was a working interest. ExxonMobil
has agreed to market the Company's gas for the first year of the
partnership.
The Partnership Agreement provides for an initial agreed capital and cash
and non-cash operating expense budget which runs through calendar 2008. The
Initial budget cannot be amended unless unanimously agreed to by the
partners. In addition to the $5,500,000 investment through December 31,
2006, the Company's capital requirement through 2008 based upon Barnett's
Partnership percentage is approximately $18,300,000. The Partnership will
continue its leasing activities within the 8-county contract area, but the
current oil and gas lease inventory is sufficient to support all
Partnership drilling activities through the initial budget period.
The Partnership Agreement provides that if a partner does not meet its
financial obligations on a timely basis, the defaulting partner can be,
among other available remedies, expelled from the Partnership. If this
occurs and if unanimous agreement as to the value of the defaulting
partner's Partnership interest cannot be reached, then the value of that
partner's interest will be determined using the Partnership's appraisal
methods. All accrued obligations and fees related to the valuation would
then be deducted. The resulting figure would then be further reduced by an
additional thirty percent (30%) to achieve a figure which is the amount
which would be paid to the defaulting partner for its interest upon
expulsion.
SOUTHWEST GARWOOD PROJECT, COLORADO COUNTY, TEXAS
------------------------------------------------------
Effective November 1, 2006, the Company exercised its option to acquire a
100% working interest (68% after payout working interest) from Rock Energy
Partners Operating, L.P. in the Anthony Kallina et al lease covering 438.16
acres and the existing Kallina 46#1 well in the Southwest Garwood Field of
Colorado County, Texas. As part of this transaction, the Company gave up a
20% working interest in 240 acres and a 21.5% after payout working interest
in 445 acres.
In connection with Petrosearch's exercise of the option and acquisition of
these interests into its newly formed subsidiary, Garwood Petrosearch, Inc.
("Garwood"), Garwood executed an agreement with Laurus Master Fund, Ltd.
("Laurus") for Laurus to provide financing for the acquisition, payment of
the previous working interest owner's vendor obligations and the completion
costs for the Kallina 46#1 well (Note 6).
On November 13, 2006, Garwood farmed out a 12.5% working interest in the
Kallina lease and the Kallina 46 #1 well to an industry partner on a heads
up basis. Garwood retains an 87.5% working interest in the Kallina lease
and the Kallina 46 #1 well before payout and a 59.5% working interest after
payout.
In the SW Garwood project, as a result of the exercise of this option and
the sale of the interest in the entire SW Garwood Project, Petrosearch
entities now own a 16% working interest in 640 acres; a 16% after payout
working interest in 640 acres; and an 87.5% before payout and 75.5% after
payout working interest in 438 acres.
The net cost to exercise the Company's option after the 12.5% farm-out was
approximately $4,500,000. Included in unproved property costs as of
December 31, 2006, is approximately $5,400,000 of costs related to the
Southwest Garwood Project.
NORTH TEXAS/PANHANDLE WATER FLOOD PROJECT
---------------------------------------------
Effective November 15, 2005, the Company entered into an agreement to
purchase a 100% working interest in 1755 acres of leases in the Quinduno
Field located in Roberts County, Texas from Quinduno Energy, L.L.C,
("Quinduno"). 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. The Company
is currently in the first phase of the project and has paid $750,000 and
issued
F-13
1,000,000 shares of stock to Quinduno. Should the Company decide to
progress into Phase II of the project, the Company's next payment to
Quinduno of $500,000 and 500,000 shares of common stock of the Company will
be due on May 15, 2007. 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.
At any time after completion of the first phase of the project, should the
Company, in the Company's sole discretion, determine to terminate further
operations, then the Company must offer Quinduno the Company's interest in
the leases for a purchase price equal to an internal rate of return to the
Company of twenty-two and one half percent (22.5%), calculated monthly,
using the closing date under the Agreement as the commencement date and,
taking into account all acquisition cash, all capital expenditures, plus a
sum of $7,500,000 and the net income received from the project. Quinduno
will have 45 days to exercise its right of refusal to repurchase the
leases, at which time, upon Quinduno's refusal to repurchase, the Company
may sell the Company's interest in the leases to a third party.
GRUMAN #18-1 WELL AND GRUMAN LEASES
-----------------------------------
Effective September 28, 2005, the Company purchased an additional 21.25%
working interest in the producing Gruman #18-1 Well, and Gruman Leases for
$637,500, increasing the Company's working interest in the property to 85%.
In March, 2006, the Company began drilling the Gruman 18-3 well intended to
be a water injection well. The well reached total depth of 9,890 feet on
April 14, 2006.
In October 2006, the Company undertook certain remedial work on the Gruman
18-1 which has improved the production on the well. The Company is
currently assessing the positive impact on the long term production.
On February 1, 2007 we began injecting produced water into the Gruman
18-3 well. The result has been to reduce the cost of operating the Gruman
18-1. The Company is considering supplementing this injection with water
from the Dakota for pressure maintenance in the mound. The Company has
established that the Gruman 18-3 is in pressure communication with the
Gruman 18-1. Further testing or stimulation may be necessary to achieve the
desired future injection rates.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
----------------------------------------------
Prepaid expenses and other current assets consist of the following at
December 31, 2006 and 2005:
2006 2005
-------- --------
Prepaid expenses $244,775 $152,386
Prepaid bonds 285,022 277,000
Current portion of financing costs 235,429 42,890
Other receivables 63,878 45,206
-------- --------
$829,104 $517,482
======== ========
5. ACCRUED LIABILITIES
--------------------
Accrued liabilities consist of the following at December 31, 2006 and 2005:
2006 2005
---------- --------
Revenue payable and operated prepayment liability $ 367,915 $ 21,297
Accrued interest payable 169,060 36,794
Accrued liabilities for capital additions 604,449 500,000
Financing costs payable 193,050 -
Accrued liability for professional fees 84,778 50,000
Other accrued expenses 112,944 141,945
---------- --------
$1,532,196 $750,036
========== ========
F-14
6. LONG-TERM DEBT AND NOTES
---------------------------
At December 31, 2006, principal payments due over the next five-year period
and thereafter are following:
2007 2008 2009 Total
---------- ---------- ---------- -----------
Revolving Credit Facility $2,130,000 $2,135,000 - $ 4,265,000
Secured Term Note $ 298,806 $ 507,714 $6,455,980 $ 7,262,500
Trade Note Payable $ 409,819 - - $ 409,819
---------- ---------- ---------- -----------
Total Payments $2,838,625 $2,642,714 $6,455,980 $11,937,319
========== ========== ========== ===========
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 agreement
has supplemental terms that were effective on October 16, 2006 through a
separate letter agreement as discussed below. 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 December 31, 2006,
the balance outstanding under the line of credit agreement was $4,265,000,
$2,130,000 of which is due in the next twelve months and $2,135,000 of
which is due in 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.
As consideration for entering into the agreement, the lender received 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 were 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 (2005 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, the Company is required to offer to
the lender the opportunity to participate in up to a minimum of 33.3% and
up to 100% based on the sole discretion of the Company.
On October 16, 2006, the Company entered into a Letter Agreement to amend
its existing revolving credit facility with the lender. The principal
available under the revolving borrowing base remains $10,000,000. Under the
terms of the transaction, Fortuna advanced the Company $780,000 for the
purpose of paying amounts due for the Barnett Shale Project which was
repaid to Fortuna in December, 2006. As part of the financing, the Company
pledged additional interests in its oil and gas properties as collateral.
The lender also
F-15
agreed to relinquish all of its past and future overriding royalty interest
assignments delivered to the lender other than assignments associated with
the Blue Ridge Field upon debt repayment. In addition, the Company agreed
to issue to Fortuna 475,000 five year warrants with a strike price of $0.92
per share (2006 warrants). The Warrants contain a "put" provision which
will allow Fortuna to "put" the warrants to the Company at a price of $0.65
per share for two (2) years. Additionally, as part of the transaction, the
Company agreed to issue 100,000 new warrants, which expire five (5) years
from the date of issue, at a price of $0.92 per share (2006 warrants) to
replace 100,000 warrants previously issued to Fortuna at a price of $2.00
per share, which were previously set to expire on November 1, 2007. The
warrants have piggyback registration rights. All other terms of the amended
and restated revolving credit agreement remain in full force and effect.
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 2006 and 2005 warrants as a
debt discount was calculated at $338,500 and $88,422, respectively. The
unamortized debt discount was $335,395 at December 31, 2006. The debt
discount is 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.
SECURED TERM NOTE
-------------------
Garwood Petrosearch, Inc. ("Garwood"), a wholly-owned subsidiary of the
Company, executed a Securities Purchase Agreement and Secured Term Note
with an entity to provide financing for payment of obligations related to
the drilling of the Kallina 46 #1 well and payment of the future completion
costs for the Kallina 46 #1. The note is for the amount of $8,300,000 and
matures on November 1, 2009. Advances under the note bear interest at Wall
Street Journal Prime plus 2% with a minimum interest rate of 8% and a
maximum interest rate of 15%. Payments under the note will be paid from 90%
of net production revenues beginning on the earlier to occur of (i) receipt
of actual proceeds from production from the Kallina 46 #1 well and (ii) a
date which is 120 days after the closing date of the transaction and
require a minimum monthly payment of $87,500. Upon any event of default,
the lender would be entitled to receive 100% of the net production revenues
relating to oil and gas properties of Garwood. The note is collateralized
by Garwood's recently acquired interest in the Kallina 46 #1 well and the
related Section 46 acreage. The note has a balance of $7,262,500
outstanding as of December 31, 2006.
As a part of the financing arrangement, Garwood issued the lender a warrant
to acquire, upon payout of the note indebtedness, 45% of Garwood's
outstanding common stock such that upon exercise of the warrant, Garwood
would be owned 55% by the Company and 45% by the lender. The fair value of
the warrant at the time of the transaction was deemed to be of
insignificant value due to the lack of proved reserves and the initial
stages of the subsidiary.
TRADE NOTE PAYABLE
--------------------
Effective October 24, 2006, the Company entered into a note payable
agreement with a vendor in the amount of $487,293 bearing interest at an
annual rate of 11.25% and a maturity date of November 1, 2007. The note is
not collateralized and has a balance outstanding of $409,819 as of December
31, 2006.
7. INCOME TAXES
-------------
Through December 31, 2006, the Company has incurred losses since its
inception and, therefore, has not been subject to federal income taxes. As
of December 31, 2006, the Company had net operating loss ("NOL")
carryforwards for income tax purposes of approximately $21,300,000 which
expire in various tax years through 2026. Under the provisions of Section
382 of the Internal Revenue Code, the ownership change in the Company that
resulted from the recapitalization of the Company could limit the Company's
ability to utilize its NOL carryforward to reduce future taxable income and
related tax liabilities. Additionally, because United States tax laws limit
the time during which NOL carryforwards may be applied against future
taxable income, the Company may be unable to take full advantage of its NOL
for federal income tax purposes should the Company generate taxable income.
F-16
The composition of deferred tax assets and the related tax effects at
December 31, 2006 and 2005 are as follows:
2006 2005
------------ ------------
Deferred tax assets:
Net operating loss carry-forward $ 7,246,463 $ 3,874,325
Allowance for doubtful accounts 28,245 42,868
Contribution carryover 3,515 2,346
--------------------------
Total deferred tax assets 7,278,223 3,919,539
Less valuation allowance (2,416,054) (1,628,636)
--------------------------
Net deferred tax asset 4,862,169 2,290,903
--------------------------
Deferred tax liabilities:
Book/tax basis difference in oil and
Gas properties (4,851,493) (2,277,366)
Book/tax basis difference in property
and equipment (10,676) (13,537)
--------------------------
Total deferred tax liability (4,862,169) (2,290,903)
--------------------------
Net deferred tax $ - $ -
==========================
The difference between the income tax benefit in the accompanying statement
of operations and the amount that would result if the U.S. Federal
statutory rate of 34% were applied to pre-tax loss for the years ended
December 31, 2006 and 2005 is as follows:
2006 2005
AMOUNT % AMOUNT %
---------- ------- ---------- -------
Benefit for income tax at federal statutory rate $(789,455) (34.0)% $(986,351) (34.0)%
Non-deductible expenses and other 2,037 0.0 5,347 0.0
Increase in valuation allowance 787,418 34.0 981,004 34.0
----------------------------------------
$ - - % $ - - %
========================================
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
OPERATING LEASE
---------------
The Company rents office space under long-term office leases that expire
through 2010. The future minimum lease payments required under the
operating leases that have initial non-cancelable lease terms in excess of
one year amount to $398,881 of which $96,234 is to be paid in 2007, $99,989
is to be paid in 2008, $101,888 is to be paid in 2009, and $100,770 is to
be paid in 2010. Rent expense incurred under operating leases during the
years ended December 31, 2006 and 2005 was $95,152 and $101,321,
respectively.
LEGAL PROCEEDINGS
------------------
We are currently not a party to any material pending legal proceedings.
9. STOCKHOLDERS' EQUITY
---------------------
The Company has the authority to issue up to 120,000,000 shares of stock,
consisting of 100,000,000 shares of common stock, par value $.001 per
share, and 20,000,000 shares of preferred stock, par value $1.00 per share.
F-17
PREFERRED STOCK
----------------
The Company's articles of incorporation authorize the issuance of up to
20,000,000 shares of preferred stock with characteristics determined by the
Company's board of directors.
As of December 31, 2006 and 2005, the Company has 1,000,000 shares of
Series A 8% Convertible Preferred Stock ("Series A Preferred") authorized
and 483,416 shares outstanding. The shares have a par and stated value of
$1.00 per share. If declared by the Board of Directors, dividends are to be
paid quarterly in cash or in common stock of the Company to the holders of
shares of the Series A Preferred. The shares of the Series A Preferred rank
senior to the common stock both in payment of dividends and liquidation
preference. The Series A Preferred is convertible into common stock of the
Company at a conversion price of $6.50 per share. Beginning August 19,
2003, the Company had the right to redeem all or part of the shares of
Series A Preferred for cash at a redemption price equal to $6.50 per share
plus all accrued and unpaid dividends on the shares to be redeemed. As of
December 31, 2006, no dividends have been declared and approximately
$170,000 of dividends were in arrears related to the Series A Preferred if
the Company decided to declare dividends.
As of December 31, 2006 and 2005, the Company has 100,000 shares authorized
and 43,000 shares issued and outstanding of Series B Convertible Preferred
Stock ("Series B Preferred"). The shares have a par and stated value of
$1.00 per share. The shares of the Series B Preferred rank senior to the
common stock in liquidation preference. The Series B Preferred is
convertible into common stock of the Company at an initial conversion price
of $2.14 per share at the option of the holder. Beginning October 1, 2003,
the Company had the right to redeem all or part of the shares of Series B
Preferred for cash at a redemption price equal to $6.50 per share.
STOCK WARRANTS
---------------
The Company periodically issues incentive stock warrants to executives,
officers, directors and employees 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. For purposes of determining compensation expense associated
with stock warrants in 2005, the intrinsic value of the Company's stock was
determined based upon the quoted market price of the Company's common stock
for executives, officers and directors and fair value of the Company's
stock was determined based upon the Black-Scholes option pricing model for
non-employees. For purposes of determining compensation expense associated
with stock warrants in 2006, the fair value of the Company's stock was
determined based upon the Black-Scholes option pricing model for
non-employees and employees. The Company issues shares of authorized common
stock upon exercise of warrants.
The Company issued the following warrants in 2006 and 2005:
Pursuant to a private placement done in February, 2006, the Company issued
964,285 three year warrants to purchase shares of the Company's common
stock with an exercise price of $2.00 per share to the accredited
investors. In addition, the Company issued 96,429 warrants to purchase
shares of the Company's common stock to the placement agency. The warrants
issued to the placement agent are exercisable for three years and have an
exercise price of $2.00 per share. The shares of common stock underlying
the warrants have piggyback registration rights. The fair value of the
warrants of $674,084 was recorded in equity as a cost of raising capital.
In connection with the modification of the Revolving Credit Agreement with
Fortuna (Note 6), the Company modified the terms of 100,000 warrants held
by Fortuna by extending the expiration date from November 1, 2007 to
October 15, 2011, and by lowering the exercise price from $2.00 to $0.92
per share. The difference in value between the new and revised warrants of
$37,302 was based on the Black-Scholes Option Pricing Model and was
recorded as additional debt discount with an offset to additional paid in
capital. In addition to the modification of warrants, the Company granted
Fortuna 475,000 warrants at an exercise price of $0.92 for a term of five
years. The warrants are "puttable" back to Fortuna for a period of two
years, commencing 180 days from issuance, at a price of $0.65 per share. In
addition, there are piggyback registration rights for the warrants upon the
Company's next registration of any securities. In compliance with FAS 150
"Accounting
F-18
for Certain Financial Instruments with Characteristics of both Liabilities
and Equity", the fair value of the warrants of $301,198 was recorded as a
liability in the accompanying financial statements and was marked-to-market
as of December 31, 2006 to $317,752. The warrants were valued by a third
party using the Black-Scholes Option Pricing Formula with a put option
floor. If settlement would have occurred at December 31, 2006, the Company
would have paid $308,750, which is the maximum amount the Company could be
required to pay to redeem the instrument.
Pursuant to a private placement done in December, 2006, the Company issued
6,440,000 five year warrants to purchase shares of the Company's common
stock with an exercise price of $0.92 per share to the accredited
investors. The shares of common stock underlying the warrants have
piggyback registration rights. The value of the warrants of $3,359,104 was
recorded in equity as a cost of raising capital.
During 2005, the Company granted warrants to purchase 1,215,000 shares of
common stock of the Company to board of directors and employees for
services performed during 2005. The warrants expire in 2008 and have an
exercise price of $1.95, which exceeded the fair market value of the common
stock at the date of grant and, thus, no compensation cost was recorded.
In September, 2005, the Company granted warrants to purchase 100,000 shares
of common stock of the Company with an exercise price of $2.00 and an
expiration date in 2007 to a lender for financing costs associated with the
Company's amended credit facility with the lender (Note 6). The value
allocated to the warrants as a debt discount was $88,422.
During December, 2005, the Company extended the expiration date of warrants
held by an officer of the Company to purchase 92,308 shares of common stock
of the Company at an exercise price of $0.98 per share from August 28,
2006, to November 15, 2008. The exercise price exceeded the fair market
value of the common stock at the modification date, thus, no compensation
cost was recorded.
During 2005, the Company cancelled warrants to purchase 153,847 shares of
common stock of the Company valued at $88,392 to reduce a note receivable
from a former officer of the Company.
A summary of the Company's stock warrant activity and related information
for the years ended December 31, 2006 and 2005 follows:
WEIGHTED TOTAL
AVERAGE INTRINSIC
NUMBER OF WEIGHTED GRANT VALUE
SHARES AVERAGE DATE FAIR WARRANT
UNDER EXERCISE EXERCISE VALUE EXERCISES
WARRANT PRICE PRICE ($/SHARE) (1)
-------------------------------------------------------------
Warrants outstanding at
December 31, 2004 7,333,905 $0.98-$9.75 $ 3.77
Issued 1,407,308 $0.98-$2.00 $ 1.89 $ 0.66
Cancelled (246,155) $ 0.98 $ 0.98
-------------------------------------------------------------
Warrants outstanding at
December 31, 2005 8,495,058 $0.98-$9.75 $ 3.57
Issued 8,075,714 $0.92-$2.00 $ 1.06 $ 0.54
Exercised (178,233) $ 0.98 $ 0.98 $ 84,082
Cancelled (2,244,849) $0.98-$1.63 $ 5.41
-------------------------------------------------------------
Warrants outstanding at
December 31, 2006 14,147,690 $0.98-$9.75 $ 1.88
===================================
F-19
All outstanding stock warrants are exercisable at December 31, 2006. A
summary of outstanding stock warrants at December 31, 2006 follows:
WEIGHTED
NUMBER OF REMAINING AVERAGE WEIGHTED
COMMON CONTRACTED REMAINING AVERAGE AGGREGATE
STOCK EXPIRATION LIFE CONTRACTUAL EXERCISE EXERCISE INTRINSIC
EQUIVALENTS DATE (YEARS) TERM (YEARS) PRICE PRICE VALUE (1)
----------- -------------- ----------- ------------ ----------- --------- -----------
211,541 February 2007 .17 $ 9.75 $ 9.75
30,770 March 2007 .25 $ 9.75 $ 9.75
300,004 April 2007 .34 $ 9.75 $ 9.75
161,538 May 2007 .42 $6.50-$9.75 $ 7.27
76,923 July 2007 .50 $5.20-$6.50 $ 6.24
269,231 September 2007 .67 $4.88-$5.20 $ 5.15
150,000 March 2008 1.25 $ 1.95 $ 1.95
20,000 August 2008 1.62 $ 1.95 $ 1.95
4,851,969 November 2008 1.92 $0.98-$1.95 $ 1.93
1,060,714 February 2009 2.17 $ 2.00 $ 2.00
575,000 October 2011 4.88 $ .92 $ .92
6,440,000 December 2011 4.92 $ .92 $ .92
----------- ------------ -----------
14,147,690 3.31 $ 420,900
=========== ============ ===========
(1) The intrinsic value of a warrant is the amount by which the current
market value of the underlying stock exceeds the exercise price of the
warrant, or the market price at the end of the period less the exercise
price.
In December 2004, the FASB issued SFAS 123(R), which is a revision of SFAS
123. SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock warrants, to be recognized as stock-based
compensation expense in the Company's Consolidated Statements of Operations
based on their fair values. Proforma disclosure is no longer an
alternative, as was permitted by SFAS 123. Until the adoption of the
provisions of SFAS 123(R) on January 1, 2006, the Company 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 the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation", required 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
warrants is greater than or equal to the market price of the underlying
stock on the date of grant, no compensation expense was recognized.
The adoption of SFAS 123(R) has not resulted in any compensation charges in
2006 related to warrants outstanding at December 31, 2005, because all
employee stock warrants were vested as of December 31, 2005.
Although it is no longer required due to the adoption of SFAS 123(R),
proforma information regarding net income and earnings per share was
required by Statement 123 and 148 (included for purposes of 2005 proforma
comparison), 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 to employees or directors during 2006 and
2005, the fair value of such warrants was estimated at the date of grant
using a Black-Scholes option-pricing model with the following assumptions:
2006 2005
------------- ----------
Dividend yield -0- -0-
Expected volatility 70% - 100% 70%
Risk free interest 3.00% - 4.79% 3.00%
Expected lives 3-5 years 2-4 years
F-20
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/warrants, 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.
2006 2005
------------ ------------
Net loss as reported $(2,321,925) $(2,901,031)
Add: Stock-based employee compensation expense included in
reported net loss, net of tax 240,000 60,000
Deduct: Stock-based employee compensation expense determined
under the fair value method, net of tax (240,000) (893,855)
------------ ------------
Proforma net loss $(2,321,925) $(3,734,886)
============ ============
Basic and diluted net loss per common share, as reported $ (0.08) $ (0.11)
============ ============
Proforma basic and diluted net loss per common share $ (0.08) $ (0.15)
============ ============
No tax effects were included in the determination of proforma net loss
because the deferred tax asset resulting from stock-based employee
compensation would be offset by an additional valuation allowance for
deferred tax assets.
The following table provides a detail of stock-based compensation incurred
during the years ended December 31, 2006, and 2005:
2006 2005
------------ ------------
Warrants $ 4,371,688 $ 88,422
Restricted stock 294,584 1,150,000
------------ ------------
Total stock-based compensation 4,666,272 1,238,422
Less amounts offset in equity as syndication costs (4,033,188) -
Less amounts recorded as a debt discount (338,500) (88,422)
Less amounts capitalized (15,383) (1,090,000)
------------ ------------
Stock compensation expense, net of amounts capitalized $ 279,201 $ 60,000
============ ============
Amounts capitalized in 2006 are for prepaid expenses, and amounts
capitalized in 2005 are for leasehold acquisition costs. Amounts expensed
are included as a component of general and administrative expense. The
above table excludes common stock issued for cash.
10. RELATED PARTY TRANSACTIONS
----------------------------
During the year ended December 31, 2006, the Company did not engage in any
transactions with related parties. During the year ended December 31, 2005,
the Company was engaged in several transactions with related parties as
follows:
During the year ended December 31, 2005, a vendor owned by the spouse of a
director of the Company
F-21
through December 8, 2005, at which time he resigned as director, provided
drilling services totaling $485,570. The balance owed to this vendor was
$-0- at December 31, 2005. The director's spouse was also a 15 - 30%
working interest owner in the Fort Bend County Prospect (Blue Ridge) which
the Company sold in 2005. Accounts receivable from the spouse for joint
interest billings was $-0- as of December 31, 2005.
Mr. Wayne Beninger, who became the Company's Chief Operating Officer on May
16, 2005, is the owner of Southwest Oil & Gas Management (Southwest) which
has provided engineering and geological consulting services for the
Company's projects. When Mr. Beninger became an employee of the Company,
the agreement with Southwest was terminated. From January 1, 2005, until
the agreement was terminated on May 15, 2005, the Company paid Southwest
approximately $365,000 for engineering and geological consulting services.
Mr. Beninger has an option to purchase for $1.00 a 5% interest (after
payout to the Company and its drilling partner) in the Company's subsidiary
that holds the Jefferson County, Mississippi project. The first well on
that prospect was a dry hole and the Company does not intend to pursue any
other wells in that prospect.
11. EARNINGS PER SHARE
--------------------
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the years ended December 31, 2006
and 2005:
2006 2005
------------ ------------
Net loss $(2,321,925) $(2,901,031)
Less: Preferred stock dividends (38,673) (38,673)
------------ ------------
Net loss available to common stockholders (numerator) $(2,360,598) $(2,939,704)
============ ============
Weighted average shares of common stock 31,253,819 25,409,348
============ ============
Basic and diluted net loss per share $ (0.08) $ (0.11)
============ ============
12. NON-CASH INVESTING AND FINANCING ACTIVITIES
-----------------------------------------------
During the years ended December 31, 2006 and 2005, the Company engaged in
various non-cash financing and investing activities as follows:
2006 2005
-------- ----------
Transfer of overriding royalty interest for debt issuance costs $ - $ 64,784
======== ==========
Reduction in note receivable for property costs $282,532 $ -
======== ==========
Issuance of common stock for acquisition of property $ - $1,090,000
======== ==========
Reduction in financing costs for transfer of overriding royalty
interest $ 46,348 $ -
======== ==========
Increase in accounts payable and accrued liabilities for property
costs $870,080 $ 500,000
======== ==========
Increase in property costs associated with asset retirement
obligation $243,172 $ 633,455
======== ==========
Increase in accrued liabilities for costs of raising capital $193,050 $ -
======== ==========
Issuance of warrants with debt $338,500 $ 88,422
======== ==========
Cancellation of warrants for reduction in note receivable $ - $ 88,392
======== ==========
Transfer of automobile for reduction in liability $ - $ 15,346
======== ==========
F-22
13. IMPAIRMENT AND SALE OF OIL AND GAS PROPERTIES
----------------------------------------------------
At December 31, 2006 and 2005, the net capitalized costs of crude oil
and natural gas properties included in the amortization base did not exceed
the present value of the estimated reserves; as such, no write-down was
recorded.
14. SUPPLEMENTAL OIL AND GAS INFORMATION - UNAUDITED
------------------------------------------------
The following supplemental information regarding the oil and gas activities
of the Company is presented pursuant to the disclosure requirements
promulgated by the Securities and Exchange Commission ("SEC") and SFAS No.
69, Disclosures About Oil and Gas Producing Activities (`Statement 69").
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
---------------------------------------------------
Set forth below is a summary of the changes in the estimated quantities of
the Company's crude oil and condensate, and gas reserves for the periods
indicated, as estimated by the Company as of December 31, 2006. All of the
Company's reserves are located within the United States. Proved reserves
cannot be measured exactly because the estimation of reserves involves
numerous judgmental determinations. Accordingly, reserve estimates must be
continually revised as a result of new information obtained from drilling
and production history, new geological and geophysical data and changes in
economic conditions.
Proved reserves are estimated quantities of gas, crude oil, and condensate,
which geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed reserves are
proved reserves that can be expected to be recovered through existing wells
with existing equipment and operating methods.
OIL GAS
QUANTITY OF OIL AND GAS RESERVES (BBLS) (MCF)
-------------------------------- ---------- ----------
Total proved reserves at December 31, 2004 373,797 1,247,037
Extensions and discoveries 2,033,869 1,121,000
Production (33,676) (4,725)
Sale of Assets (64,771) - 0 -
Revisions to previous estimate 36,575 (519,565)
---------- ----------
Total proved reserves at December 31, 2005 2,345,794 1,843,747
========== ==========
Extensions and discoveries 3,421 455,000
Production (16,489) (17,504)
Revisions to previous estimate (575,085) (971,834)
---------- ----------
Total proved reserves at December 31, 2006 1,757,641 1,309,409
========== ==========
PROVED DEVELOPED RESERVES:
December 31, 2006 263,604 557,409
========== ==========
December 31, 2005 330,838 229,747
========== ==========
F-23
CAPITALIZED COSTS OF OIL AND GAS PRODUCING ACTIVITIES
-----------------------------------------------------
The following table sets forth the aggregate amounts of capitalized costs
relating to the Company's oil and gas producing activities and the
aggregate amount of related accumulated depletion, depreciation and
amortization as of December 31, 2006 and 2005:
2006 2005
------------ ------------
Unevaluated properties, not subject to amortization $ 6,309,169 $ 3,513,597
Properties subject to amortization 23,462,639 11,849,520
------------ ------------
Total capitalized costs 29,771,808 15,363,117
Less accumulated depletion, depreciation and amortization (2,307,020) (1,929,727)
------------ ------------
Net capitalized costs $27,464,788 $13,433,390
============ ============
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
--------------------------------------------------
The following table reflects the costs incurred in oil and gas property
acquisition, exploration and development activities during the years ended
December 31, 2006 and 2005:
2006 2005
---------- ----------
Acquisition costs $3,884,783 $4,079,919
========== ==========
Exploration and development costs $8,345,181 $1,147,816
========== ==========
Development costs $2,687,742 $1,096,124
========== ==========
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
---------------------------------------------------------------
The following table reflects the Standardized Measure of Discounted Future
Net Cash Flows relating to the Company's interest in proved oil and gas
reserves as of December 31, 2006 and 2005:
2006 2005
------------- -------------
Future cash inflows $110,627,480 $158,565,979
Future development and production costs (50,421,345) (59,263,004)
------------- -------------
Future net cash inflows before income taxes 60,206,135 99,302,975
Future income taxes (9,611,255) (27,804,833)
------------- -------------
Future net cash flows 50,594,880 71,498,142
10% discount factor (25,820,824) (36,654,786)
------------- -------------
Standardized measure of discounted future net
cash inflow $ 24,774,056 $ 34,843,356
============= =============
F-24
The following are the principal sources of change in the standardized
measure of discounted future net cash flows during 2006:
Beginning of year $ 34,843,356
Sales of oil and gas produced, net of production costs (496,028)
Net changes in prices and production costs (4,126,970)
Extensions, discoveries, and improved recovery, less related costs 1,672,043
Development costs incurred during the period 2,498,278
Revisions of estimated development costs (1,190,277)
Revisions of previous quantity estimates (20,819,265)
Accretion of discount 3,484,336
Net change in income taxes 8,908,583
-------------
$ 24,774,056
=============
Total standardized measure of discounted future net cash inflow
decreased to $24,774,056 as of December 31, 2006 from $34,843,356 as of
December 31, 2005. The two main factors that caused the decrease in both
reserve quantities and PV-10 value from 2005 to 2006 were related to the
Company's Texas Panhandle waterflood project. The reasons were as follows:
1) the price of natural gas used to calculate the PV-10 value decreased
from $13.08 to $5.24 as of the years ended December 31, 2005 and 2006,
respectively; and 2) our independent reserve engineer made an internal
decision in their reserve estimation process for the year ended December
31, 2006 to place greater confidence on different areas of available data
related to the waterflood as compared to the year end 2005 reserve
estimate. This shift in focus on other data by the independent reserve
engineer caused a decrease in the estimate of our Proved Undeveloped
reserves in the Texas Panhandle project of approximately 570,000 barrels of
oil equivalent.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
---------------------------------------------------------------
Future net cash flows at each year end, as reported in the above schedule,
were determined by summing the estimated annual net cash flows computed by:
(1) multiplying estimated quantities of proved reserves to be produced
during each year by current prices, and (2) deducting estimated
expenditures to be incurred during each year to develop and produce the
proved reserves (based on current costs).
Income taxes were computed by applying year-end statutory rates to pretax
net cash flows, reduced by the tax basis of the properties and available
net operating loss carryforwards. The annual future net cash flows were
discounted, using a prescribed 10% rate, and summed to determine the
standardized measure of discounted future net cash flow.
The Company cautions readers that the standardized measure information
which places a value on proved reserves is not indicative of either fair
market value or present value of future cash flows. Other logical
assumptions could have been used for this computation which would likely
have resulted in significantly different amounts. Such information is
disclosed solely in accordance with Statement 69 and the requirements
promulgated by the SEC to provide readers with a common base for use in
preparing their own estimates of future cash flows and for comparing
reserves among companies. Management of the Company does not rely on these
computations when making investment and operating decisions.
15. SUBSEQUENT EVENTS
-----------------
CONVERTIBLE DEBT AGREEMENT
On February 1, 2007 the Company executed a Note and Warrant Purchase
Agreement with an Institutional Investor for the sale of a $10,000,000, 8%
Senior Secured Convertible Promissory Note and a four-year warrant to
purchase 5,000,000 shares of common stock at an exercise price of $1.40 per
share for total proceeds of $10,000,000. At the option of the investor, the
three-year Convertible Note will be convertible into shares of common stock
at a price of $1.00 per share after the earlier of one year from the
closing of the transaction or three months after a registration statement
relating to this transaction becomes effective. The
F-25
Warrant is exercisable one year after the closing of the transaction.
The Company may elect to redeem part or all of the outstanding Convertible
Note at the later of (i) such time as the investor has the right to
convert; and (ii) twelve months from the date of closing, at one-hundred
ten percent (110%) of the principal amount of the Convertible Note,
provided however that such redemption right only applies if, upon receiving
notice of redemption, the lender has the right to convert all the shares
the Company intends to redeem at the applicable conversion price and the
applicable registration statement for the resale of such shares of common
stock is effective.
The Convertible Note is collateralized by a security interest in
twenty-five percent of the membership interest of the Company's wholly
owned subsidiary, Exploration Holding Co., LLC, which owns one-hundred
percent of Barnett Petrosearch, LLC. Barnett Petrosearch is the subsidiary
which owns a 5.54% interest in DDJET, Ltd, LLP, and participates in the
Barnett Shale Project.
F-26
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Petrosearch Operating Company, L.L.C.
TK Petrosearch, L.L.C.
Guidance Petrosearch, L.L.C.
Pursuit Petrosearch, L.L.C.
Buena Vista Petrosearch, L.L.C.
Rocky Mountain Petrosearch, L.L.C.
Big Sky Petrosearch, L.L.C.
Great Buffalo Petrosearch, L.L.C.
Beacon Petrosearch, L.L.C.
Anadarko Petrosearch, L.L.C.
Rancon Petrsearch, L.L.C.
Wilcox Petrosearch, L.L.C.
Magnolia Petrosearch, L.L.C.
Black Ramn Petrosearch, L.L.C.
Barnett Petrosearch LLC
Garwood Petrosearch, Inc.
Exploration Holdings Co, LLC
Exhibit 23.1
Consent
We hereby consent to the incorporation of our reserve reports by reference in
the Petrosearch Energy, SEC Form 10-KSB for the year ended December 31, 2006 and
the SEC Form SB-2 Registration Statement to be filed by Petrosearch in April
2007. The reference includes our name and information regarding our review of
the reserve estimates of Petrosearch Energy Corporation
/s/ Jack McCartney
McCartney Engineering, LLC
Consulting Petroleum Engineers
Wheat Ridge, CO
March 26, 2007
RYDER SCOTT COMPANY
PETROLEUM CONSULTANTS FAX (713)651-0849
1100 LOUISIANA SUITE 3800 HOUSTON, TEXAS 77002-5218 TELEPHONE (713)651-9191
EXHIBIT 23.2
Consent
We hereby consent to the incorporation of our reserve reports by reference
in the Petrosearch Energy SEC Form 10-KSB for the year ended December 31, 2006
and the SEC Form SB-2 Registration Statement to be filed by Petrosearch in April
2007. The reference includes our name and information regarding our estimate of
reserves attributable to certain properties and certain interests of Petrosearch
Energy Corporation.
/s/ Ryder Scott Company, L.P.
RYDER SCOTT COMPANY, L.P.
Houston, Texas
March 30, 2007
1200, 530-8TH AVENUE, S.W. CALGARY, ALBERTA T2P358
621 17TH STREET, SUITE 1550 DENVER, COLORADO 80293-1501
TEL(403)262-2799 FAX(403)262-2790
TEL(303)623-9147 FAX(303)623-4258
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Richard D. Dole, certify that:
1. I have reviewed this annual report on Form 10-KSB of Petrosearch Energy
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Petrosearch Energy Corporation as of, and for, the periods presented in
this report;
4. Petrosearch Energy Corporation's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
Petrosearch Energy Corporation and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to Petrosearch Energy
Corporation, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, 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;
(c) Evaluated the effectiveness of Petrosearch Energy Corporation's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in Petrosearch Energy Corporation's
internal control over financial reporting that occurred during Petrosearch
Energy Corporation's most recent fiscal year that has materially affected,
or is reasonably likely to materially affect, Petrosearch Energy
Corporation's internal control over financial reporting; and
5. Petrosearch Energy Corporation's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to Petrosearch Energy Corporation's independent
registered public accounting firm and the audit committee of Petrosearch
Energy Corporation's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect Petrosearch Energy Corporation's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in Petrosearch Energy Corporation's
internal control over financial reporting.
Date: April 2, 2007 By: /s/ Richard D. Dole
-------------------
Richard D. Dole
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, David J. Collins, certify that:
1. I have reviewed this annual report on Form 10-KSB of Petrosearch Energy
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Petrosearch Energy Corporation as of, and for, the periods presented in
this report;
4. Petrosearch Energy Corporation's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
Petrosearch Energy Corporation and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to Petrosearch Energy
Corporation, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, 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;
(c) Evaluated the effectiveness of Petrosearch Energy Corporation's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in Petrosearch Energy Corporation's
internal control over financial reporting that occurred during Petrosearch
Energy Corporation's most recent fiscal year that has materially affected,
or is reasonably likely to materially affect, Petrosearch Energy
Corporation's internal control over financial reporting; and
5. Petrosearch Energy Corporation's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to Petrosearch Energy Corporation's independent
registered public accounting firm and the audit committee of Petrosearch
Energy Corporation's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect Petrosearch Energy Corporation's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in Petrosearch Energy Corporation's
internal control over financial reporting.
Date: April 2, 2007 By: /s/ David J. Collins
--------------------
David J. Collins
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO RULE 13a-14(b) OR
RULE 15d-14(b) and 18 U.S.C. Sec.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Petrosearch Energy Corporation (the
"Company") on Form 10-KSB for the year ended December 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Richard
D. Dole, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: April 2, 2007 By: /s/ Richard D. Dole
-------------------
Richard D. Dole
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO RULE 13a-14(b) OR
RULE 15d-14(b) and 18 U.S.C. Sec.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Petrosearch Energy Corporation (the
"Company") on Form 10-KSB for the year ended December 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, David
J. Collins, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: April 2, 2007 By: /s/ David J. Collins
--------------------
David J. Collins
Chief Financial Officer