As filed with the Securities and Exchange Commission on August 1, 2006
Registration No. 333-134978
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
BASELINE OIL & GAS CORP.
(Name of small business issuer in its charter)
Nevada 1311 30-0226902
(State or Jurisdiction (Primary Standard (IRS Employer
of Incorporation Industrial Identification
or Organization) Classification Number)
Code Number)
20022 Creek Farm
San Antonio, Texas 78259
(210) 481-5177
(Address and telephone number of principal executive offices)
20022 Creek Farm
San Antonio, Texas 78259
(Address of principal place of business)
Barrie Damson, Chairman and CEO
Baseline Oil & Gas Corp.
20022 Creek Farm
San Antonio, Texas 78259
(210) 481-5177
(Name, address and telephone number of agent for service)
Copies of communications to:
Matthew S, Cohen, Esq.
Eaton & Van Winkle LLP
3 Park Avenue, 16th Floor
New York, New York 10016
(212) 779-9910
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Amount Proposed Maximum Proposed Maximum Amount of
Securities To Be To Be Offering Price Per Aggregate Offering Registration
Registered Registered Share (1) Price Fee
- -------------------------------------------------------------------------------------------------------------------------
$.001 par value per share
common stock (2) 16,923,408 $ 2.45 $41,462,350 $4,437
- -------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 457(c), the fee calculation is based on $2.45, which is the
average of the high and low prices of the Registrant's common stock on the OTC
Bulletin Board on June 7, 2006.
(2) This registration statement relates to the resale by certain selling
security holders identified herein of up to 16,923,408 shares of common stock
consisting of (i) 9,131,818 shares of common stock presently outstanding and
held by selling security holders, (ii) 220,000 shares of common stock estimated
to be issued to certain selling stockholders in connection with certain
penalties under a registration rights agreement, (iii) up to 5,462,500 shares of
common stock that may be issuable upon conversion of convertible notes
(including interest accruing on such convertible notes) and (iv) up to 2,109,090
shares of our common stock that are issuable upon exercise of stock options and
common stock purchase warrants.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
i
Subject to Completion, Dated August ___, 2006
16,923,408 Shares
BASELINE OIL & GAS CORP.
Common Stock
This prospectus relates to the resale of up to 16,923,408 shares of our
common stock, $.001 par value per share ("Common Stock"), by the selling
security holders listed in the prospectus commencing on page 13, consisting of
(i) 9,131,818 shares of common stock presently outstanding and held by selling
security holders, (ii) 220,000 shares of common stock estimated to be issued to
certain selling stockholders in connection with certain penalties under a
registration rights agreement, (iii) up to 5,462,500 shares of common stock that
may be issuable upon conversion of convertible notes (including interest
accruing on such convertible notes) and (iv) up to 2,109,090 shares of our
common stock that are issuable upon exercise of stock options and common stock
purchase warrants.
The transactions in which the selling security holders acquired the shares
of Common Stock covered by this prospectus are described in the section of this
prospectus entitled "Selling Security Holders."
We changed our name from College Oak Investments, Inc. to Baseline Oil &
Gas Corp. on January 17, 2006.
The selling security holders, by themselves or through brokers and
dealers, may offer and sell the shares at prevailing market prices or in
transactions at negotiated prices. We will not receive any proceeds from the
selling security holders' resale of the shares of Common Stock. The selling
security holders will receive all proceeds from such sales. We will, in the
ordinary course of business, receive proceeds from the issuance of our Common
Stock upon exercise of the stock options and common stock purchase warrants.
It is not possible to determine the price to the public in any sale of the
shares of Common Stock by the selling security holders and the selling security
holders reserve the right to accept or reject, in whole or in part, any proposed
purchase of shares. Accordingly, the selling security holders will determine the
public offering price, the amount of any applicable underwriting discounts and
commissions and the net proceeds at the time of any sale. The selling security
holders will pay any underwriting discounts and commissions. The selling
security holders, and the brokers through whom sales of the securities are made,
will be "underwriters" within the meaning of Section 2(11) of the Securities Act
of 1933, as amended, referred to herein as the "Securities Act".
Our Common Stock is traded on the OTC Bulletin Board under the symbol
"BOGA". On June 7, 2006 the average of the high and low sale prices of our
Common Stock on the OTC Bulletin Board was $2.45.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 2.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information from that
contained in this prospectus. The selling security holders are offering to sell
ii
and seeking offers to buy shares of our Common Stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our Common Stock.
No person is authorized in connection with this prospectus to give any
information or to make any representations about us, the selling security
holders, the securities or any matter discussed in this prospectus, other than
the information and representations contained in this prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or any
selling security holder. This prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy the securities in any circumstances under
which the offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any distribution of securities in accordance with this prospectus
shall, under any circumstances, imply that there has been no change in our
affairs since the date of this prospectus.
The date of this prospectus is August __, 2006
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY 1
RISK FACTORS 2
WHERE YOU CAN FIND MORE INFORMATION 12
USE OF PROCEEDS 13
DETERMINATION OF OFFERING PRICE1 13
SELLING SECURITY HOLDERS 13
PLAN OF DISTRIBUTION 21
LEGAL PROCEEDINGS 24
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
EXECUTIVE OFFICERS AND RELATED SHAREHOLDER MATTERS 26
DESCRIPTION OF SECURITIES 27
LEGAL MATTERS 27
EXPERTS 28
INDEMNIFICATION OF DIRECTORS AND OFFICERS 28
DESCRIPTION OF BUSINESS 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 32
DESCRIPTION OF PROPERTY 33
CERTAIN RELATIONSHIPS AMD RELATED TRANSACTIONS 34
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 35
EXECUTIVE COMPENSATION 36
FINANCIAL STATEMENTS 39
INDEMNIFICATION OF OFFICERS AND DIRECTORS 40
RECENT SALES OF UNREGISTERED SECURITIES 40
EXHIBITS 43
UNDERTAKINGS 44
SIGNATURES 46
POWERS OF ATTORNEY 47
iii
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our Common Stock. You should read the entire
prospectus, including "Risk Factors" and the consolidated financial statements
and the related notes before making an investment decision.
In this prospectus, the "Company" and terms such as "we," "us" and "our,"
refer to Baseline Oil & Gas Corp., a Nevada corporation.
Our Company
We were incorporated in the State of Nevada on February 3, 2004 as College
Oak Investments, Inc. We changed our name on January 17, 2006 to Baseline Oil &
Gas Corp. On April 6, 2005, we entered into a merger transaction with Coastal
Energy Services, Inc., a Delaware corporation, as described below under
"Business - Development of Business", which resulted in a change in control of
our Company. As described below under "Business - New Albany", as of November
25, 2005, we entered into a joint venture agreement with Rex Energy Operating
Corp. ("Rex Energy") with respect to New Albany-Indiana, LLC, a Delaware limited
liability company of which we own 50% of the outstanding membership interests
("New Albany" or the "LLC"). We are a non-managing member of New Albany. New
Albany owns working interests in certain oil and gas leases covering
approximately 138,500 acres in the State of Indiana. See "Description of
Business -New Albany".
On June 8, 2006, we entered into a Mutual Termination Agreement with Rex
Energy and certain of its affiliates (collectively, the "Rex Parties"), pursuant
to which we and the Rex Parties mutually terminated (i) that certain purchase
agreement between us, dated January 16, 2006, and (ii) that certain stock
agreement, dated January 16, 2006 (as amended on March 10, 2006). See "Business
- - Termination of Rex Agreement".
Our principal offices are at 20022 Creek Farm, San Antonio, Texas 78259
and our telephone number is (210) 481-5177.
The Offering
This prospectus relates to the resale by selling security holders of up to
16,923,408 shares of our Common Stock, consisting of (i) 9,131,818 shares of
common stock presently outstanding and held by selling security holders, (ii)
220,000 shares of common stock estimated to be issued to certain selling
stockholders in connection with certain penalties under a registration rights
agreement, (iii) up to 5,462,500 shares of common stock that may be issuable
upon conversion of convertible notes (including interest accruing on such
convertible notes) and (iv) up to 2,109,090 shares of our common stock that are
issuable upon exercise of stock options and common stock purchase warrants.
The issuances of such securities to the selling security holders was made
in reliance upon exemptions from the registration requirements of the Securities
Act provided by Section 4(2) of the Securities Act for private transactions.
Additional information concerning the transactions in which the rights to
acquire the shares covered by this prospectus were obtained by the selling
security holders are set forth in the section of this prospectus entitled
"Selling Security Holders."
1
Sales By Selling Security Holders
The selling security holders may offer the Common Stock pursuant to this
prospectus in varying amounts and transactions so long as this prospectus is
then current under the rules of the SEC and we have not withdrawn the
registration statement. The offering of Common Stock may be through the
facilities of the OTC Bulletin Board or such other exchange or reporting system
where the Common Stock may be traded. Brokerage commissions may be paid or
discounts allowed in connection with such sales; however, it is anticipated that
the discounts allowed or commissions paid will be no more than the ordinary
brokerage commissions paid on sales effected through brokers or dealers. To our
knowledge, as of the date hereof, no one has made any arrangements with a broker
or dealer concerning the offer or sale of the Common Stock. See "Plan of
Distribution."
Outstanding Securities
As of June 9, 2006, there were approximately 30,271,818 shares of our
Common Stock outstanding. On a fully-diluted basis, giving effect to and
assuming the exercise or conversion of all of our options, warrants and
derivative securities, we would have had outstanding an aggregate of
approximately 50,143,408 shares of Common Stock as of June 9, 2006. These share
numbers do not give effect to any shares issuable as a result of interest
accruing on the outstanding convertible notes (estimated to be 712,500 shares
for the 18 months following November 2005) or to any shares issuable as a result
of our delay in registering shares held by selling security holders (estimated
to be 96,685 shares as of June 9, 2006).
An investment in the shares of our Company is subject to a number of
risks. We have set forth these risk factors below under the heading "Risk
Factors" which you should carefully review.
RISK FACTORS
The reader should carefully consider each of the risks described below. If
any of the following risks develop into actual events, our business, financial
condition or results of operations could be materially adversely affected and
the trading price of the Common Stock could decline significantly.
Since we did not complete the Rex Energy asset acquisition transaction, our
future business prospects and our future financial condition could be negatively
impacted. Our decision not to complete such transaction could also adversely
affect the price for our Common Stock.
o Since the Rex Energy asset acquisition transaction will not be completed,
we own only passive equity interests in a joint venture and the prospects
for the growth of our business and increasing our revenues have been
impaired. Also, we could lose access to capital resources to finance
merger or acquisition transactions to which we may become a party.
o Certain costs relating to the Rex Energy asset acquisition transaction
(such as legal, reserve engineering, accounting and financial advisory
fees) were still payable by us even though the transaction was not be
completed.
o We do not have any operating business and are considered to be a "shell"
company under the Securities Act. We are a non-managing 50% member of New
Albany, which is an operating company. Our membership interests in New
Albany constitute our only non-cash asset.
2
Conflicts of interests for certain members of the present management exist with
regards to their obligations to the Company and their obligations to businesses
in which they continue to own interests and manage.
Mr. Alan Gaines is the Chairman and Chief Executive Officer of Dune
Energy, Inc. ("Dune") and his employment with Dune is governed by an Employment
Agreement dated as of May 12, 2005 (the "Gaines Employment Agreement"). The
Gaines Employment Agreement is currently scheduled to expire on June 30, 2007.
Pursuant to the terms of the Gaines Employment Agreement, Mr. Gaines is required
to devote substantially all of his business time and efforts to the business of
Dune. Furthermore, the Gaines Employment Agreement provides that during its term
and for one year thereafter, Mr. Gaines may not directly or indirectly engage in
any business involved in the exploration, drilling, or production of natural gas
or oil, within any area owned by the Welder family of Victoria County, Texas.
There can be no guarantee that Mr. Gaines will be able to devote adequate time
to the affairs of the Company given his fiduciary and contractual obligations to
Dune.
The officers and directors of the Company are subject to the certain
duties imposed on them under the Nevada law, including a general requirement
that certain opportunities within the scope of the Company's proposed business
operations which come to their attention may be considered opportunities that
should be made available to the Company and the companies that they are
affiliated with on an equal basis. A breach of this requirement will be a breach
of the fiduciary duties of the officer and director. If the Company or any of
the other companies with which that officer or director is affiliated both
desire to take advantage of an opportunity, then those officers and directors
would abstain from negotiating and voting upon the business opportunity. Even in
the event these procedures are followed, we cannot assure you that conflicts of
interests among the Company, its officers and directors and Dune will not
develop.
Risks Relating to the Business of New Albany and the Oil and Natural Gas
Industry.
Special geological characteristics of the New Albany Shale area will require New
Albany to use less-common drilling technologies in order for its development
efforts to be economically viable. The near-term focus of its development
activities will be concentrated to a large degree in the New Albany Shale area,
which exposes it to risks associated with prospect concentration.
New Albany's development activities will be concentrated in the New Albany
Shale area. New Albany Shale reservoirs are complex, often containing unusual
features that are not well understood by drillers and producers. Successful
operations in this area require specialized technical staff expertise in
horizontal drilling, with respect to which New Albany has limited experience.
The New Albany Shale contains vertical fractures. Results of past drilling
in the New Albany Shale have been mixed and are generally believed to be related
to whether or not a particular well bore intersects a vertical fracture. While
wells have been drilled into the New Albany Shale for years, most of those wells
have been drilled vertically. Where vertical fractures have been encountered,
production has been better. It is expected that horizontal drilling will allow
New Albany to encounter more fractures by drilling perpendicular to the fracture
planes. While it is believed that the New Albany Shale is subject to some level
of vertical fracturing throughout the Illinois Basin, certain areas will be more
3
heavily fractured than others. If New Albany's area of interest is not subject
to the level of vertical fracturing that it expects, then its plan for
horizontal drilling might not yield the expected results.
Gas and water are produced together from the New Albany Shale. Water is
often produced in significant quantities, especially early in the producing life
of a well. New Albany plans to dispose of this produced water by means of
injecting it into other porous and permeable formations via disposal wells
located adjacent to producing wells. If New Albany is unable to find such porous
and permeable reservoirs into which to inject this produced water or if it is
prohibited from injecting because of governmental regulation, then its cost to
dispose of produced water could increase significantly, thereby affecting the
economic viability of producing the New Albany Shale wells.
The relative concentration of New Albany's near-term activities in the New
Albany Shale means that any impairments or material reductions in the expected
size of the reserves attributable to New Albany's wells, any material harm to
the producing reservoirs from which these wells produce or any significant
governmental regulation with respect to any of these wells, including
curtailment of production or interruption of transportation of production, could
have a material adverse effect on New Albany's financial condition and results
of operations.
A substantial or extended decline in oil and natural gas prices may adversely
affect New Albany's business, financial condition or results of operations and
its ability to meet its capital expenditure obligations and financial
commitments.
The prices which New Albany receives for its oil and natural gas
production heavily influence its revenue, profitability, access to capital and
future rate of growth. Oil and natural gas are commodities and, therefore, their
prices are subject to wide fluctuations in response to relatively minor changes
in supply and demand. Historically, the markets for oil and natural gas have
been volatile. These markets will likely continue to be volatile in the future.
The prices New Albany receives for its production, and the levels of its
production, depend on numerous factors beyond its control. These factors
include, but are not limited to, the following:
o changes in global supply and demand for oil and natural gas;
o the actions of certain foreign states, such as the governments of
Venezuela or Iran;
o the price and quantity of imports of foreign oil and natural gas;
o political conditions, including embargoes, in or affecting other oil
producing activities;
o the level of global oil and natural gas exploration and production
activity;
o the level of global oil and natural gas inventories; production or pricing
decisions made by the Organization of Petroleum Exporting Countries
(OPEC);
o weather conditions;
o technological advances affecting energy consumption; and
o the price and availability of alternative fuels.
Lower oil and natural gas prices may not only decrease New Albany's
revenues on a per unit basis but also may reduce the amount of oil and natural
gas that New Albany can produce economically. Lower prices will also negatively
impact the value of New Albany's proved reserves. A substantial or extended
decline in oil or natural gas prices may materially and adversely affect its
future business, financial condition, results of operations, liquidity or
ability to finance planned capital expenditures.
Drilling for and producing oil and natural gas are high risk activities with
many uncertainties that could adversely affect New Albany's business, financial
condition or results of operations.
New Albany's future success will depend on the success of its
exploitation, exploration, development and production activities. Its oil and
natural gas exploration and production activities are subject to numerous risks
4
beyond its control, including the risk that drilling will not result in
commercially viable oil or natural gas production. Its decisions to purchase,
explore, develop or otherwise exploit prospects or properties will depend in
part on the evaluation of data obtained through geophysical and geological
analyses, production data and engineering studies, the results of which are
often inconclusive or subject to varying interpretations. Please read "- Reserve
estimates depend on many assumptions that may turn out to be inaccurate" (below)
for a discussion of the uncertainties involved in these processes. New Albany's
costs of drilling, completing and operating wells is often uncertain before
drilling commences. Overruns in budgeted expenditures are common risks that can
make a particular project uneconomical. Further, many factors may curtail, delay
or cancel drilling, including the following:
o delays imposed by or resulting from compliance with regulatory
requirements;
o pressure or irregularities in geological formations;
o shortages of or delays in obtaining equipment and qualified personnel;
o equipment failures or accidents;
o adverse weather conditions;
o reductions in oil and natural gas prices;
o oil and natural gas property title problems; and
o market limitations for oil and natural gas.
If oil and natural gas prices decrease, New Albany may be required to take
write-downs of the carrying values of its oil and natural gas properties,
negatively impacting the trading value of our securities.
Accounting rules require that New Albany review periodically the carrying
value of its oil and natural gas properties for possible impairment. Based on
specific market factors and circumstances at the time of prospective impairment
reviews, and the continuing evaluation of development plans, production data,
economics and other factors, New Albany may be required to write down the
carrying value of its oil and natural gas properties. It is likely that the
cumulative effect of such a write-down could also negatively impact the trading
price of our securities.
New Albany accounts for oil and gas properties using the successful
efforts method of accounting. Under this method, all development costs and
acquisition costs of proved properties are capitalized and amortized on a
units-of-production basis over the remaining life of proved developed reserves
and proved reserves, respectively. Costs of drilling exploratory wells are
initially capitalized, but charged to expense if and when a well is determined
to be unsuccessful. The risk that New Albany will be required to write down the
carrying value of its oil and natural gas properties increases when oil and gas
prices are low or volatile. In addition, write-downs would occur if New Albany
were to experience sufficient downward adjustments to its estimated proved
reserves or the present value of estimated future net revenues.
Reserve estimates depend on many assumptions that may turn out to be inaccurate.
Any material inaccuracies in these reserve estimates or underlying assumptions
will materially affect the quantities and present value of New Albany's
reserves.
The process of estimating oil and natural gas reserves is complex. It
requires interpretations of available technical data and many assumptions,
including assumptions relating to economic factors. Any significant inaccuracies
in these interpretations or assumptions could materially affect the estimated
quantities and present value of New Albany's reported reserves. In order to
prepare its estimates, it must project production rates and timing of
development expenditures. It must also analyze available geological,
geophysical, production and engineering data. The extent, quality and
reliability of this data can vary. The process also requires economic
assumptions about matters such as oil and natural gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds.
Therefore, estimates of oil and natural gas reserves are inherently imprecise.
5
Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves most likely will vary from New Albany's estimates. Any
significant variance could materially affect the estimated quantities and
present value of its reported reserves. In addition, it may adjust estimates of
proved reserves to reflect production history, results of exploration and
development, prevailing oil and natural gas prices and other factors, many of
which are beyond its control.
Prospects that New Albany decide to drill may not yield oil or natural gas in
commercially viable quantities.
New Albany's prospects are in various stages of evaluation. There is no
way to predict in advance of drilling and testing whether any particular
prospect will yield oil or natural gas in sufficient quantities to recover
drilling or completion costs or to be economically viable. The use of seismic
data and other technologies and the study of producing fields in the same area
will not enable New Albany to know conclusively prior to drilling whether oil or
natural gas will be present or, if present, whether oil or natural gas will be
present in commercial quantities. We cannot assure you that the analogies we
draw from available data from other wells, more fully explored prospects or
producing fields will be applicable to New Albany's drilling prospects.
New Albany cannot control activities on properties that it does not operate and
it is unable to ensure their proper operation and profitability.
New Albany will not operate all of the properties in which it will own an
interest. As a result, it has limited ability to exercise influence over, and
control the risks associated with, the operations of these properties. The
failure of an operator of New Albany's wells to adequately perform operations,
an operator's breach of the applicable agreements or an operator's failure to
act in ways that are in New Albany's best interests could reduce its production
and revenues. The success and timing of its drilling and development activities
on properties operated by others therefore depend upon a number of factors
outside of its control, including the operator's
o timing and amount of capital expenditures;
o expertise and financial resources;
o inclusion of other participants in drilling wells; and
o use of technology.
The marketability of New Albany's natural gas production depends on facilities
that it typically does not own or control, which could result in a curtailment
of production and revenues.
The marketability of New Albany's production will depend in part upon the
availability, proximity and capacity of natural gas gathering systems, pipelines
and processing facilities. It generally delivers natural gas through gas
gathering systems and gas pipelines that it does not own under interruptible or
short-term transportation agreements. Under the interruptible transportation
agreements, the transportation of New Albany's gas may be interrupted due to
capacity constraints on the applicable system, for maintenance or repair of the
system, or for other reasons as dictated by the particular agreements. New
Albany's ability to produce and market natural gas on a commercial basis could
be harmed by any significant change in the cost or availability of such markets,
systems or pipelines.
6
New Albany's future acquisitions may yield revenues or production that vary
significantly from its projections.
In acquiring producing properties, New Albany will assess the recoverable
reserves, future natural gas and oil prices, operating costs, potential
liabilities and other factors relating to the properties. Its assessments are
necessarily inexact and their accuracy is inherently uncertain. Its review of a
subject property in connection with its acquisition assessment will not reveal
all existing or potential problems or permit it to become sufficiently familiar
with the property to assess fully its deficiencies and capabilities. New Albany
may not inspect every well, and it may not be able to observe structural and
environmental problems even when it does inspect a well. If problems are
identified, the seller may be unwilling or unable to provide effective
contractual protection against all or part of those problems. Any acquisition of
property interests may not be economically successful, and unsuccessful
acquisitions may have a material adverse effect on New Albany's financial
condition and future results of operations.
Hedging activities New Albany engages in may prevent it from benefiting from
price increases and may expose it to other risks.
New Albany may, from time to time, use derivative instruments to hedge the
impact of market fluctuations on crude oil and natural gas prices. To the extent
that it engages in hedging activities, it may be prevented from realizing the
benefits of price increases above the levels of the hedges. In addition, New
Albany will be subject to risks associated with differences in prices at
different locations, particularly where transportation constraints restrict its
ability to deliver oil and gas volumes to the delivery point to which the
hedging transaction is indexed.
We have had a history of operating losses and we may have losses in the future.
Since our inception in June 2004, we have had limited operations and
nominal revenues. While we hope to increase our revenues through potential
merger or acquisition transactions, there can be no assurance that we will be
successful.
Our Common Stock is listed on the OTC Bulletin Board. Our Common Stock is
not quoted on the NASDAQ National Market System or listed on a national
securities exchange. The NASDAQ National Market System and national securities
exchanges require companies to fulfill certain requirements in order for their
shares to be listed and to continue to be listed. The securities of a company
may be ineligible for listing or, if listed, may be considered for delisting if
the company fails to meet certain financial thresholds, including if the company
has sustained losses from continuing operations and/or net losses in recent
fiscal years. There can be no assurance that we will not report additional
losses in the future or that we will be able to list or have quoted our Common
Stock on the NASDAQ National Market or a national securities exchange. An
inability to list our Common Stock could adversely affect our ability to raise
capital in the future by issuing Common Stock or securities convertible into or
exercisable for our Common Stock.
Continuing losses may mean that additional funding may not be available on
acceptable terms, if at all. If adequate funds are unavailable from additional
sources of financing, we might be forced to reduce or delay acquisitions or
capital expenditures, sell assets, reduce operating expenses, refinance all or a
portion of our debt, or delay or reduce important drilling or enhanced
production initiatives.
In addition, in that instance, we may seek to raise any necessary
additional funds through equity or debt financings, convertible debt financing,
joint ventures with corporate partners or other sources, which may be dilutive
to our existing shareholders and may cause the price of our Common Stock to
decline.
7
The unavailability or high cost of drilling rigs, equipment, supplies, personnel
and oil field services could adversely affect New Albany's ability to execute on
a timely basis its exploration and development plans within its budget.
With the increase in the prices of oil and natural gas, New Albany has
encountered an increase in the cost of securing drilling rigs, equipment and
supplies. Shortages or the high cost of drilling rigs, equipment, supplies and
personnel are expected to continue in the near-term. In addition, larger
producers may be more likely to secure access to such equipment by virtue of
offering drilling companies more lucrative terms. If New Albany is unable to
acquire access to such resources, or can obtain access only at higher prices,
not only would this potentially delay its ability to convert its reserves into
cash flow, but it could also significantly increase the cost of producing those
reserves, thereby negatively impacting anticipated net income.
New Albany may incur substantial losses and be subject to substantial liability
claims as a result of its oil and natural gas operations.
New Albany is not insured against all risks. Losses and liabilities
arising from uninsured and underinsured events could materially and adversely
affect its business, financial condition or results of operations. New Albany's
oil and natural gas exploration and production activities are subject to all of
the operating risks associated with drilling for and producing oil and natural
gas, including the possibility of:
o environmental hazards, such as uncontrollable flows of oil, natural gas,
brine, well fluids, toxic gas or other pollution into the environment,
including groundwater and shoreline contamination;
o abnormally pressured formations;
o mechanical difficulties, such as stuck oil field drilling and service
tools and casing collapses;
o fires and explosions;
o personal injuries and death; and
o natural disasters.
Any of these risks could adversely affect New Albany's ability to conduct
operations or result in substantial losses to it. It may elect not to obtain
insurance if it believes that the cost of available insurance is excessive
relative to the risks presented. In addition, pollution and environmental risks
generally are not fully insurable. If a significant accident or other event
occurs and is not fully covered by insurance, then that accident or other event
could adversely affect New Albany's results of operations, financial condition
and cash flows.
New Albany may not have enough insurance to cover all of the risks that it
faces.
In accordance with customary industry practices, New Albany maintains
insurance coverage against some, but not all, potential losses in order to
protect against the risks it faces. It does not carry business interruption
insurance. It may elect not to carry insurance if its management believes that
the cost of available insurance is excessive relative to the risks presented. In
addition, New Albany cannot insure fully against pollution and environmental
risks. The occurrence of an event not fully covered by insurance could have a
material adverse effect on New Albany's financial condition and results of
operations.
8
New Albany is subject to complex laws that can affect the cost, manner or
feasibility of doing business.
Exploration, development, production and sale of oil and natural gas are
subject to extensive federal, state, local and international regulation. New
Albany may be required to make large expenditures to comply with governmental
regulations. Matters subject to regulation include:
o discharge permits for drilling operations;
o drilling bonds;
o reports concerning operations;
o the spacing of wells;
o unitization and pooling of properties; and
o taxation.
Under these laws, New Albany could be liable for personal injuries,
property damage and other damages. Failure to comply with these laws also may
result in the suspension or termination of its operations and subject it to
administrative, civil and criminal penalties. Moreover, these laws could change
in ways that substantially increase its costs. Any such liabilities, penalties,
suspensions, terminations or regulatory changes could materially adversely
affect its financial condition and results of operations.
New Albany' operations may cause it to incur substantial liabilities for failure
to comply with environmental laws and regulations.
New Albany's oil and natural gas operations are subject to stringent
federal, state and local laws and regulations relating to the release or
disposal of materials into the environment or otherwise relating to
environmental protection. These laws and regulations may require the acquisition
of a permit before drilling commences, restrict the types, quantities and
concentration of substances that can be released into the environment in
connection with drilling and production activities, limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas, and impose substantial liabilities for pollution resulting from
New Albany's operations. Failure to comply with these laws and regulations may
result in the assessment of administrative, civil and criminal penalties,
incurrence of investigatory or remedial obligations or the imposition of
injunctive relief. Changes in environmental laws and regulations occur
frequently, and any changes that result in more stringent or costly waste
handling, storage, transport, disposal or cleanup requirements could require New
Albany to make significant expenditures to maintain compliance, and may
otherwise have a material adverse effect on its results of operations,
competitive position or financial condition as well as the industry in general.
Under these environmental laws and regulations, New Albany could be held
strictly liable for the removal or remediation of previously released materials
or property contamination regardless of whether it was responsible for the
release or if its operations were standard in the industry at the time they were
performed.
9
Competition in the oil and natural gas industry is intense, which may adversely
affect New Albany's ability to compete.
New Albany operates in a highly competitive environment for acquiring
properties, marketing oil and natural gas and securing trained personnel. Many
of its competitors possess and employ financial, technical and personnel
resources substantially greater than New Albany's, which can be particularly
important in the areas in which it operates. Those companies may be able to pay
more for productive oil and natural gas properties and exploratory prospects and
to evaluate, bid for and purchase a greater number of properties and prospects
than New Albany's financial or personnel resources permit. New Albany's ability
to acquire additional prospects and to find and develop reserves in the future
will depend on its ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment. New Albany may not
be able to compete successfully in the future in acquiring prospective reserves,
developing reserves, marketing hydrocarbons, attracting and retaining quality
personnel and raising additional capital.
If New Albany's access to markets is restricted, it could negatively impact New
Albany's production, its income and ultimately its ability to retain its leases.
Market conditions or the unavailability of satisfactory oil and natural
gas transportation arrangements may hinder New Albany's access to oil and
natural gas markets or delay its production. The availability of a ready market
for New Albany's oil and natural gas production depends on a number of factors,
including the demand for and supply of oil and natural gas and the proximity of
reserves to pipelines and terminal facilities. Its ability to market its
production depends in substantial part on the availability and capacity of
gathering systems, pipelines and processing facilities owned and operated by
third parties. Its failure to obtain such services on acceptable terms could
materially harm its business.
New Albany's productive properties may be located in areas with limited or
no access to pipelines, thereby necessitating delivery by other means, such as
trucking, or requiring compression facilities. Such restrictions on its ability
to sell oil or natural gas have several adverse affects, including higher
transportation costs, fewer potential purchasers (thereby potentially resulting
in a lower selling price) or, in the event New Albany were unable to market and
sustain production from a particular lease for an extended time, possibly
causing it to lose a lease due to lack of production.
Risks Relating to Our Common Stock
You may experience dilution of your ownership interests due to the future
issuance of additional shares of the Company's Common Stock.
The Company may in the future issue its previously authorized and unissued
securities, which will result in the dilution of the ownership interests of its
present stockholders. The Company is currently authorized to issue 140,000,000
shares of Common Stock and 10,000,000 shares of preferred stock with such
designations, preferences and rights as determined by our Board of Directors. As
of June 9, 2006, the Company has issued 30,271,818 shares of Common Stock. In
addition, we have outstanding options, warrants and convertible promissory notes
to purchase up to an additional 19,871,590 shares of the Company's Common Stock.
Issuance of additional shares of Common Stock may substantially dilute the
ownership interests of the Company's existing stockholders. The potential
issuance of such additional shares of Common Stock may create downward pressure
on the trading price of our Common Stock that in turn will require it to issue
additional shares to raise funds through sales of its securities. The Company
may also issue additional shares of its stock in connection with the hiring of
personnel, future acquisitions, future private placements of its securities for
capital raising purposes, or for other business purposes. This will further
dilute the interests of the Company's existing holders.
10
If we, or our stockholders holding registration rights, sell additional shares
of our Common Stock, the market price of our Common Stock could decline.
Sales of a substantial number of our shares of Common Stock in the public
market, or the expectation of such sales, could cause the market price of our
Common Stock to decline, even precipitously. Our current market float is very
limited and our stock is thinly traded, which may tend to aggravate the downward
pressures on our stock price.
The market price of our Common Stock may be affected by low volume float.
While there has been a public market for our Common Stock on the OTC
Bulletin Board, our Common Stock is very thinly traded. We also estimate that,
as of April 6, 2006, approximately 3,000,000 additional shares of Common Stock
were capable of being resold under Rule 144.
Substantial sales of our Common Stock, including shares issued upon the
exercise of outstanding options and warrants, in the public market, or the
perception that these sales could occur, may have a depressive effect on the
market price of our Common Stock. Such sales or the perception of such sales
could also impair our ability to raise capital or make acquisitions through the
issuance of our Common Stock.
We have no plans to, and are currently unable to, pay dividends on our Common
Stock. You may not receive funds without selling your stock.
We do not anticipate paying any cash dividends on our Common Stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the expansion of our business. Our future dividend policy is within the
discretion of our Board of Directors and will depend upon various factors,
including our business, financial condition, results of operations, capital
requirements and investment opportunities. Our accumulated losses and
stockholders' deficits prevent us from being able to declare and pay dividends.
In addition, our proposed credit facility will prohibit us from paying
dividends.
We may issue shares of preferred stock having greater rights than our Common
Stock.
Our certificate of incorporation authorizes our Board of Directors to
issue one or more series of preferred stock and set the terms of the preferred
stock without seeking any further approval from our shareholders. Any preferred
stock that is issued may rank ahead of our Common Stock, with respect to
dividends, liquidation rights and voting rights, among other things. Provisions
under Nevada law could delay or prevent a change in control of our company,
which could adversely affect the price of our Common Stock. While we do not
believe that we currently have any provisions in our organizational documents
that could prevent or delay a change in control of our company (such as
provisions calling for a staggered Board of Directors, or the issuance of stock
with super-majority voting rights), the existence of some provisions under
Nevada law could delay or prevent a change in control of our Company, which
could adversely affect the price of our Common Stock. Nevada law imposes some
restrictions on mergers and other business combinations between us and any
holder of 10% or more of our outstanding Common Stock.
11
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission, 100 F
Street, N.E., Washington, D.C. 20549, a registration statement on Form SB-2,
under the Securities Act for the Common Stock offered by this prospectus. We
have not included in this prospectus all the information contained in the
registration statement and you should refer to the registration statement and
its exhibits for further information.
Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
The registration statement and other information may be read and copied at
the Commission's Public Reference Room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC
maintains a web site (HTTP://WWW.SEC.GOV.) that contains the registration
statements, reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC such as us. We are
required to file reports with the Commission pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We file
reports such as annual reports on Form 10-KSB, quarterly reports on Form 10-QSB
and current reports on Form 8-K. We intend to furnish our stockholders with
annual reports containing audited financial statements and other reports as we
think appropriate or as may be required by law.
You may read and copy any reports, statements or other information that we
have filed with the SEC at the addresses indicated above and you may also access
them electronically at the web site set forth above. These SEC filings are also
available to the public from commercial document retrieval services.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus contain some
forward-looking statements. Certain of the matters discussed concerning our
operations, cash flows, financial position, economic performance and financial
condition, including, in particular, future sales, product demand, competition
and the effect of economic conditions include forward-looking statements within
the meaning of section 27A of the Securities Act of 1933, referred to herein as
the Securities Act, and Section 21E of the Securities Exchange Act of 1934,
referred to herein as the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures, distribution channels,
profitability, new products, adequacy of funds from operations, these statements
and other projections and statements contained herein expressing general
optimism about future operating results and non-historical information, are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Investors are cautioned that our forward-looking statements are not
guarantees of future performance and actual results or developments may differ
materially from the expectations expressed in the forward-looking statements.
12
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. We expressly disclaim a duty to provide updates to these forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this filing to reflect events or changes in circumstances or changes in
expectations or the occurrence of anticipated events.
We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
Form 10-KSB, Form 10-QSB and Form 8-K reports to the SEC. Also note that we
provide a cautionary discussion of risk and uncertainties under the caption
"Risk Factors" in this prospectus. These are factors that we think could cause
our actual results to differ materially from expected results. Other factors
besides those listed here could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
USE OF PROCEEDS
We will not receive any of the proceeds from the selling stockholders'
sale of the shares offered under this prospectus.
DETERMINATION OF OFFERING PRICE
We are not selling any of the Common Stock that we are registering. The
Common Stock will be sold by the selling security holders listed in this
prospectus. The selling security holders may sell the Common Stock at the market
price as of the date of sale or a price negotiated in a private sale. Our Common
Stock is traded on the OTC Bulletin Board under the symbol "BOGA". On June 7,
2006 the reported closing price for our Common Stock on the OTC Bulletin Board
was $ 2.45.
We have agreed to pay certain expenses in connection with the registration
of the securities offered by the selling security holders for resale pursuant to
this prospectus.
SELLING SECURITY HOLDERS
Based on information provided by the selling security holders, the table
below sets forth certain information, as of June 9, 2006 unless otherwise noted,
regarding the selling security holders. Certain of the selling security holders
(identified by more than one footnote reference after their name) are listed
more than once in the following table because they fall into multiple categories
of selling security holders. However, their shares are counted only once in
arriving at the total number of shares beneficially owned and being offered by
the selling stockholders.
Percentage ownership of common stock is based on 30,271,818 shares of our
Common Stock outstanding as of June 9, 2006. For purposes of calculating the
post-offering ownership of each selling security holder, the table also assumes
the sale of all of the securities being offered by such selling security holder.
Next to the name of each selling stockholder listed below that is not a
natural person (or the name of which is not identified with a natural person),
we have set forth in parentheses the name of the natural person who has the
power to exercise voting and/or investment power over the shares owned by such
selling stockholder. Except for C.K Cooper & Company and Gilford Securities,
Inc., who served as placement agents in our private offerings, no selling
stockholder is a registered broker-dealer.
13
The second column from the left in the table below lists the number of
shares of Common Stock beneficially owned by each selling stockholder, based on
his/her ownership of the shares of our Common Stock.
The third column from the left lists the shares of Common Stock being
offered pursuant to this prospectus by the selling stockholders.
The fourth column from the left assumes the sale of all of the shares
offered by the selling stockholders pursuant to this prospectus.
The selling stockholders may sell all, some or none of their shares in
this offering. See "Plan of Distribution."
Common stock beneficially owned
after the offering
Name of selling security holders Number of
shares of
common stock
beneficially
owned prior to Number of shares Percentage of
the offering being offered Number of shares outstanding shares
Certain Holders of April 2005 Stock Options (1):
R. Scott Barter (2005 Defined Contribution
Plan)(1a) 500,000 500,000 0 0
Steven Barrenechea (1b) 250,000 250,000 0 0
Wayne Brannan (1b) 630,000 250,000 380,000 *
Carey Birmingham (1c) 433,000 100,000 333,000 *
David Loev (1c) 100,000 100,000 0 0
Investors in November 2005 Financing (2):
Frank J. Stanley III (2a) 135,000 135,000 0 0
Frank J. Stanley III IRA FCC (2a) 135,000 135,000 0 0
Jos Turtle Trust fbo Virginia N. Haydu (2a)
(Dudley Johnson) 135,000 135,000 0 0
Superius Securities Group, Inc.
Profit Sharing Plan (2b)(5c)(James
Hudgins) 1,584,090 1,584,090 0 0
Meadowbrook Opportunity Fund, LLC (2c)
(Michael Ragins) 540,000 540,000 0 0
Richard M. Dearnley (2d)(5a) 470,000 470,000 0 0
Gus Blass II (2d)(5a) 470,000 470,000 0 0
14
Young & Franklin Retirement Trust (2d) 270,000 270,000 0 0
Louis P. Buck (2d) 270,000 270,000 0 0
Disoway, Inc. (2b) 675,000 675,000 0 0
Dudley D. Johnson (2d) 270,000 270,000 0 0
T & J Associates (2a) (Thomas Richardson) 135,000 135,000 0 0
Daniel Murphy (2a) 135,000 135,000 0 0
Cheng H. Tai & Jen Hui Chiou (2b) 805,000 675,000 130,000 *
Jung Tai (2f) 161,000 135,000 26,000 *
Howard & Ruby Weiss (2d)(5b) 330,000 330,000 0 0
Michael H. Tai (2a) 161,000 135,000 26,000 *
MLC Management Company (2d)(5a) 470,000 470,000 0 0
Evdoxia Koritsoglu (2e) 67,500 67,500 0 0
Elsa Wexler (2e) 67,500 67,500 0 0
William Lawson (2e) 197,500 67,500 130,000 *
St. Andrews, Inc. (2d) (Todd Kaplan) 270,000 270,000 0 0
Selma C. Harman Revocable Trust
(Richard S. Harman, Trustee) (2a) 135,000 135,000 0 0
Robert J. Dresner (2d) 270,000 270,000 0 0
Presley Reed (2a) 135,000 135,000 0 0
Placement Agent in November 2005 Financing :
Gilford Securities, Inc.(A)(C)(3)(6b) 556,818 556,818 0 *
Holder of December 2005 Stock Option:
Richard M. Cohen (4) 375,000 175,000 200,000 *
15
Investors in February 2006 Financing (5):
Pemigewasset Partners L.P. 87,000 87,000 0 0
Pemigewasset Offshore Ltd. 13,000 13,000 0 0
Stephen Taylor 50,000 50,000 0 0
Dr. Steven Rosenberg and Robin Rosenberg JT TEN 45,455 45,455 0 0
Jack Jankovic 45,455 45,455 0 0
James R. Stevens (B)(D)(E) 45,455 45,455 0 0
Ruth Winkle and William Winkle JT WROS 45,455 45,455 0 0
Neil Breslau 45,455 45,455 0 0
RFJM Partners LLC (Jeffrey Markowitz) 90,909 90,909 0 0
BRU Holding Co., LLC (Bruce Toll) 136,363 136,363 0 0
Kevin T. Tolbert 45,455 45,455 0 0
Leonidas Group LLC 45,455 45,455 0 0
Stephen Weingrow 45,455 45,455 0 0
Larry Schmalz 45,455 45,455 0 0
Scott M. Wallace 45,455 45,455 0 0
Loretta Diamond 45,455 45,455 0 0
Girdhar Korlipara 45,455 45,455 0 0
Frommer Investment Partners LP
(Sachin Shah) (B)(D)(E) 90,909 90,909 0 0
Mark Abrams 50,000 50,000 0 0
Michael Vandemaele 50,000 50,000 0 0
Tiedemann Trust Company TTEE Trust B
U/W Edward Burke Ross FBO
Amory L. Ross I/M 45,455 45,455 0 0
Bruce C. Conway 50,000 50,000 0 0
Kurt Eichler 45,455 45,455 0 0
Lawrence Antonucci 45,455 45,455 0 0
Saleh Alamoudi 45,455 45,455 0 0
Robert Holmes TTEE
The Holmes Family Trust UA DTD
4/24/87 50,000 50,000 0 0
Gus Blass II (5a)(2d) 470,000 470,000 0 0
Richard M. Dearnley (5e)(2a) 470,000 470,000 0 0
RCB Securities Proft Sharing Plan
(Robert Bedford) 50,000 50,000 0 0
Jay R. Kuhne 50,000 50,000 0 0
Howard Malman 35,000 35,000 0 0
Gerald Zeitz 50,000 50,000 0 0
Goldstein Family Associates, LLP
(Barry Goldstein) 25,000 25,000 0 0
Ronald Shear 50,000 50,000 0 0
Hwang Community Property Trust
(Li-San Hwang Trustee) 230,000 230,000 0 0
George H. Robinette III 65,000 65,000 0 0
Phil Frey Living Trust of 3/20/96
(Phil Frey Trustee) 68,000 68,000 0 0
16
Henry Bedinger Mitchell III 30,000 30,000 0 0
Janis Salin 50,000 50,000 0 0
Gary Brennglass 50,000 50,000 0 0
Cordillera Fund, L.P. (Stephen Carter) 397,000 397,000 0 0
Enable Growth Partners LP (Mitch Levine) (B)(D)(E) 289,810 289,810 0 0
Enable Opportunity Parnters LP
(Mitch Levine) (B)(D)(E) 47,640 47,640 0 0
Pierce Diversified Strategy Master Fund
LLC (Mitch Levine) (B)(D)(E) 59,550 59,550 0 0
Kaia Offshore Partners, LP
(Jack Alfandary) 99,303 99,303 0 0
Kaia Partners I LP (Jack Alfandary) 41,733 41,733 0 0
Vladimir Vagin 500,000 500,000 0 0
Fribourg Enterprises, Inc. 500,000 500,000 0 0
Israel Braunstein 100,000 100,000 0 0
Moses & Yetta Braunstein Trust (Israel Braunstein) 100,000 100,000 0 0
Rachel B. Blass 100,000 100,000 0 0
Nicola Dimonda 50,000 50,000 0 0
Jodi Kirsch 45,455 45,455 0 0
Fountainhead Investments, Inc.
(Peter Zachariou) 45,455 45,455 0 0
David Cantor 22,700 22,700 0 0
Philip Clark 25,000 25,000 0 0
CMS Capital 90,000 90,000 0 0
Howard Weiss (5b)(2d) 330,000 330,000 0 0
Superius Securities Group Inc.
Profit Sharing Plan (James Hudgins) (2b)(5c) 1,584,090 1,584,090 0 0
Stanford S. Warshawsky 96,000 96,000 0 0
Ronald Koenig 50,000 50,000 0 0
Peter D. Burack 20,000 20,000 0 0
Larry Lomrantz & Merle Robin Lomrantz,
Joint Tenants 10,000 10,000 0 0
Diamondback Master Fund, Ltd.
(Chad Loweth) 731,990 731,990 0 0
Daniel A. Burack 40,000 40,000 0 0
Bayberrie Partners (Elliott Jaffe) 96,000 96,000 0 0
Avedis Movsesian 20,000 20,000 0 0
Arthur & Marylin B. Levitt 90,910 90,910 0 0
Amiel David 65,000 65,000 0 0
Gerald Parselle Wilton 36,000 36,000 0 0
Milton Dressner 90,910 90,910 0 0
Gavin Scotti 90,910 90,910 0 0
Chris Engel 96,000 96,000 0 0
Louisa Ramsay 40,000 40,000 0 0
Henry D'Abo 90,901 90,901 0 0
Blair Harrison 50,000 50,000 0 0
Stiletto Capital Partners, LP
(Jonathan Sorensen) (B)(D)(E) 100,000 100,000 0 0
MLC Management Company (5a)(2d) 470,000 470,000 0 0
17
Tembo Associates LLC, Series C
(Jeffrey Tweedy) 136,000 136,000 0 0
Holders of Warrants Issued in February 2006
Financing (6):
C.K. Cooper & Company (Otilia Chen)(A)(C)(6a) 122,728 122,728 0 *
Gilford Securities, Inc. (Robert Malley) 556,818 556,818
(A)(C)(6b)(3) 0 *
The Altitude Group LLC 45,454 45,454
(Michael Kreizman)(6c) 0 0
Matthew Toboroff (6d) 4,545 4,545 0 0
Jacqueline Toboroff (6d) 4,545 4,545 0 0
Shares Issuable as Penalty (7):
Investors in February 2006 Financing 220,000 220,000 0 0
Totals: 18,148,408 16,923,408 1,225,000 4.0%
- ----------
(*) Less than one percent.
(A) Is a registered broker dealer.
(B) Is an affiliate of a registered broker dealer.
(C) Is deemed to be an underwriter.
(D) Is not deemed to be an underwriter.
(E) Acquired its shares of common stock in the ordinary course of business
and, at the time of the acquisition, did not have any arrangements or
understandings with any person to distribute the securities.
(1) The individuals listed below under this heading (except R. Scott Barter)
are among those who received stock options from us on April 29, 2005,
exercisable for an aggregate of 12,950,000 shares of our Common Stock.
Such options (the "April Options") were immediately exercisable upon grant
at the price of $.05 per share and will expire on April 28, 2010.
(1a) The 500,000 shares of Common Stock listed as beneficially owned by such
individual are issuable upon exercise of stock options granted to such
individual on April 1, 2005. Such stock options are immediately
exercisable into an aggregate of 500,000 shares of Common Stock at the
exercise price of $0.30 per share, expire on April 1, 2010, and have
"cashless exercise" provisions.
18
(1b) Of the shares of Common Stock listed as beneficially owned by such
individual, 250,000 of the shares are the shares issuable upon exercise of
his April Options. Mr. Barrenechea was previously one of our Board
members.
(1c) Of the shares of the Common Stock listed as beneficially owned by such
individual, 100,000 of the shares are the shares issuable upon exercise of
his April Options. Mr. Birmingham is our President.
(2) The investors from our November 2005 Financing are listed below under this
heading. We raised an aggregate gross amount of $2,375,000 in our November
2005 Financing and issued convertible promissory notes in such aggregate
principal amount. Interest accrues on such notes at 10% per annum and the
notes mature eighteen months after their date of issuance. The principal
amount of each such note, and interest accruing thereon, may be converted
at any time by the holder into shares of our Common Stock at the
conversion price of $0.50 per share. Upon making their investment, each of
the investors in our November 2005 Financing received a number of "kicker"
shares of Common Stock (the "November Kicker Shares") equal to 40% of the
dollar amount of such investor's investment (or 950,000 shares of Common
Stock in the aggregate). For purposes of calculating the number of shares
of Common Stock beneficially owned and being offered hereby by each
investor in the November 2005 Financing, we have assumed that interest at
10% per annum has accrued on the notes for eighteen months and that such
accrued interest has been converted into shares at $0.50 per share. Thus,
in addition to the shares issuable upon conversion of the principal amount
of the notes and the previously-issued November Kicker Shares, we are also
registering for each of the investors in our November 2005 Financing the
number of shares of Common Stock which would be issuable if eighteen
months' accrued interest on the holder's note were converted into shares
of Common Stock (the "November Interest Shares").
(2a) Holds a $50,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the
holder includes: 100,000 shares issuable upon conversion of the principal
amount of such note, 15,000 shares issuable as the November Interest
Shares, and 20,000 shares previously issued as the November Kicker Shares.
For purposes of this selling security holders table, we list separately
the shares beneficially owned by Frank J. Stanley III and those held by
Frank J. Stanley III IRA FCC even though the former party beneficially
owns the shares listed as held by the latter party. The latter party does
not beneficially own the shares listed as held by the former party.
(2b) Holds a $250,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the
holder includes: 500,000 shares issuable upon conversion of the principal
amount of such note, 75,000 shares issuable as the November Interest
Shares, and 100,000 shares previously issued as the November Kicker
Shares.
(2c) Holds a $200,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the
holder includes: 400,000 shares issuable upon conversion of the principal
amount of such note, 60,000 shares issuable as the November Interest
Shares, and 80,000 shares previously issued as the November Kicker Shares.
(2d) Holds a $100,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the
holder includes: 200,000 shares issuable upon conversion of the principal
amount of such note, 30,000 shares issuable as the November Interest
Shares, and 40,000 shares previously issued as the November Kicker Shares.
19
(2e) Holds a $25,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the
holder includes: 50,000 shares issuable upon conversion of the principal
amount of such note, 7,500 shares issuable as the November Interest
Shares, and 10,000 shares previously issued as the November Kicker Shares.
(2f) The shares of Common Stock listed as beneficially owned by the holder
include 100,000 shares issuable to Jung Tai upon conversion of a $50,000
convertible note acquired in our November 2005 Financing, 15,000 shares
issuable to Jung Tai as the November Interest Shares and 20,000 shares
previously issued to Jung Tai as the November Kicker Shares. The shares
identified in footnote (1c) with respect to this holder are beneficially
owned jointly by Jung Tai and Duan Rong.
(3) As the placement agent in our November 2005 Financing, Gilford Securities,
Inc. received from us warrants immediately exercisable into an aggregate
of 475,000 shares of our Common Stock at the exercise price of $0.50 per
share. Such warrants expire in November 2010 and have "cashless" exercise
provisions. 475,000 of the shares listed as beneficially owned by Gilford
Securities represent the shares issuable upon exercise of such warrants.
(4) Mr. Cohen is our Chief Financial Officer and was granted a stock option on
December 27, 2005, exercisable for up to 175,000 shares of our Common
Stock, at an exercise price of $0.94 per share. The option expires on
December 27, 2010.
(5) The investors from our February 2006 Financing are listed below under this
heading. We raised an aggregate gross amount of $9,000,000 in our February
2006 Financing by issuing to investors 8,181,818 shares of our Common
Stock at the price of $1.10 per share. We are registering for each of the
investors in our February 2006 Financing the number of shares of Common
Stock which they acquired from us in such financing (which number is
listed in the second column to the right of each investor's name), plus
certain additional shares issuable pro rata to each such investor,
pursuant to a Registration Rights Agreement between us and such investor,
as a result of our not filing a registration statement under the
Securities Act with respect to such investor's shares by April 2, 2006 and
not attaining effectiveness of such registration statement by June 2,
2006. Under the Registration Rights Agreement, the Company has elected to
pay its penalty in shares of additional Common Stock. We have estimated
the aggregate number of such additional shares to be 220,000 and have
listed such shares separately under the heading, "Shares Issuable as
Penalty". Such 220,000 share number is equal to the sum of (i) 1% of such
investors' investment ($90,000) divided by $2.94 (the closing price of the
Common Stock on April 2, 2006), plus (ii) $90,000 divided by $3.10 (the
closing price of the Common Stock on May 2, 2006), plus (iii) $90,000
divided by $2.43 (the closing price of the Common Stock on June 1, 2006),
plus (iv) 123,315, which represents an estimated number of shares which
may become issuable to such investors as a result of the delay in
attaining effectiveness of our registration statement. For every 30-day
period during which our registration statement is not declared effective,
we are required to issue to the investors either (i) an aggregate number
of additional shares equal to $90,000 divided by the market price of our
Common Stock on the date as of which we become obligated to issue such
additional shares or (ii) $90,000 cash.
(5a) The shares listed as beneficially owned by the holder include 200,000
shares of Common Stock acquired by the holder in our February 2006
Financing.
20
(5b) The shares listed as beneficially owned by the holder include 60,000
shares of Common Stock acquired by Howard Weiss in our February 2006
Financing. The shares identified in footnote (2d) with respect to this
holder are beneficially owned jointly by Howard Weiss and Ruby Weiss.
(5c) The shares listed as beneficially owned by the holder include 909,090
shares of Common Stock acquired by the holder in our February 2006
Financing.
(6) C.K. Cooper & Company and Gilford Securities, Inc. were the placement
agents in our February 2006 Financing and, in connection therewith,
received warrants to purchase 122,728 and 81,818 shares, respectively, of
our Common Stock. In addition, for their assistance in the February 2006
Financing, we issued warrants to purchase 45,454 shares of our Common
Stock to the Altitude Group LLC and warrants to purchase 4,545 shares to
each of Matthew Toboroff and Jacqueline Toboroff. Such warrants are
immediately exercisable at the price of $1.32 per share, expire in
February 2009, and have "cashless exercise" provisions.
(6a) The shares of Common Stock listed as beneficially owned by C.K. Cooper &
Company are the shares issuable upon its exercise of such warrants issued
to C.K. Cooper in connection with the February 2006 Financing.
(6b) Of the shares of Common Stock listed as beneficially owned by Gilford
Securities, Inc., 81,818 of the shares are the shares issuable upon
exercise of such warrants issued to Gilford Securities in connection with
the February 2006 Financing.
(6c) The shares of Common Stock listed as beneficially owned by The Altitude
Group LLC are the shares issuable upon its exercise of the warrants which
we issued to it in connection with the February 2006 Financing.
(6d) The shares of Common Stock listed as beneficially owned by each of Matthew
Toboroff and Jacqueline Toboroff are the shares issuable upon each of
his/her exercise of the warrants which we issued to him or her in
connection with the February 2006 Financing.
(7) Represents an estimated aggregate number of shares of Common Stock which
have become and will become issuable to the investors in the February 2006
Financing as a result of our failure to timely file a registration
statement under the Securities Act and timely attain effectiveness of such
registration statement. See footnote 5, above.
PLAN OF DISTRIBUTION
All fees, costs, expenses and fees in connection with the registration of
the Common Stock offered by this prospectus will be borne by us. Brokerage
commissions, if any, attributable to the sale of the Common Stock will be borne
by the selling security holders.
The selling security holders may sell the Common Stock directly or through
brokers, dealers or underwriters who may act solely as agents or may acquire
Common Stock as principals. The selling stockholders may distribute the Common
Stock in one or more of the following methods:
o ordinary brokers transactions, which may include long or short
sales;
o transactions involving cross or block trades or otherwise on the
open market;
21
o purchases by brokers, dealers or underwriters as principal and
resale by these purchasers for their own accounts under this
prospectus;
o "at the market" to or through market makers or into an existing
market for the Common Stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales made through
agents;
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); or
o any combination of the above, or by any other legally available
means.
Selling security holders will not be restricted as to the price or prices
at which the selling security holders may sell their Common Stock. Sales of
Common Stock by the selling security holders may depress the market price of our
Common Stock since the number of shares which may be sold by the selling
security holders is very large compared to the historical average weekly trading
volume of our Common Stock, which has been quite low. Accordingly, if the
selling security holders were to sell, or attempt to sell, all of such
securities at once or during a short time period, we believe such a transaction
would dramatically adversely affect the market price of our Common Stock.
From time to time a selling security holder may pledge its Common Stock
under margin provisions of customer agreements with its brokers or under loans
with third parties. Upon a default by the selling security holder, the broker or
such third party may offer and sell any pledged securities from time to time.
In effecting sales, brokers and dealers engaged by a selling security
holder may arrange for other brokers or dealers to participate in the sales as
agents or principals. Brokers or dealers may receive commissions or discounts
from the selling security holder or, if the broker-dealer acts as agent for the
purchaser of such Common Stock, from the purchaser in amounts to be negotiated,
which compensation as to a particular broker dealer might be in excess of
customary commissions customary in the types of transactions involved.
Broker-dealers may agree with the selling security holders to sell a specified
number of shares of Common Stock at a stipulated price, and to the extent the
broker-dealer is unable to do so acting as agent for the selling security
holders, to purchase as principal any unsold securities at the price required to
fulfill the broker-dealer commitment to the selling security holder.
Broker-dealers who acquire securities as principal may then resell those
securities from time to time in transactions: in the over-the counter market or
otherwise; at prices and on terms prevailing at the time of sale; at prices
related to the then-current market price; or in negotiated transactions.
These resales may involve block transactions or sales to and through other
broker-dealers, including any of the transactions described above. In connection
with these sales, these broker-dealers may pay to or receive from the purchasers
of the Common Stock commissions as described above. The selling security holders
may also sell the Common Stock in open market transactions under Rule 144 under
the Securities Act, rather than under this prospectus.
The selling security holders and any broker-dealers or agents that
participate with the selling security holders in sales of the Common Stock may
be deemed to be "underwriters" within the meaning of the Securities Act in
connection with these sales. In this event, any commissions received by these
broker-dealers or agents and any profit on the resale of the Common Stock
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
The selling security holders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Common
Stock against certain liabilities, including liabilities arising under the
Securities Act.
NASD Notice to Members 88-101 states that in the event a selling
shareholder intends to sell any of the shares registered for resale in this
Prospectus through a member of the NASD participating in a distribution of our
22
securities, such member is responsible for insuring that a timely filing is
first made with the Corporate Finance Department of the NASD and disclosing to
the NASD the following:
o it intends to take possession of the registered securities or to
facilitate the transfer of such certificates;
o the complete details of how the selling shareholders shares are and will
be held, including location of the particular accounts;
o whether the member firm or any direct or indirect affiliates thereof have
entered into, will facilitate or otherwise participate in any type of
payment transaction with the selling shareholders, including details
regarding any such transactions; and
o in the event any of the securities offered by the selling shareholders are
sold, transferred, assigned or hypothecated by any selling shareholder in
a transaction that directly or indirectly involves a member firm of the
NASD or any affiliates thereof, that prior to or at the time of said
transaction the member firm will timely file all relevant documents with
respect to such transaction(s) with the Corporate Finance Department of
the NASD for review.
We have advised the selling shareholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling shareholders and their affiliates.
In addition, we will make copies of this Prospectus available to the selling
shareholders for the purpose of satisfying the Prospectus delivery requirements
of the Securities Act. The selling security holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Stock against certain liabilities, including liabilities arising
under the Securities Act.
The selling security holders are subject to applicable provisions of the
Securities Exchange Act of 1934 and the SEC's rules and regulations, including
Regulation M, which provisions may limit the timing of purchases and sales of
the securities by the selling security holders.
In order to comply with certain states' securities laws, if applicable,
the Common Stock may be sold in those jurisdictions only through registered or
licensed brokers or dealers. In certain states the securities may not be sold
unless they have been registered or qualified for sale in such state, or unless
an exemption from registration or qualification is available and is obtained.
We have agreed to indemnify each selling stockholder whose shares we are
registering from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement.
23
LEGAL PROCEEDINGS
The Company is not currently involved in any litigation.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth information with respect to the current
directors and executive officers of the Company.
Name of Individual Age Position with the Company
- -------------------------- -------- ----------------------------------------
Barrie Damson 70 Chairman and Chief Executive Officer
Alan Gaines 50 Vice Chairman and Director
Richard Cohen 55 Chief Financial Officer
Carey Birmingham 50 President
Richard d'Abo 49 Director
The business experience of each director and executive officer of the Company is
set forth below.
Mr. Barrie Damson: Mr. Damson joined the Board of Directors and became
Chairman/CEO of the Company as of February 1, 2006. Since 1988, Mr. Damson has
been the President and Chairman of Damson Financial Resources, Inc., a company
specializing in oil and gas, real estate and venture capital investments. Prior
to forming Damson Financial, he was President and Chairman of Damson Oil
Corporation, a publicly traded oil and gas exploration, development and
production company that also served as the general partner of private and
publicly traded oil and gas and real estate limited partnerships. Mr. Damson
also served as President and Chairman of Bronco Oil Corp and Delta Minerals
Corp. He has also served as a director of the Independent Petroleum Association
of America, the Domestic Petroleum Council and Viking Resources International.
Mr. Damson was a founding member and Vice Chairman of the American Business
Conference. He also served as chairman of the New York City Economic Development
Corporation. He currently serves on the Dean's Council of the Harvard School of
Public Health and the Board of Trustees of the Hospital for Special Surgery in
New York. He has also served as a Governor of the American Stock Exchange and a
member of its executive committee and chairman of its audit committee. Mr.
Damson received his Bachelor's degree from Harvard University, and his Juris
Doctorate from New York University.
Mr. Alan Gaines: Mr. Gaines has served as vice chairman and a director of
the Company since April 2005. He is currently the Chairman and CEO of Dune
Energy, Inc., an independent E&P company engaged in the development, exploration
and acquisition of oil and gas properties, with operations presently
concentrated onshore the Louisiana/Texas Gulf Coast as well as the Fort Worth
Basin Barnett Shale. Mr. Gaines has 25 years of experience as an energy
investment and merchant banker. In 1983, he co-founded Gaines, Berland Inc., an
investment bank and brokerage firm, specializing in global energy markets, with
particular emphasis given to small to medium capitalization companies involved
in exploration and production, pipelines, refining and marketing, and oilfield
services. Prior to selling his interest in Gaines, Berland, the Firm managed or
co-managed, and participated in $4 billion of equity and debt financings during
a three year period. He has acted as an advisor to financier Carl Icahn during
such corporate takeovers as USX Corporation (Marathon Oil) and Texaco. Mr.
Gaines has provided funding and/or advisory services to Parker & Parsley (now -
NYSE listed Pioneer Natural Resources), Lomak Petroleum (now NYSE - listed Range
Resources), Devon Energy (now NYSE - listed), and Comstock Resources (now NYSE -
listed). Mr. Gaines holds a BBA in Finance from Baruch College, and an MBA in
Finance (with distinction) from Zarb School, Hofstra University School of
Graduate Management.
24
Mr. Richard Cohen: Mr. Cohen has served as Chief Financial Officer of the
Company since December 2005. Since 2003, Mr. Cohen has served as a director of
Dune Energy, Inc., for which he served as Chief Financial Officer from November
2003 to April 2005. Since 1996, he has been the President of Richard M. Cohen
Consultants, a financial services consulting company that accepts engagements
from public and private companies to assist with their corporate governance and
corporate finance needs. During 1999, Mr. Cohen served as the President of
National Auto Credit, a publicly traded sub-prime auto finance company. From
1992 to 1995, Mr. Cohen was the President of General Media, then a $150 million
international diversified publishing and communications company. Mr. Cohen is a
Certified Public Accountant (New York State). He received a BS from The
University of Pennsylvania (Wharton) and an MBA from Stanford University.
Mr. Carey Birmingham: Mr. Birmingham has served as the President of the
Company since its formation in February 2004 and as a Director from February
2004 to January 2006. Mr. Birmingham has 20 years of experience in all aspects
of commercial real estate in assisting clients and negotiating contracts. Since
April 2006, Mr. Birmingham has served as President, Chief Executive Officer and
as Director of International Test Systems, Inc. ("ITS"). Previously, Mr.
Birmingham had served in those roles from September 1999 until September 2003
(when he resigned as director) and until March 2004 (when he resigned as an
officer).
Mr. Richard d'Abo: Mr. d'Abo has served as a Director of the Company since
January 17, 2006. He is presently a transaction partner at The Yucaipa
Companies, a private equity firm focused on consolidating companies within the
supermarket industry. From 1995 through 2003, Mr. d'Abo was a private investor,
and served as a consultant to numerous companies both public and private
regarding acquisitions and related financings. From 1988 to 1994, Mr. d'Abo was
a partner at The Yucaipa Companies and was instrumental in the creation of
financing structures for a number of acquisitions.
Certain Matters Involving Promoters
Immediately prior to our merger with Coastal in April 2005, 47.3% of the
Company's then outstanding shares of Common Stock were held by Mr. David Loev.
Mr. Loev is an attorney residing in the State of Texas who performed legal
services for the Company prior to its merger with Coastal. At no time was Mr.
Loev an officer or a director of the Company.
In November 2005, the SEC filed a civil lawsuit in the Houston federal
district court against certain parties unrelated to the Company and sued Mr.
Loev for allegedly violating certain registration provisions of the federal
securities laws (SEC Litigation Release No. 19476; November 29, 2005). Mr. Loev
settled the lawsuit with the SEC by consenting to the entry of an order
permanently enjoining him from violating the securities registration provisions,
ordering him to disgorge $25,785.50, plus interest, and imposing a $25,000 civil
penalty. The order also prohibits Mr. Loev from issuing any legal opinions that
the securities of any issuer are exempt from the securities registration
provisions of the federal securities laws pursuant to Rule 504 of Regulation D
and from accepting securities of any issuer whose securities are quoted on the
Pink Sheets in consideration for legal or consulting services rendered.
As previously stated, since April of 2005, Mr. Loev has had no dealings
with the Company.
25
Audit Committee
Presently, we do not have an Audit Committee.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We have 30,271,818 shares of Common Stock outstanding as of June 9, 2006
(without giving effect to any shares issuable as a result of interest accruing
on outstanding convertible notes or to any shares issuable as a result of our
delay in registering shares held by selling security holders). The following
table sets forth certain information regarding the beneficial ownership of our
Common Stock as of June 9, 2006 by (i) each person who, to our knowledge,
beneficially owns more than 5% of our Common Stock; (ii) each of our current
directors and executive officers; and (iii) all of our current directors and
executive officers as a group:
Name of Percent
Beneficial Owner Number of Shares of Outstanding Shares
- ---------------- ---------------- ---------------------
Barrie Damson (Chairman & CEO) 11,894,250 (1) 32.8%
Alan Gaines (Vice Chairman & Director) 11,894,250 (1) 32.8%
Carey Birmingham (President) 433,000 (2) 1.4%
Richard d'Abo (Director) 1,186,000 (3)(4) 3.9%
Richard Cohen (CFO) 375,000 (5) 1.2%
All Officers & Directors as a Group 25,782,500
(5 persons) (1)(2)(3)(4)(5) 60.2%
- ----------
* Less than 1%
(1) Includes 6,000,000 shares underlying stock options exercisable at $.05 per
share.
(2) Includes 100,000 shares underlying a stock option exercisable at $.05 per
share.
(3) Includes 936,000 shares issued to Mr. d'Abo in April 2006 upon conversion of
his convertible promissory note.
(4) Includes 250,000 shares underlying a stock option exercisable at $.05 per
share.
(5) Includes 175,000 shares underlying a stock option exercisable at $0.94 per
share.
The address of each of our current officers and directors is 20022 Creek
Farm, San Antonio, Texas 78259.
All of the shares of Common Stock underlying the stock options or
convertible notes referred to in the table and footnotes above are currently
exercisable or convertible in full.
26
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 140,000,000 shares
of Common Stock and 10,000,000 shares of preferred stock. As of June 9, 2006
(without giving effect to shares issuable as a result of interest accruing on
outstanding convertible notes or shares issuable as a result of our delay in
registering shares held by selling security holders), there are a total of
30,271,818 shares of Common Stock issued and outstanding and no shares of
preferred stock that are issued and outstanding. In addition to the foregoing,
there are (i) 13,675,000 shares of Common Stock issuable pursuant to outstanding
stock options, (ii) 5,462,500 shares of Common Stock that are issuable upon
conversion of $2,375,000 principal amount of convertible promissory notes and
(iii) 734,090 shares of Common Stock issuable pursuant to outstanding warrants.
Holders of outstanding shares of Common Stock are entitled to one vote for
each share of stock standing in his or her name on the records of the
corporation on all matters submitted to a vote of stockholders, including the
election of directors. The holders of Common Stock do not have cumulative voting
rights. Dividends may be paid to holders of Common Stock when, as and if
declared by the board of directors out of funds legally available therefore.
Holders of Common Stock have no conversion, redemption or preemptive rights. All
shares of commons stock, when validly issued and fully paid, will be
non-assessable. In the event of any liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in the assets
of the Company remaining after provision for payment of creditors and after the
liquidation preference, if any, of any Preferred stock outstanding at the time.
We are authorized to issue up to a total of 10,000,000 shares of "blank
check" preferred stock, $0.001 par value. There are currently no shares of
preferred stock issued or outstanding. In accordance with the Company's Articles
of Incorporation, the Board of Directors may, by resolution, issue additional
preferred stock in one or more series at such time or times and for such
consideration as the Board of Directors may determine. The Board of Directors is
expressly authorized to provide for such designations, preferences, voting power
(or no voting power), relative, participating, optional or other special rights
and privileges, and such qualifications, limitations or restrictions thereof, as
it determines in the resolutions providing for the issue of such class or series
of preferred stock prior to the issuance of any shares thereof.
The Company may issue preferred stock to effect a business combination, to
raise capital or for other reasons. In addition, preferred stock could be
utilized as a method of discouraging, delaying or preventing a change in control
of the Company.
The Nevada statutory law applicable to private corporations such as the
Company contains provisions that impose certain restrictions on the ability of
stockholders owning a specific percentage or more of shares of a Nevada
corporation's voting stock to engage in a combination transaction with that
corporation, and on the ability to certain persons or entities to acquire a
controlling interest in a Nevada corporation. Because the Company's Articles of
Incorporation and Bylaws do not prohibit the application of these provisions,
these laws may have the effect to inhibiting the acquisition of shares of common
stock or otherwise engage in a combination with the Company.
LEGAL MATTERS
Our counsel, Eaton & Van Winkle LLP, located in New York, New York, is
passing upon the validity of the issuance of the shares of Common Stock that are
being offered pursuant this prospectus.
27
EXPERTS
Malone & Bailey, PC, independent registered public accountants, located in
Houston, Texas, has audited our Financial Statements included in this
registration statement to the extent, and for the periods set forth in their
reports. We have relied upon such report, given upon the authority of such firm
as an expert in accounting and auditing.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation and by-laws provide that we will indemnify
to the fullest extent permitted by the Nevada General Corporation Law any person
made or threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person or such person's testator or intestate is or was a director,
officer, employee or agent of our Company or serves or served at our request as
a director, officer or employee of another corporation or entity.
We may enter into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in our articles of incorporation
and by-laws. These agreements, among other things, would indemnify our directors
and officers for certain expenses (including advancing expenses for attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by us or in our right, arising
out of such person's services as a director or officer of our Company, any
subsidiary of ours or any other company or enterprise to which the person
provides services at our request.
We maintain a Directors, Officers and Company Liability Policy.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
DESCRIPTION OF BUSINESS
We were incorporated as a Nevada corporation in February 2004 under the
name of College Oak Investments, Inc., and changed our name to Baseline Oil &
Gas Corp. on January 17, 2006.
We are the surviving corporation of a merger transaction with Coastal
Energy Services, Inc. ("Coastal") that was effective on April 6, 2005. As a
result of the merger, Coastal was treated as the "acquiring" company and the
historical financial statements of our company were restated to be those of
Coastal for financial accounting and reporting purposes. See " - Development of
Business" below.
We are a "shell company" as that term is defined in Rule 405 promulgated
under the Securities Act of 1933 (the "Securities Act") and Rule 12b-2
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), and
as such, are subject to rules of the Securities Exchange Commission (SEC)
applicable to shell companies. To date, we have only conducted nominal
operations and have only nominal assets.
28
Development of Business.
Initial Registered Offering. In 2004, we filed a registration statement on
Form SB-2 for the sale by certain selling stockholders of up to 232,000 shares
of our Common Stock. At that time, our business plan involved our engaging in
development consulting, construction management and general contracting services
and support for small to mid-size commercial developers and users of commercial
buildings and various types of raw land for speculation and development. For the
nine months ended January 31, 2005, we had minimal revenues from general
contracting activities and management fees.
Coastal Merger. Effective April 6, 2005, we completed a merger transaction
with Coastal. Under the Plan and Agreement of Merger, Coastal was merged with
and into our company in exchange for 17,206,000 shares of our Common Stock
issued to the former Coastal stockholders. In addition, all stock options and
other rights to purchase shares of common stock of Coastal were converted into
options or rights to purchase an equal number of shares of our Common Stock. As
of the effective date of the merger, options to acquire up to 500,000 shares of
Coastal common stock were converted into options to acquire 500,000 shares of
our Common Stock.
Under the merger agreement, we assumed all of the obligations and
liabilities of Coastal, including Coastal's obligations to repay outstanding
indebtedness under its $350,000 original principal amount of 10% convertible
promissory notes. These notes were convertible into shares of our Common Stock
at an effective conversion price of $0.21 per share. Effective April 6, 2006,
the holders of such notes converted such notes into an aggregate of 1,820,000
shares of our Common Stock. In addition, on the effective date of the merger,
Coastal delivered the sum of $125,000 to the Company to discharge amounts owed
by us for prior legal services rendered to us and for expenses incurred by us in
connection with the merger transaction.
As a result of the merger, Barrie M. Damson and Alan D. Gaines, current
officers and directors of the Company, each became beneficial owners of 27.9% of
our then-outstanding shares of Common Stock. Mr. Damson became chairman of the
board, chief executive officer and a director, and Mr. Gaines became vice
chairman and a director. See "Directors, Executive Officers, Promoters and
Control Persons", "Executive Compensation," "Security Ownership of Certain
Beneficial Owners and Management" and "Certain Relationships and Related
Transactions".
Coastal had been formed to engage in the energy business, and following
the merger, the Company began pursuing opportunities in the energy industry.
The merger transaction with Coastal resulted in the Coastal stockholders
controlling approximately 89% of our issued and outstanding shares of Common
Stock immediately following its completion. Consequently, the transaction was
accounted for as a reverse merger with Coastal being deemed the acquiring entity
for financial accounting purposes. See "Management's Discussion and Analysis or
Plan of Operations" and Note 2 of Notes to Financial Statements of Baseline Oil
& Gas Corp.
Post-Merger Activities. On April 29, 2005, our board of directors granted
stock options to purchase up to 12,950,000 shares of our Common Stock, $0.001
par value, to seven individuals, including five of our officers and directors.
The stock options were immediately exercisable at an exercise price of $.05 per
share and expire on April 28, 2010.
Prior to the merger, on March 28, 2005, Coastal had issued (i) 100,000
shares of its common stock for services valued at $35,000, and 16,906,000 shares
of its common stock for $16,590 in cash. The value deemed in excess of the cash
proceeds ($5,900,194) received by Coastal was charged to expense as share based
compensation. On April 1, 2005, Coastal granted stock options to a consultant to
purchase up to 500,000 shares of common stock at an exercise price of $0.30 per
share. The term of this option expires March 31, 2010 and is fully exercisable
at any time after October 1, 2005. During 2005, the Company granted additional
stock options to purchase up to a total of 14,500,000 shares of Common Stock to
its officers, directors, consultants and other individuals. See Note 5 of Notes
to Financial Statements of Baseline Oil & Gas Corp.
29
In June 2005, our board of directors determined to change our fiscal year
from a 12-month period ending April 30 of each year to a 12-month period to end
on December 31 of each year.
In November 2005, we completed the offering and sale of $2.375 million in
units of our notes and shares of Common Stock in privately negotiated
transactions with accredited investors. For each $50,000 invested, an investor
received (i) a $50,000 principal amount 10% convertible promissory note and (ii)
20,000 shares of our Common Stock. Each note matures on May 15, 2007 and bears
interest at the rate of 10% per annum. The holder of a note may elect to receive
interest on the note in cash or in shares of Common Stock valued at $0.50 per
share. At any time prior to maturity, holders may convert the principal and
accrued but unpaid interest on their note into such number of shares of Common
Stock equal to the outstanding principal amount plus accrued but unpaid
interest, divided by $0.50, or a total of 4,750,000 shares. At the time of their
initial investment, the purchasers of the units received in the aggregate
950,000 shares of Common Stock. Upon conversion of the notes, holders will
receive up to an additional 5,462,000 shares of Common Stock, assuming that all
holders elect to receive shares of Common Stock in lieu of cash for interest
through the maturity date.
We issued the placement agent for this transaction a five-year warrant to
purchase up to 475,000 shares of our Common Stock at an exercise price of $0.50
per share. We also granted to purchasers of the units certain "piggy-back"
registration rights for the shares acquired, the shares underlying the
convertible notes (including those which may be issued as interest payments) and
the shares underlying the warrant. If no such filing is made, then at any time
after November 15, 2006, the holders will have the right to demand that we file,
no later than 45 days following the date of the demand, a registration statement
covering the resale of their shares.
Termination of Rex Agreement.
On June 8, 2006, we entered into a Mutual Termination Agreement (the
"Termination Agreement") with Rex Energy and certain of its affiliates pursuant
to which we and the Rex Parties mutually terminated (i) that certain purchase
agreement between us dated January 16, 2006 (the "Purchase Agreement") and (ii)
that certain stock agreement dated January 16, 2006 (as amended on March 10,
2006, the "Stock Agreement"). We and the Rex Parties terminated the Purchase
Agreement and the Stock Agreement when it became apparent that the Company could
not obtain financing for the proposed acquisition on terms satisfactory to the
Rex Parties.
Pursuant to the Termination Agreement, we also entered into a Mutual
Release Agreement (the "Release Agreement") and a Mutual Non-Disparagement
Agreement (the "Non-Disparagement Agreement") with the Rex Parties,
respectively, hereto.
Pursuant to the Termination Agreement, the Rex Parties surrendered for
cancellation, 12,069,250 shares of our Common Stock, previously issued to them
pursuant to the Stock Agreement. Pursuant to the Release Agreement, we and the
Rex Parties have agreed to release and hold each other harmless from certain
claims arising out of our dealings with one another.
Nothing in the Termination Agreement, the Release Agreement or the
Non-Disparagement Agreement affects our rights with respect to New Albany, of
which we own a 50% non-managed membership interest ("New Albany"). New Albany
holds an undivided 48.75% working interest (40.7% net revenue interest) in (i)
certain oil, gas and mineral leases covering approximately 107,500 acres in the
30
State of Indiana and (ii) all of the rights of Aurora Energy Ltd. ("Aurora")
under a certain Farmout Agreement with a third party. In addition, New Albany
holds an option from Aurora, exercisable by New Albany until August 1, 2007, to
acquire a fifty percent (50%) working interest in any and all acreage leased or
acquired by Aurora or its affiliates in additional counties in Indiana
(currently estimated to be 50,000 acres), at a fixed price of $25 per acre. New
Albany also holds a 45% working interest in certain oil, gas and mineral leases
acquired from Source Rock Resources, Inc., covering approximately 31,000 acres
in Knox and Sullivan Counties in Indiana, which the Company believes contain New
Albany Shale formation stratum. The Rex Parties own the other 50% membership
interest in New Albany, and Rex Energy Wabash, LLC, a Delaware limited liability
company and an affiliate of Rex Energy, is the Managing Member of New Albany and
manages its day-to-day operations.
New Albany.
On November 25, 2005, we entered into a joint venture with Rex Energy, a
privately held Delaware corporation, for the purpose of acquiring working
interests in leasehold interests in leasehold acreage in the Illinois Basin
located in Southern Indiana known to contain New Albany Shale formations. Under
this joint venture, we and Rex Energy formed New Albany-Indiana, LLC, a Delaware
limited liability company. Pursuant to a Limited Liability Company Agreement
(the "LLC Agreement"), we have a 50% economic/voting interest in New Albany and
certain affiliates of Rex Energy have a 50% economic/voting interest in New
Albany. Rex Energy had originally been a member of New Albany but, on January
30, 2006, Rex Energy withdrew as a member and assigned its membership interests
to several of its affiliates, namely Lance T. Shaner, Shaner Limited Partnership
& Hulburt Capital Partners Limited Partnership, Rex Energy II Limited
Partnership, Douglas Oil & Gas and Rex Energy Wabash, LLC (collectively, the
"LLC Assignees").
On February 1, 2006, New Albany completed its acquisition of certain oil
and gas leases and other rights from Aurora, pursuant to a Purchase and Sale
Agreement dated November 15, 2005 (the "Aurora Agreement"). Pursuant to the
Aurora Agreement, New Albany purchased from Aurora an undivided 48.75% working
interest (40.7% net revenue interest) in (i) certain oil, gas and mineral leases
initially covering approximately 80,000 acres in several counties in Indiana
(the "Leases") and (ii) all of Aurora's rights under a certain Farmout and
Participation Agreement with a third party ("Farmout Agreement"). In addition,
New Albany was granted an option from Aurora (the "Option"), exercisable by New
Albany until August 1, 2007, to acquire a 50% working interest in any and all
acreage leased or acquired by Aurora or its affiliates within certain other
counties located in Indiana (currently estimated to be 50,000 acres), at a fixed
price of $25 per net acre. The total purchase price for the acquisition of the
working interests in the Leases and the Farmout Agreement, together with the
grant of the Option, was $10,500,000. Of the total purchase price, we paid an
aggregate of $5,250,000. We obtained funding to pay our share of New Albany's
purchase price for this acquisition through private placements of (i) the
convertible notes and stock in November 2005 and (ii) shares of our Common Stock
in February 2006. See "Management's Discussion and Analysis or Plan of
Operations". As described above, on January 30, 2006, Rex Energy withdrew as a
member from New Albany and assigned its membership interests to New Albany
Assignees. Since February, New Albany has acquired a working interest in leases
covering an additional 27,500 acres.
On March 6, 2006, New Albany purchased from Source Rock Resources, Inc.
("Source Rock") a 45% working interest in certain oil, gas and mineral leases
initially covering approximately 21,000 acres in Knox and Sullivan Counties in
Indiana, which the Company believes contain New Albany Shale formation stratum.
The purchase price paid by New Albany was $735,000 (of which we paid half). Rex
Energy will be the operator for wells drilled on the acreage. Since March, New
Albany has acquired a working interest in leases covering an additional 10,000
acres.
31
In June 2006, New Albany entered into a Joint Operating Agreement (the
"June JOA") with El Paso Exploration & Development Corp., Pogo Producing Company
and Aurora Energy Ltd., pursuant to which New Albany contributed certain of its
acreage in exchange for a 17% working interest in a new area of mutual intent,
targeting the New Albany Shale formation in Greene County, Indiana. Under the
June JOA, El Paso will serve as operator.
The name "New Albany Shale" refers to brownish-black shale exposed along
the Ohio River at New Albany in Floyd County, Indiana, and is present in the
subsurface throughout much of the Illinois Basin. The Illinois Basin covers
approximately 60,000 square miles in parts of Illinois, southwestern Indiana and
western Kentucky. The New Albany Shale has produced natural gas since 1858,
mostly from wells located in southwestern Indiana and western Kentucky (at least
40 fields in Kentucky and 19 in Indiana). As is the case with other organic
shale reservoirs, the gas is stored both as free gas in fractures and as
absorbed gas on kerogen and clay surfaces within the shale matrix. Wells
typically begin producing high volumes of water and low volumes of gas when
first beginning to produce in a new area. As more and more wells are drilled in
an area, the formation becomes dewatered and the gas continues to desorb from
the shale. An initially high level of water is a positive indicator of natural
fracturing in the New Albany Shale.
Prior to 1994, according to industry sources, over 600 New Albany Shale
wells had produced commercially in the Illinois Basin. Horizontal drilling may
be able to exploit the anisotropic nature of the New Albany Shale natural
fracture systems. Vertical fractures are dominant in the New Albany Shale and
the fracture system contains water. Historically, the potential for wells in
this area was limited by the efficiency of water disposal methods. Improved
technology for pumping and disposal of water may allow for better rates of gas
production.
Employees
We do not have any employees other than our four officers. See
"Management's Discussion and Analysis or Plan of Operations".
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Plan of Operation. We have not had any revenues from operations since we
commenced business in June 2004. See "Financial Statements". Accordingly, the
information provided in this section is a plan of operation pursuant to
Regulation S-B Item 303(a) promulgated by the SEC.
The merger transaction with Coastal in April 2005 resulted in the Coastal
stockholders controlling approximately 89% of our issued and outstanding shares
of Common Stock immediately following its completion. Consequently, the
transaction was accounted for as a reverse merger with Coastal being deemed the
acquiring entity for financial accounting purposes. Since the transaction
involved the merger of a private company (Coastal) into a public shell company,
it was considered to be a capital transaction rather than a purchase business
combination for financial accounting purposes. Thus, for financial accounting
and reporting purposes, the historical financial statements of the Company prior
to the effective date of the Coastal merger have been restated to be those of
Coastal.
As discussed in "Description of Business", we presently hold a 50%
economic/voting membership interest in New Albany LLC, which holds working
interests in leases covering approximately 138,500 acres in the New Albany Shale
area of the Illinois Basin located in Southern Indiana. These properties were
initially acquired by New Albany from (i) Aurora in February 2006 and (ii)
Source Rock in March 2006. New Albany has acquired a working interest in
additional leases since those dates. In addition, by virtue of the June JOA, New
Albany has a 17% working interest in an area of mutual interest in Greene
County, Indiana.
32
During the second quarter, New Albany commenced drilling the first of its
initial 10-well pilot program. The operator for this drilling program is Aurora.
The initial well to test the New Albany Shale required drilling through the
Borden Siltstone. This formation kept sloughing in the open hole. The operator
determined not to continue drilling, but to drill a new well with a casing
program which should eliminate the problem encountered in the Borden Siltstone.
Drilling of the new well should commence by the end of August. The anticipated
cost to New Albany of the pilot program is estimated to be $4.6 million.
In connection with our June JOA, a well was successfully drilled during
the second quarter and El Paso has determined to complete the well. The well is
currently being completed.
With respect to the properties acquired from Source Rock, we anticipate
that New Albany will commence drilling these properties by December 2006.
We are actively seeking an operating company with which to enter into a
merger or acquisition transaction. We are also exploring various strategic joint
ventures. There can be no assurance that we will be able to enter into any such
transaction.
33
Capital Resources. During 2005, we raised funds by issuances of our debt
and equity securities to pay current expenses and funds for our proposed
operations. See "Description of Business" and Notes 3 and 4 of Notes to Audited
Financial Statements of Baseline Oil and Gas Corp., contained in "Financial
Statements".
In February 2006, we completed the sale of 8,181,818 shares of our Common
Stock at a price of $1.10 per share in privately-negotiated transactions with
accredited investors, raising $9.0 million in gross proceeds. We also entered
into a registration rights agreement with the purchasers whereby we agreed to
use our best efforts to file a registration statement covering re-sales of the
shares acquired in that offering within 60 days of its closing and to have the
registration statement declared effective within 120 days of closing. C. K.
Cooper & Company and Gilford Securities, Incorporated acted as placement agents
for the private sale. We paid aggregate placement agent commissions of $675,000
(7.5% of the gross proceeds of the February Private Placement), and issued
three-year warrants to the placement agents to purchase up to a total of 259,090
shares of Common Stock at an exercise price of $1.32 per share. Because this
registration statement was not filed on or before April 2, 2006 (the 60th day
following the closing of the February private placement) and because it has not
been declared effective by June 2, 2006 (the 120th day following the closing of
the February private placement), the Company is required to issue as of April 3,
2006 to the holders of such Common Stock either (i) additional shares having a
market value equal to $90,000 (1% of the $9 million raised) or (ii) $90,000
cash, and either (x) additional shares with a $90,000 market value or (y)
$90,000 cash, as of each thirtieth day thereafter until such registration
statement is declared effective. The Company has the right to elect to pay the
registration penalty in cash or in shares of additional Common Stock for each
30-day period after June 2, 2006, until the Company's registration statement has
been declared effective.
The $8,185,000 in net proceeds raised by the Company in the February
placement was applied, or will be applied, as follows:
o $3,500,000 was applied to pay our share of the costs to fund New Albany's
purchase price obligations under the Aurora Agreement;
o $367,500 was applied to pay our share of the costs to fund New Albany's
purchase price for the Source Rock purchase described in "Description of
Business"; and
o $4,317,500 will be applied for our working capital purposes.
At March 31, 2006, we had working capital of $3,048,560. While we believe
that we will have sufficient capital to satisfy our cash requirements over the
next twelve months, we cannot predict what our cash requirements will be if we
enter into a merger or acquisition transaction. In the event we enter into such
a transaction, we may require additional financing.
DESCRIPTION OF PROPERTY
Our corporate office is located at 20022 Creek Farm, San Antonio, Texas
78259.
As of December 31, 2005, we had only an indirect contractual right
(pursuant to our interest in New Albany) for New Albany to acquire interests in
oil and gas leases and other rights from Aurora Energy Ltd., in the New Albany
Shale area in Indiana. Therefore, we did not own any interests in any oil and
gas properties at that time. As of February 1, 2006, the date New Albany
acquired the oil and gas leases and other properties from Aurora, New Albany
owned interests in 80,000 gross undeveloped acres. We own 50% of the membership
interests in New Albany.
34
CERTAIN RELATIONSHIPS AND RELATED STOCKHOLDER MATTERS
During 2005, we granted stock options to certain of our affiliates as
described below under "Executive Compensation - Option Grants in Last Fiscal
Year".
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is quoted on the OTC Bulletin Board under the trading
symbol "BOGA". Prior to January 17, 2006, our name was College Oak Investments,
Inc. and our symbol was "COKV". The prices set forth below reflect the quarterly
high and low sale information for shares of our Common Stock during the period
since the Common Stock began trading. These quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not represent
actual transactions. There were no trades of our securities on the OTC Bulletin
Board prior to March 3, 2005.
2006 Quarter Ended High Price Low Price
- ------------------ ---------- ---------
3/31/06 $3.25 $0.85
2005 Quarter Ended High Price Low Price
- ------------------ ---------- ---------
12/31/2005 $1.40 $0.60
9/30/2005 0.90 0.60
6/30/2005 1.01 0.20
3/31/2005 0.90 0.10
As of March 31, 2006, there were approximately 132 holders of record of
our Common Stock.
Our Common Stock is covered by an SEC rule that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors, which are generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and transaction prior
to the sale. Consequently, the rule may affect the ability of broker-dealers to
sell our securities and also may affect the ability of purchasers of our Common
Stock to sell their shares in the secondary market. It may also cause fewer
broker-dealers to be willing to make a market in our Common Stock, and it may
affect the level of news coverage we receive.
We have not declared or paid any cash dividends on our Common Stock since
our inception, and our Board of Directors currently intends to retain all
earnings for use in the business for the foreseeable future. Any future payment
of dividends will depend upon our results of operations, financial condition,
cash requirements and other factors deemed relevant by our Board of Directors.
Pursuant to the convertible notes we issued in November 2005, as long as there
is outstanding indebtedness thereunder, we may not declare or pay a cash
dividend on our Common Stock without the consent of the agent to such holders of
the notes.
No equity securities of the Company were purchased by the Company or any
"affiliated purchaser" of the Company during 2005.
We have outstanding as of June 9, 2006, stock options to purchase
13,675,000 shares of Common Stock, warrants to purchase 734,090 shares of Common
Stock and notes convertible into 7,282,500 shares of Common Stock.
35
EXECUTIVE COMPENSATION
Prior to December 2005, the Company had not paid salaries to any
individual. Commencing December 2005, the Company agreed to pay Richard M. Cohen
a monthly salary of $7,500. During 2005, the Company granted stock options to
the following officers/directors as follows: Alan Gaines - options for 6,000,000
shares; Barrie Damson - options for 6,000,000 shares; Carey Birmingham - options
for 100,000 shares; Richard Cohen - options for 175,000 shares; Steven
Barrenechea (a former director of the Company) - options for 250,000 shares.
Incentive Plans
During 2004, we did not grant any options to purchase shares of our Common
Stock. Pursuant to approval by our Board of Directors, but not our shareholders,
we granted contractual stock options during 2005 as described below.
On April 1, 2005, Coastal granted a stock option to a non-employee to
purchase up to 500,000 shares of Coastal common stock at $0.30 per share. This
option is exercisable until March 31, 2010 and became exercisable on October 1,
2005. The fair value of this option was $150,000 and it has been fully expensed
as share-based compensation. As of the effective date of the Merger, this option
became an option to purchase 500,000 shares of our Common Stock, exercisable
until March 31, 2010 at the price of $0.30 per share.
On April 29, 2005, we granted stock options to seven persons to purchase
an aggregate of 12,950,000 shares of our Common Stock. These options are
exercisable at any time at $0.05 per share and will expire on April 28, 2010.
These options were granted as an inducement to retain management and for
services rendered to the Company. Among the options described in this paragraph,
the fair value of the options granted to the five individuals who were our
employees (or expected at the time of grant to become our employees or
directors) was $10,080,000, and this amount has been expensed as share-based
compensation. The fair value of the options granted to the two individuals who
were not our employees was $297,500 and this amount has been expensed as
share-based compensation.
On December 27, 2005, we granted to Richard Cohen, our CFO, options to
purchase 175,000 shares of Common Stock, exercisable immediately and until the
fifth anniversary of the date of grant at the price of $0.94 per share.
As of December 20, 2005, we issued stock options to the certain designees
of Rex Energy to purchase an aggregate of 50,000 shares of Common Stock at the
exercise price of $1.00 per share. These options expire on December 20, 2008.
36
Option Grants In Last Fiscal Year (2005)
Number of % of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Year Granted(1) Fiscal Year Price Date
---- ---------- ----------- ----- ----
Alan Gaines ........... 2005 6,000,000 47.9% $.05 4/28/10
Carey Birmingham....... 2005 100,000 .8% $.05 4/28/10
Richard Cohen ........ 2005 175,000 1.4% $.94 12/26/10
Richard d'Abo ......... 2005 250,000 2.0% $.05 4/28/10
Barrie Damson ......... 2005 6,000,000 47.9% $.05 4/28/10
- --------------------------------------------------------------------------------
(1) All of the shares of Common Stock underlying such options were fully vested
and exercisable in full at the time of grant.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
During 2005, none of our officers or directors exercised any options to
purchase shares of Common Stock. The following table sets forth, for each of our
officers and directors, the number and value of vested and unvested options held
as of December 31, 2005 and the value of any in-the-money stock options, vested
and unvested, as of such date.
Option Value at December 31, 2005
Number of Securities
Underlying Unexercised Value of Unexercised In-The-Money
Options at December 31, 2005 Options at December 31, 2005
---------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Barrie Damson ................... 6,000,000 -- $5,700,000 -0-
Carey Birmingham ................ 100,000 -- $95,000 -0-
Richard Cohen .................. 175,000 -- $10,500 -0-
Richard d'Abo ................... 250,000 -- $237,500 -0-
Alan Gaines ..................... 6,000,000 -- $5,700,000 -0-
The last sale price of the Common Stock was $1.00 on December 30, 2005.
37
Employment Agreements.
Presently, the Company does not have employment agreements with any of its
existing officers.
Equity Compensation Arrangements.
The following table provides information as of December 31, 2005 about our
equity compensation arrangements.
(c)
Number of securities
remaining available for
(a) (b) 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
Plan Category warrants and rights warrants and rights column (a))
- ------------------------------- -------------------------- ---------------------- -------------------------
Equity compensation plans
approved by security holders -0- -0- -0-
- ------------------------------- -------------------------- ---------------------- -------------------------
Equity compensation plans not
approved by security holders
(1) 14,150,000 $.09 -0-
- ------------------------------- -------------------------- ---------------------- -------------------------
Total (1) 14,150,000 $.07 -0-
=============================== ========================== ====================== =========================
(1) Include warrants to our placement agent and individual stock option
grants. See "Incentive Compensation" discussed above.
Director Compensation
Directors of the Company are not compensated in cash for their services
but are reimbursed for out-of-pocket expenses incurred in furtherance of our
business.
38
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Pages
-----
I. Baseline Oil & Gas Corp. Unaudited Financial Statement as of
March 31, 2006 and Notes
A. Balance Sheets.......................................... F-1
B. Statements of Expenses.................................. F-2
C. Statements of Cash Flows................................ F-3
D. Notes to Financial Statements........................... F-4
II. Baseline Oil & Gas Corp. Audited Financial Statements and Notes
A. Report of Independent Registered Public Accounting Firm. F-7
B. Balance Sheets.......................................... F-8
C. Statements of Expenses.................................. F-9
D. Statements of Cash Flows................................ F-10
E. Statements of Changes in Stockholders' Equity/(Deficit). F-11
F. Notes to Financial Statements........................... F-12
39
BASELINE OIL & GAS CORP.
(A Development Stage Company)
BALANCE SHEETS
(Unaudited)
March 31, December 31,
2006 2005
------------ -----------
ASSETS
Cash $ 4,157,451 $ 206,489
Prepaid and other current assets 56,250 --
------------ -----------
Total current assets 4,213,701 206,489
Deferred debt issuance costs, net of amortization of
$59,298 and $0, respectively 266,841 326,139
Property acquisition deposit -- 1,750,000
Unproven leasehold acquisition costs 5,653,584 --
Deferred acquisition costs 13,276,175 --
------------ -----------
Total assets $ 23,410,301 $ 2,282,628
============ ===========
LIABILITIES & STOCKHOLDERS'
EQUITY
Accounts payable $ 96,075 $ 98,726
Accrued liabilities 123,481 56,492
Derivative liability 605,644 -
Short term debt and current portion long
term debt, net of discount 339,941 298,384
------------ -----------
Total current liabilities 1,165,141 453,602
Long term debt, net of discount 1,094,000 809,333
------------ -----------
Total liabilities 2,259,141 1,262,935
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value,
10,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $.001 par value,
140,000,000 shares authorized,
40,521,068 and 20,270,000 shares issued
and outstanding, respectively 40,521 20,270
Additional paid-in-capital 39,816,432 18,791,179
Deficit accumulated in the development
Stage (18,705,793) (17,791,756)
------------ -----------
Total stockholders' equity 21,151,160 1,019,693
------------ -----------
Total liabilities & stockholders'
equity $ 23,410,301 $ 2,282,628
============ ===========
See accompanying summary of accounting policies
and notes to financial statements.
F-1
BASELINE OIL & GAS CORP.
(A Development Stage Company)
STATEMENTS OF EXPENSES
Three Month Periods Ended March 31, 2006 and 2005 and the Period from
June 29, 2004 (Inception) through March 31, 2006
(Unaudited)
Inception
Three Months Ended Through
March 31, March 31, March 31,
2006 2005 2006
----------------------------------------------------------
Selling, general and
administrative expenses $ 426,255 $ 25,451 $ 1,351,322
Share based compensation -- 5,935,194 16,499,670
Interest income (22,030) -- (22,030)
Interest expense 409,839 198 773,599
Loss on derivative liability 99,973 -- 99,973
Other expense -- -- 3,259
------------ ------------ ------------
Total expenses 914,037 5,960,843 18,705,793
------------ ------------ ------------
Net loss $ (914,037) $ (5,960,843) $(18,705,793)
============ ============ ============
Basic and diluted net loss
per common share $ (0.03) $ (6.24)
============ ============
Weighted average common
shares outstanding 35,557,242 955,822
See accompanying summary of accounting policies
and notes to financial statements.
F-2
BASELINE OIL & GAS CORP.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Three Month Periods Ended March 31, 2006 and 2005 and the Period from
June 29, 2004 (Inception) through March 31, 2006
(Unaudited)
Three Months Ended Inception Through
March 31, 2006 March 31, 2005 March 31, 2006
----------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (914,037) $ (5,960,843) $ (18,705,793)
Adjustments to reconcile net loss to
cash used in operating activities:
Share based compensation -- 5,935,194 16,499,670
Amortization of debt discount 342,517 -- 648,342
Amortization of debt issuance costs 59,298 -- 88,947
Unrealized (gain) loss on derivative
liability 99,973 -- 99,973
Changes in:
Prepaid assets and other assets (56,250) -- (56,250)
Accounts payable and accrued liabilities 64,541 25,649 221,052
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (403,958) -- (1,204,059)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property acquisition costs (3,903,584) -- (5,653,584)
------------- ------------- -------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (3,903,584) -- (5,653,584)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on note payable (16,496) -- (16,496)
Proceeds from note payable -- -- 15,000
Proceeds from common stock
sales, net 8,275,000 725 8,291,590
Proceeds from convertible notes -- 305,000 2,725,000
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 8,258,504 305,725 11,015,094
------------- ------------- -------------
NET CHANGE IN CASH 3,950,962 305,725 4,157,451
Cash balance, beginning of period 206,489 -- --
------------- ------------- -------------
Cash balance, end of period $ 4,157,451 $ 305,725 $ 4,157,451
============= ============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ -- $ -- $ --
Cash paid for income taxes $ -- $ -- $ --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Warrants issued in connection with
issuance of stock $ 505,671 $ -- $ 505,671
See accompanying summary of accounting policies
and notes to financial statements.
F-3
BASELINE OIL & GAS CORP.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations and organization
Baseline Oil & Gas Corp. is an independent exploration and production company,
with operations presently focused in the Illinois Basin New Albany Shale play.
Pursuant to a definitive purchase agreement and subject to the satisfaction of
certain terms and conditions, Baseline anticipates acquiring significant oil and
natural gas assets from Rex Energy Operating Corp. ("Rex Energy") and its
affiliates. Such assets consist of operated and non-operated working interests
in leases located in Illinois, Indiana, Pennsylvania, West Virginia, New York,
Texas and New Mexico, and approximately 2,028 gross producing oil and natural
gas wells.
Basis of Presentation
The accompanying unaudited interim financial statements of Baseline have been
prepared in accordance with accounting principles generally accepted in the
United Sates of America and the rules of the Securities and Exchange Commission,
and should be read in conjunction with Baseline's audited 2005 annual financial
statements and notes thereto. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the result of operations for the interim periods
presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. Notes to the financial statements, which would substantially
duplicate the disclosure required in Baseline's 2005 annual financial statements
have been omitted.
Use of estimates
The preparation of these financial statements is in conformity with accounting
principles generally accepted in the United States of America and requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - ISSUANCE OF COMMON STOCK
On March 28, 2005, Baseline issued 17,006,000 shares as follows:
o 100,000 shares of common stock for services valued at $35,000 and is
included in share based compensation; and
o 16,906,000 shares of common stock valued at $5,917,100 for cash
proceeds of $16,906. The $5,900,194 of value in excess of the cash
proceeds received has been charged to expense as share based
compensation;
The services were provided by the founders in connection with non-specific
research into oil and gas business opportunities. The value of the shares issued
was determined by reference to the closing price of Baseline's stock on the date
of issuance.
On January 16, 2006, Baseline entered into a definitive Purchase Agreement
("Purchase Agreement") to purchase certain assets from Rex Energy and its
affiliates, and, the 50% membership in the New Albany -Indiana, LLC ("New
Albany") that we do not already own. Concurrently with the execution of the
F-4
Purchase Agreement, we entered into a Stock Agreement with certain individuals
designated by Rex Energy, pursuant to which we issued a total of 12,069,250
shares of our Common Stock valued at $13,276,175. The issuance of such shares is
subject to our right of first refusal to repurchase all such shares at a price
$1.00 below any bona fide purchase offer for such shares made by a third party.
We have accounted for the aforementioned shares as Deferred Acquisition Costs.
On February 1, 2006 Baseline completed a private placement of $ 9,000,000 by
selling an aggregate of 8,181,819 shares of newly-issued Common Stock at $ 1.10
per share. As part of the transaction, Baseline issued warrants to the placement
agents ("Placement Warrants") to purchase an aggregate of 204,546 shares of
Common Stock at an exercise price of $ 1.32 per share. These warrants have a
three year term. The Company agreed to register the resale of the shares of
common stock issuable upon exercise of the Placement Warrants. If the Company
fails to timely register or if the registration does not become effective within
a certain time frame, the Company will be subject to certain financial
penalties. Such penalties shall equal $90,000 per each 30 days that the Company
is late, payable at the Company's election in either (i) cash or (ii) shares of
additional common stock having a market value equal to $90,000. Based on the
guidance in SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities" and EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in a Company's Own Stock", Baseline concluded
the Placement Warrants qualified for derivative accounting. Baseline determined
the Placement Warrants had the attributes of a liability and therefore recorded
the fair value of the Placement Warrants on day one as a current liability and a
reduction of additional paid in capital as a cost of equity issuance. Baseline
is required to record the unrealized changes in fair value in subsequent periods
of the Placement Warrants as an adjustment to the current liability with
unrealized changes in the fair value of the derivative reflected in the
statement of expenses as "(Gain)/loss on derivative liability." The fair value
of the Placement Warrants was $505,671 at February 1, 2006. The fair value of
the Placement Warrants was determined utilizing the Black-Scholes stock option
valuation model. The significant assumptions used in the valuation were: the
exercise price as noted above; the market value of Baseline's common stock on
February 1, 2006, $2.50; expected volatility of 268%; risk free interest rate of
approximately 4.54%; and a term of three years. The fair value of the Placement
Warrants was $605,644 at March 31, 2006. The fair value of the Placement
Warrants was determined utilizing the Black-Scholes stock option valuation
model. The significant assumptions used in the valuation were: the exercise
price as noted above; the market value of Baseline's common stock on March 31,
2006, $3.02; expected volatility of 248%; risk free interest rate of
approximately 4.83%; and a term of two years and ten months. The resulting
unrealized change in fair value of $99,973 from February 1, 2006 was recorded in
the statement of expenses as a loss on derivative liability.
NOTE 3 - INVESTMENT IN JOINT VENTURE
On November 25, 2005, Baseline entered into a joint venture with Rex Energy, a
privately held company, for the purpose of acquiring a working interest in
certain leasehold interests located in the Illinois Basin, Indiana. The joint
venture will be conducted through New Albany, a Delaware limited liability
company. Pursuant to a Limited Liability Company Agreement, Baseline has a 50%
economic/voting interest in New Albany and Rex Energy and its affiliates has a
50% economic/voting interest in New Albany. Rex Energy Wabash, LLC, an affiliate
of Rex, is the Managing Member of New Albany and manages the day to day
operations of New Albany.
On November 15, 2005, New Albany entered into a Purchase and Sale Agreement with
Aurora Energy Ltd ("Aurora"), pursuant to which New Albany has agreed to
purchase from Aurora an undivided 48.75% working interest (40.7% net revenue
interest) in (i) certain oil, gas and mineral leases covering acreage in several
counties in Indiana and (ii) all of Aurora's rights under a certain Farmout and
Participation Agreement with a third party ("Farmout Agreement"). In addition,
at the closing of the transaction, New Albany was granted an option from Aurora,
exercisable by New Albany for a period of eighteen (18) months thereafter, to
acquire a fifty percent (50%) working interest in any and all acreage leased or
acquired by Aurora or its affiliates within certain other counties located in
Indiana, at a fixed price per acre.
F-5
On February 1,2006, New Albany completed its acquisition of certain oil and gas
leases and other rights from Aurora pursuant to the November 15,2005 Purchase
and Sale Agreement mentioned above. The total purchase price under the Aurora
Purchase Agreement and the grant of the Aurora Option was $ 10,500,000 of which
Baseline paid $5,250,000.
On March 6, 2006, New Albany acquired a 45% working interest (37.125% net
revenue interest) in certain oil, gas and mineral leases covering approximately
21,000 acres of prospective New Albany Shale acreage in Knox and Sullivan
Counties, Indiana. New Albany acquired its 45% working interest from Source Rock
Resources, Inc., for a total consideration of $ 735,000 (of which Baseline paid
half).
NOTE 4 - SUBSEQUENT EVENTS
On April 6, 2006, holders of Baseline's convertible promissory notes issued in
April of 2005, in the aggregate principal amount of $350,000, converted all of
such notes into 1,820,000 shares of Baseline's common stock.
F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Baseline Oil & Gas Corp.
(A Development Stage Company)
San Antonio, Texas
We have audited the accompanying balance sheets of Baseline Oil & Gas Corp.
("Baseline") (formerly College Oak Investments, Inc.) (a development stage
company) as of December 31, 2005 and 2004 and the related statements of
expenses, stockholders' equity/(deficit), and cash flows for the year ended
December 31, 2005 and the periods from June 29, 2004 (inception) to December 31,
2004 and 2005. These financial statements are the responsibility of Baseline's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of Baseline as of December 31,
2005 and 2004, and the results of its operations and its cash flows for the
periods described in conformity with accounting principles generally accepted in
the United States of America.
/s/ Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
March 10, 2006
F-7
BASELINE OIL & GAS CORP.
(Formerly COLLEGE OAK INVESTMENTS, INC.)
(A Development Stage Company)
BALANCE SHEETS
December 31, December 31,
2005 2004
------------ ------------
ASSETS
Cash $ 206,489 $ --
------------ -----------
Total current assets 206,489 --
Deferred debt issuance costs, net of amortization of
$29,649 and $0, respectively 326,139 --
Property acquisition-deposit 1,750,000 --
------------ -----------
Total assets $ 2,282,628 $ --
============ ===========
LIABILITIES & STOCKHOLDERS'
EQUITY/(DEFICIT)
Accounts payable $ 98,726 $ 76,463
Accrued liabilities 56,492 --
Short term debt and current long term
debt, net of discount 298,384 --
------------ -----------
Total current liabilities 453,602 76,463
Long term debt, net of discount 809,333 15,844
------------ -----------
Total liabilities 1,262,935 92,307
Commitments and contingencies -- --
STOCKHOLDERS' DEFICIT
Preferred stock, $.001 par value,
10,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $.001 par value,
140,000,000 shares authorized,
20,270,000 and 200,000 shares issued
and outstanding, respectively 20,270 200
Additional paid-in-capital 18,791,179 (200)
Deficit accumulated in the development Stage (17,791,756) (92,307)
------------ -----------
Total stockholders'equity/(deficit) 1,019,693 (92,307)
------------ -----------
Total liabilities & stockholders' equity /(deficit) $ 2,282,628 $ --
============ ===========
See accompanying summary of accounting policies
and notes to financial statements.
F-8
BASELINE OIL & GAS CORP.
(Formerly COLLEGE OAK INVESTMENTS, INC.)
(A Development Stage Company)
STATEMENTS OF EXPENSES
Year Ended December 31, 2005 and Periods from June 29, 2004 (Inception)
Through December 31, 2005 and 2004
June 29, 2004 June 29, 2004
(Inception) Through (Inception) Through
Year Ended
December 31, 2005 December 31, 2004 December 31, 2005
--------------------------------------------------------------
Selling, general and
administrative expenses $ 835,258 $ 89,809 $ 925,067
Share based compensation 16,499,670 -- 16,499,670
Interest expense 362,916 844 363,760
Other expense 1,605 1,654 3,259
------------ ------------- ---------------
Total expenses 17,699,449 92,307 17,791,756
------------ ------------- ---------------
Net loss $(17,699,449) $ (92,307) $ (17,791,756)
============ ============= ===============
Basic and diluted net loss
per common share $ (1.20) $ (0.46)
============ =============
Weighted average common
shares outstanding 14,777,299 200,000
See accompanying summary of accounting policies
and notes to financial statements.
F-9
BASELINE OIL & GAS CORP.
(Formerly COLLEGE OAK INVESTMENTS, INC.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Year Ended December 31, 2005 and the Periods from June 29, 2004 (Inception)
Through December 31, 2005 and 2004
June 29, 2004 June 29, 2004
Year Ended (Inception) Through (Inception) Through
December 31, 2005 December 31, 2004 December 31, 2005
--------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (17,699,449) $ (92,307) $ (17,791,756)
Adjustments to reconcile net loss to
cash used in operating activities:
Share based compensation 16,499,670 -- 16,499,670
Amortization of debt discount 305,825 -- 305,825
Amortization of debt issuance costs 29,649 -- 29,649
Changes in:
Accounts payable and accrued liabilities 79,204 77,307 156,511
------------- ------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (785,101) (15,000) (800,101)
------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property acquisition-deposit (1,750,000) -- (1,750,000)
------------- ------------ -------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (1,750,000) -- (1,750,000)
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable -- 15,000 15,000
Proceeds from sale of common stock 16,590 -- 16,590
Proceeds from convertible notes 2,725,000 -- 2,725,000
------------- ------------ -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,741,590 15,000 2,756,590
------------- ------------ -------------
NET CHANGE IN CASH 206,489 -- 206,489
Cash balance, beginning of period -- -- -
------------- ------------ -------------
Cash balance, end of period $ 206,489 $ -- $ 206,489
============= ============ =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ -- $ -- $ --
Cash paid for income taxes $ -- $ -- $ --
See accompanying summary of accounting policies
and notes to financial statements.
F-10
BASELINE OIL & GAS CORP.
(Formerly COLLEGE OAK INVESTMENTS, INC.)
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/ (DEFICIT)
Year Ended December 31, 2005 and the Period from June 29, 2004 (Inception)
Through December 31, 2004
Deficit Accumulated
Common Paid In During Development
Shares Stock Capital Stage Totals
------ ----- ------- ----- ------
Balances at June 29, 2004 -- $ -- $ -- $ -- $ --
Shares issued to founders at
inception for $0.00 per share 200,000 200 (200) -- --
Net loss (92,307) (92,307)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2004 200,000 200 (200) (92,307) (92,307)
Proceeds from issuance of
common stock 17,006,000 17,006 -- -- 17,006
Debt discount related to
shares issued with
convertible notes 950,000 950 -- -- 950
Shares issued in
connection with merger 2,114,000 2,114 (3,480) -- (1,366)
Stock based compensation -- -- 16,499,670 -- 16,499,670
Debt discount -- -- 1,939,401 -- 1,939,401
Debt issuance costs -- -- 355,788 -- 355,788
Net loss -- -- -- (17,699,449) (17,699,449)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2005 20,270,000 $ 20,270 $ 18,791,179 $(17,791,756) $ 1,019,693
============ ============ ============ ============ ============
See accompanying summary of accounting policies
and notes to financial statements.
F-11
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations and organization
Baseline Oil & Gas Corp. (formerly known as College Oak Investments, Inc.,
"Baseline") is an independent exploration and production company, with
operations presently focused in the Illinois Basin New Albany Shale play.
Pursuant to a definitive purchase agreement and subject to the satisfaction of
certain terms and conditions, Baseline anticipates acquiring significant oil and
natural gas assets from Rex Energy Operating Corp. and its affiliates. Such
assets consist of operated and non-operated working interests in leases located
in Illinois, Indiana, Pennsylvania, West Virginia, New York, Texas and New
Mexico, and approximately 1,400 gross producing oil and natural gas wells.
Use of estimates
The preparation of these financial statements is in conformity with accounting
principles generally accepted in the United States of America and requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents
Cash and cash equivalents include cash in banks and certificates of deposit
which mature within three months of the date of purchase.
Properties and Equipment
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Under this method, acquisition costs for proved and
unproved properties are capitalized when incurred. Exploration costs, including
geological and geophysical costs, the costs of carrying and retaining unproved
properties and exploratory dry hole drilling costs, are expensed. Development
costs, including the costs to drill and equip development wells, and successful
exploratory drilling costs to locate proved reserves are capitalized.
Exploratory drilling costs are capitalized when incurred pending the
determination of whether a well has found proved reserves. A determination of
whether a well has found proved reserves is made shortly after drilling is
completed. The determination is based on a process that relies on
interpretations of available geologic, geophysic, and engineering data. If a
well is determined to be successful, the capitalized drilling costs will be
reclassified as part of the cost of the well. If a well is determined to be
unsuccessful, the capitalized drilling costs will be charged to expense in the
period the determination is made. If an exploratory well requires a major
capital expenditure before production can begin, the cost of drilling the
exploratory well will continue to be carried as an asset pending determination
of whether proved reserves have been found only as long as: i) the well has
found a sufficient quantity of reserves to justify its completion as a producing
well if the required capital expenditure is made and ii) drilling of the
additional exploratory wells is under way or firmly planned for the near future.
If drilling in the area is not under way or firmly planned, or if the well has
not found a commercially producible quantity of reserves, the exploratory well
is assumed to be impaired, and its costs are charged to expense.
In the absence of a determination as to whether the reserves that have been
found can be classified as proved, the costs of drilling such an exploratory
well is not carried as an asset for more than one year following completion of
drilling. If, after that year has passed, a determination that proved reserves
exist cannot be made, the well is assumed to be impaired, and its costs are
charged to expense. Its costs can, however, continue to be capitalized if a
sufficient quantity of reserves are discovered in the well to justify its
completion as a producing well and sufficient progress is made in assessing the
reserves and the well's economic and operating feasibility.
The impairment of unamortized capital costs is measured at a lease level and is
reduced to fair value if it is determined that the sum of expected future net
cash flows is less than the net book value. The Company determines if impairment
has occurred through either adverse changes or as a result of the annual review
of all fields.
F-12
Development costs of proved oil and gas properties, including estimated
dismantlement, restoration and abandonment costs and acquisition costs, are
depreciated and depleted on a field basis by the units-of-production method
using proved developed and proved reserves, respectively. The costs of unproved
oil and gas properties are generally combined and impaired over a period that is
based on the average holding period for such properties and the Company's
experience of successful drilling.
Investments in Oil and Gas Joint Ventures
The Company accounts for its investments in oil and gas joint ventures pursuant
to the provisions of AICPA Accounting Interpretation No. 2 to APB No. 18. As
such, the Company includes in its financial statements its pro rata share of the
assets, liabilities, revenues, and expenses of the venture.
Loss per share
Basic and diluted net loss per share calculations are presented in accordance
with Financial Accounting Standards Statement No.128, and are calculated on the
basis of the weighted average number of common shares outstanding during the
year. They include the dilutive effect of common stock equivalents in years with
net income. Basic and diluted loss per share is the same due to the absence of
dilutive common stock equivalents.
Stock compensation
Baseline adopted the disclosure requirements of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation FAS No. 123 and FAS No. 148
with respect to pro forma disclosure of compensation expense for options issued.
For purposes of the pro forma disclosures, the fair value of each option grant
is estimated on the grant date using the Black-Scholes option-pricing model.
Baseline accounts for its employee stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. Baseline granted 13,675,000 options to purchase common stock to
employees during the fiscal year ended December 31, 2005. All options are
currently vested, have a weighted average exercise price of $0.07 per share and
expire 5 years from the date of grant. Baseline recorded compensation expense of
$10,080,000 under the intrinsic value method during the fiscal year ended
December 31, 2005.
The following table illustrates the effect on net loss and net loss per share if
Baseline had applied the fair value provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
- -------------------------------------------------------------------------------
Twelve Months
Ended
December 31, 2005
- -------------------------------------------------------------------------------
Net loss as reported $(17,699,449)
Add: stock based compensation determined under
intrinsic value based method 10,080,000
Less: stock based compensation determined under
fair value based method (10,874,173)
Pro forma net loss $(18,493,622)
============
Basic and diluted net loss per common share:
As reported $ (1.20)
============
Pro forma $ (1.25)
============
- -------------------------------------------------------------------------------
The weighted average fair value of the stock options granted during 2005 was
$0.77. Variables used in the Black-Scholes option-pricing model include (1) a
range of 3.9% - 4.41% for the risk-free interest rate, (2) expected option life
is the actual remaining life of the options as of each period end, (3) expected
volatility was 274% - 672%%, and (4) zero expected dividends.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," ("SFAS 123(R)"), which is a revision of SFAS 123. SFAS 123(R)
supersedes APB 25, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized at the date of grant in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. SFAS 123(R) is
effective at the beginning of the first interim or annual period beginning after
December 15, 2005. The Company is currently analyzing impacts of the requirement
of the adoption of SFAS No 123 (R).
F-13
NOTE 2 - COASTAL MERGER TRANSACTION
On April 6, 2005 (the effective date), Baseline acquired Coastal Energy
Services, Inc. ("Coastal") in exchange for 17,206,000 shares of Baseline common
stock. Coastal was merged with and into Baseline with Baseline continuing as the
surviving entity.
The share issuance resulted in the Coastal shareholders controlling
approximately 89% of Baseline's issued and outstanding shares of common stock.
Consequently, the transaction has been accounted for as a reverse merger with
Coastal being deemed the accounting acquirer. Since the transaction involved the
merger of a private company (Coastal) into a public shell company (Baseline), it
is considered to be a capital transaction rather than a purchase business
combination. As accounting acquirer, Coastal issued one share of its common
stock for each share of Baseline's common stock issued and outstanding as of the
effective date resulting in a total of 2,114,000 shares of Coastal shares being
issued. As of the effective date, Baseline had a net deficit of $1,366. For
financial accounting and reporting purposes, the historical financial statements
of Baseline prior to the effective date have been restated to be those of
Coastal.
NOTE 3 - CONVERTIBLE NOTES
Upon the effective date of the Coastal merger, Baseline assumed the obligations
with respect to $350,000 of convertible promissory notes. The notes are
convertible at any time into shares of Baseline's common stock at an effective
conversion rate of $0.21 per share, accrue interest at the rate of 10% per annum
and mature in twelve months from the date of issuance. Based on the effective
conversion rate of $0.21, Baseline has recognized a beneficial conversion
feature on the notes of $231,401 which was recorded as a debt discount. The
discount is being amortized over the life of the Notes. As of December 31, 2005,
$163,492 of the discount had been amortized.
During November of 2005, Baseline sold $2,375,000 in aggregate of its units.
Each Unit consisted of (i) a $50,000 principal amount in an 18 month 10%
convertible promissory note, and (ii) such number of shares of common stock
equal to the quotient of (1) the aggregate principal amount of each Note
purchased, multiplied by 20% and (2) $0.50. The notes are convertible at any
time at a conversion price of $0.50 per share. Interest is payable in cash or
shares (at the conversion price) at the option of the holder. Purchasers of the
Units received in the aggregate 950,000 Shares and, upon conversion of the
Notes, will receive an additional 5,462,500 Shares (assuming that the holders
elect to receive shares of common stock in lieu of cash interest through
maturity). Baseline recorded a debt discount in connection with the initial
issuance 950,000 shares of $680,500 given the stock prices of $0.71 and $0.75 on
the dates of issuance. Based on the effective conversion rate of $0.50, Baseline
recognized a beneficial conversion feature of $1,027,500 as a debt discount on
the additional 4,750,000 shares to be issued upon conversion of the principal
amount of the note. The discount is being amortized over the life of the Notes.
As of December 31, 2005, $142,333 of the discount had been amortized.
In connection with the note issuance, Baseline granted to Gilford Securities,
the placement agent, a five year warrant to purchase 475,000 shares of Common
Stock at an exercise of $0.50 per share.
Baseline evaluated the application of Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
and Emerging Issues Task Force ("EITF") 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" for the 10% convertible promissory notes and the warrants issued in
connection with the note issuance. Based on the guidance of SFAS No. 133 and
EITF 00-19, Baseline concluded that these instruments were not required to be
accounted for as derivatives.
NOTE 4 - ISSUANCE OF COMMON STOCK
On March 28, 2005, Coastal issued 17,006,000 shares as follows:
o 100,000 shares of common stock for services valued at $35,000 and is
included in share based compensation; and
o 16,906,000 shares of common stock valued at $5,917,100 for cash
proceeds of $16,590. The $5,900,194 of value in excess of the cash
proceeds received has been charged to expense as share based
compensation;
The services were provided by the founders in connection with non-specific
research into oil and gas business opportunities. The value of the shares issued
was determined by reference to the closing price of Baseline's stock on the date
of issuance.
F-14
NOTE 5 - STOCK OPTION GRANTS
On April 1, 2005, Coastal granted a stock option to a non-employee consultant to
purchase up to 500,000 shares of common stock at an exercise price of $0.30 per
share. The option shall terminate no later than March 31, 2010 and may be
exercised in whole or in part, at any time from and after October 1, 2005. The
fair value of the option was $150,000 and has been fully expensed as share based
compensation. As of the effective date of the merger, the shares available in
connection with the option converted into an equal number of Baseline shares.
On April 29, 2005, Baseline granted stock options to seven persons, five of
which are company directors and/or officers and two of which are non-employees,
to acquire up to 12,950,000 shares of Baseline's common stock. The options are
immediately exercisable at $0.05 per share and will expire on April 28, 2010.
The options were granted as an inducement to retain management and for services
rendered to Baseline. The intrinsic value of the options granted to the
employees was $10,080,000 and has been expensed as share based compensation. The
fair value of the options granted to the non-employees was $297,500 and has been
expensed as share based compensation.
Mr. Alan Gaines ("Gaines") and Mr. Barrie Damson ("Damson"), two of the seven
persons mentioned above, have options which are cancelable under certain
conditions. Specifically, the agreement with Rex Energy Operating Corp. (see
Note 7) provides that each of Damson and Gaines, who presently each beneficially
owns 5,894,250 shares of our outstanding Common Stock and options to acquire an
additional 6,000,000 shares of Common Stock, will, upon the earlier to occur of
(i) the Closing Date or, (ii) if the Closing shall not have occurred as a result
of the Baseline's breach of a material provision of the Purchase Agreement, June
30, 2006, cancel such number of shares underlying their respective stock
options, such that on such date, each of Messrs. Gaines and Damson shall
beneficially own no more than 9.99% of the Company's outstanding shares of
Common Stock on a fully-diluted basis.
On December 20, 2005, Baseline issued to six Rex Management designees as
described in stock options, exercisable for up to an aggregate of 50,000 shares
of common stock at an exercise price of $1.00 per share. The options are fully
vested, immediately exercisable and will expire on December 20, 2008.
On December 27, 2005, Baseline issued to Mr. Richard Cohen, CFO, a stock option,
exercisable for up to 175,000 shares of common stock at an exercise price of
$0.94 per share. The option is fully vested, immediately exercisable and will
expire on December 26, 2010.
During 2005, Baseline' s Board of Directors granted the following stock options,
all of which are immediately exercisable:
F-15
The following table summarizes stock option activity:
Weighted
Average
Options Price
---------- --------
Outstanding as of January 1, 2004 -- $ --
Granted during 2004 -- --
Cancelled or Expired -- --
Exercised -- --
Outstanding as of December 31, 2004 -- $ --
Granted during 2005 14,150,000 $ 0.09
Cancelled or Expired -- --
Exercised -- --
---------- --------
Outstanding as of December 31, 2005 14,150,000 $ 0.09
---------- --------
Options outstanding and exercisable at December 31, 2005:
Exercisable
Number Remaining Number
Exercise Price of Shares life of Shares
-------------- ---------- --------- ----------
$ 0.05 12,950,000 4.2 years 12,950,000
$ 0.30 500,000 4.2 years 500,000
$ 0.50 475,000 4.7 years 475,000
$ 0.94 175,000 4.8 years 175,000
$ 1.00 50,000 2.8 years 50,000
---------- ----------
14,150,000 14,150,000
---------- ----------
NOTE 6 - INVESTMENT IN JOINT VENTURE
On November 25, 2005, Baseline entered into a joint venture with Rex Energy
Operating Corp. ("Rex Energy"), a privately held company, for the purpose of
acquiring a working interest in certain leasehold interests located in the
Illinois Basin, Indiana. The joint venture will be conducted through New
Albany-Indiana, LLC, ("New Albany") a Delaware limited liability company.
Pursuant to a Limited Liability Company Agreement, Baseline has a 50%
economic/voting interest in New Albany and Rex Energy and its affiliates has a
50% economic/voting interest in New Albany. Rex Energy Wabash, LLC, an affiliate
of Rex, is the Managing Member of New Albany and will manage the day to day
operations of New Albany.
On November 15, 2005, New Albany entered into a Purchase and Sale Agreement with
Aurora Energy Ltd ("Aurora"), pursuant to which New Albany has agreed to
purchase from Aurora an undivided 48.75% working interest (40.7% net revenue
interest) in (i) certain oil, gas and mineral leases covering acreage in several
F-16
counties in Indiana and (ii) all of Aurora's rights under a certain Farmout and
Participation Agreement with a third party ("Farmout Agreement"). In addition,
at the closing of the transaction, New Albany would be granted an option from
Aurora, exercisable by New Albany for a period of eighteen (18) months
thereafter, to acquire a fifty percent (50%) working interest in any and all
acreage leased or acquired by Aurora or its affiliates within certain other
counties located in Indiana, at a fixed price per acre. This transaction closed
on February 1, 2006 (see Note 7). Baseline deposited $1,750,000 representing
Baseline's 50% share of the deposit made by New Albany in connection with the
Aurora Purchase and Sale Agreement.
NOTE 7 - SUBSEQUENT EVENTS
On January 16, 2006, Baseline entered into a Purchase Agreement to purchase the
following assets (i) all of the assets of Douglas O&G, Midland, Douglas
Westmoreland, Penntex Resources and Rex Wabash, together with 100% of the
outstanding capital stock of Rex Energy and Penntex Resources Illinois, Inc.
(which hold operated and non-operated working interests in oil and gas leases
located in Illinois, Indiana, Pennsylvania, West Virginia, Texas, New Mexico and
New York, and approximately 1,387 gross producing oil and natural gas wells);
(ii) the 50% membership interest in New Albany that we do not already own,
together with all rights of New Albany in that certain purchase agreement, dated
as of November 15, 2005, by and between New Albany and Aurora Energy, Ltd.; and
(iii) all of the assets of Rex Royalties consisting of royalty interests in
producing natural gas wells located in Pennsylvania, Virginia and Kentucky.
The closing of the purchase is scheduled to occur on or before May 1, 2006. The
purchase price which Baseline has agreed to pay on the Closing Date for the
Acquired Assets (other than the New Albany Membership Interest) is $73,169,999
in cash, subject to certain adjustments. The purchase price we have agreed to
pay on the Closing Date for the New Albany Membership Interest is such number of
newly-issued shares of our common stock, equal to the quotient of (x) Sellers'
total capital contributions to New Albany from inception through the Closing
Date divided by (y) $1.10.
Concurrently with the execution of the Purchase Agreement, we entered into a
Stock Agreement with certain individuals designated by Rex Energy, pursuant to
which we issued a total of 12,069,250 shares of our Common Stock. The issuance
of such shares is subject to our right of first refusal to repurchase all such
shares at a price $1.00 below any bona-fide purchase offer for such shares made
by a third party. Similarly, in the event that we do not purchase the Acquired
Assets then all shares delivered to such Management Designees shall be
immediately subject to a three (3) year "lock-up" period.
On February 1, 2006, Baseline completed a private placement of $9,000,000 by
selling an aggregate of 8,181,819 shares of newly-issued Common Stock at $1.10
per share. As part of the transaction, Baseline issued three 3-year warrants to
the placement agents to purchase an aggregate of 259,090 shares of Common Stock
at an exercise price of $1.32 per share.
From the proceeds, Baseline funded its 50% share of the remaining purchase price
on New Albany, put aside funds necessary (approximately $2.25 million) to drill
an initial 10 well pilot program, and retained the rest for working capital
purposes.
On February 1, 2006, New Albany, a Delaware limited liability company, of which
Baseline owns 50% of the membership interests, completed its acquisition of
certain oil and gas leases and other rights from Aurora, pursuant to a certain
purchase agreement, dated as of November 15, 2005 (see above). The total
purchase price under the Aurora Purchase Agreement and the grant of the Aurora
Option was $10,500,000 of which $3,500,000 had already been paid and the balance
of $7,000,000 was paid to Aurora on February 1, 2006.
On February 28, 2006, New Albany, a Delaware limited liability company of which
Baseline owns a 50% membership interest, acquired an undivided 45% working
interest (37.125% net revenue interest) in certain oil, gas and mineral leases
covering approximately 21,000 acres of prospective New Albany Shale acreage in
Knox and Sullivan Counties, Indiana. New Albany acquired its 45% working
interest from Source Rock Resources, Inc., for a total consideration of $735,000
(of which Baseline paid half).
F-17
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification Of Directors And Officers
Our Articles of Incorporation and by-laws provide that we will indemnify
to the fullest extent permitted by the Nevada General Corporation Law any person
made or threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person or such person's testator or intestate is or was a director,
officer, employee or agent of our Company or serves or served at our request as
a director, officer or employee of another corporation or entity.
We may enter into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in our articles of incorporation
and by-laws. These agreements, among other things, would indemnify our directors
and officers for certain expenses (including advancing expenses for attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by us or in our right, arising
out of such person's services as a director or officer of our Company, any
subsidiary of ours or any other company or enterprise to which the person
provides services at our request.
We maintain a Directors, Officers and Company Liability Policy.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Item 25. Other Expenses Of Issuance And Distribution
Our expenses in connection with the issuance and distribution of the
securities being registered, other than the underwriting discount, are estimated
as follows:
SEC Registration Fee $ 4,437
Legal Fees and Expenses $ 15,000
Accountants' Fees and Expenses $ 10,000
Miscellaneous Expenses $ 10,000
Total $ 39,437
Item 26. Recent Sales Of Unregistered Securities
Issuances Prior to Merger with Coastal
On March 28, 2005, Coastal issued 17,006,000 shares of its common stock as
follows: (i) 100,000 shares of common stock for services valued at $35,000 and
(ii) 16,906,000 shares of common stock valued at $5,917,100 for cash proceeds of
$16,906. The $5,900,194 of value in excess of the cash proceeds received has
been charged to expense as share based compensation. The services were provided
by the founders in connection with non-specific research into oil and gas
business opportunities. The value of the shares issued was determined by
reference to the closing price of College Oak's common stock on the date of
issuance.
40
On April 1, 2005, Coastal granted a stock option to a consultant to
purchase 500,000 shares of Coastal common stock at $0.30 per share. This option
is exercisable until March 31, 2010 and became exercisable on October 1, 2005.
The fair value of this option was $150,000 and it has been fully expensed as
share-based compensation. As of the effective date of the merger with Coastal,
this option became an option to purchase 500,000 shares of our Common Stock,
exercisable until March 31, 2010 at the price of $0.30 per share.
Issuances by the Company Following the Merger
On April 6, 2005, Coastal merged into us in exchange for 17,206,000
newly-issued shares of our Common Stock. On the date of the merger, all of the
issued and outstanding shares of common stock of Coastal (17,206,000 shares)
were converted into an equal number of shares of our Common Stock. In addition,
each right to purchase shares of common stock of Coastal automatically became a
right to purchase an equal number of shares of our Common Stock. Immediately
prior to the date of the merger, options to acquire up to 500,000 shares of
Coastal's common stock were outstanding. Immediately prior to the date of the
merger, we had 2,114,000 shares of Common Stock outstanding.
Pursuant to a private offering, immediately prior to the date of the
merger, Coastal sold an aggregate of $350,000 of its Convertible Promissory
Notes (collectively the "April Notes"). By virtue of the Merger Agreement, we
assumed the obligations of the April Notes. The face amount of each April Note
is equal to the amount of the holder's investment and bears interest at a rate
of 10% per annum (payable in shares of Common Stock). In April 2006, all of the
April Notes, including accrued interest on the April Notes, were converted into
a total of 1,820,000 shares of our Common Stock. This 1,820,000 share number
includes certain "kicker" shares which were provided for by the April Notes.
On April 29, 2005, we granted stock options to seven persons to purchase
an aggregate of 12,950,000 shares of our Common Stock. These options are
exercisable at any time at $0.05 per share and will expire on April 28, 2010.
These options were granted as an inducement to retain management and for
services rendered to the Company. Among the options described in this paragraph,
the fair value of the options granted to the five individuals who were our
employees (or expected at the time of grant to become our employees or
directors) was $10,080,000 and the fair value of the options granted to the two
non-employees was $297,500.
In November 2005, we sold in a private placement to accredited investors
(the "November Offering"), $2,375,000 of units (the "Units") to accredited
investors pursuant to the November Offering. Each Unit consisted of (i) a
$50,000 principal amount 10% convertible promissory note (the "November Note"),
and (ii) such number of shares of Common Stock, determined by dividing (1) the
aggregate principal amount of each November Note purchased, multiplied by twenty
(20%) percent, by (2) $0.50. Each November Note matures on the date eighteen
(18) months from the date of issuance and bears interest at the rate of 10% per
annum. The holder of a November Note may elect to receive interest on its
November Note in cash or in shares of Common Stock valued at $0.50 per share. At
any time prior to maturity, the holder may convert the principal and accrued but
unpaid interest on its November Note into such number of shares of Common Stock
(the "November Conversion Shares") equal to the outstanding principal amount
plus accrued but unpaid interest on the November Note divided by $0.50.
The Company received total gross proceeds in the November Offering of
$2,375,000. Purchasers of the Units in the November Offering received in the
aggregate 950,000 shares of Common Stock (the "November Shares") and, upon
conversion of the November Notes, will receive up to an additional 5,462,500
November Conversion Shares (assuming that the holders elect to receive shares of
Common Stock in lieu of cash interest through maturity).
41
In connection with the November Offering, the Company paid a placement
agent (the "Agent") (i) a $237,500 commission (ten percent (10%) of the November
Offering gross proceeds), (ii) a $23,750 non-accountable expense allowance (one
percent (1%) of the November Offering gross proceeds) and (iii) a five year
warrant (the "Agent Warrant") to purchase 475,000 shares of Common Stock (the
"Warrant Shares"), at an exercise of $0.50 per share.
With respect to (i) the November Shares, (ii) the November Conversion
Shares (including those which may be issued as interest payments) and (iii) the
Warrant Shares (collectively, the "Registrable Securities"), we granted the
holders thereof, "piggy-back" registration rights on our next registration
statement (other than on Form S-4 or S-8) filed with the Securities and Exchange
Commission. If no such filing is made, then at any time after November 15, 2006,
the holders of the Registrable Securities shall have the right to demand that we
file no later than forty-five (45) days following such demand, a registration
statement on Form S-3 covering the resale of their Registrable Securities.
On December 27, 2005, we granted to Richard Cohen, our CFO, options to
purchase 175,000 shares of Common Stock, exercisable immediately and until the
fifth anniversary of the date of grant at the price of $0.94 per share.
In consideration of Rex Energy and its affiliates' entering into the
Purchase Agreement, we issued, as of January 16, 2006, an aggregate of
12,069,250 new shares of our Common Stock to certain designees of Rex Energy.
These shares have been canceled in connection with the Termination Agreement. In
addition to the foregoing, we issued, as of December 20, 2005, three (3) year
stock options to certain designees of Rex Energy, which options are exercisable
for up to an aggregate of 50,000 shares of our Common Stock, at an exercise
price of $1.00 per share.
On February 1, 2006, we completed a private placement (the "February
Private Placement") to accredited investors in which we received gross proceeds
of $9,000,000 by selling an aggregate of 8,181,819 shares of our newly-issued
Common Stock at $1.10 per share.
We paid aggregate placement agent commissions of $675,000 (or 7.5% of the
gross proceeds of the February Private Placement) and issued three-year warrants
to our placement agents to purchase an aggregate of 259,090 shares of Common
Stock at an exercise price of $1.32 per share.
In connection with the February Private Placement, as of June 9, 2006, we
are obligated to issue an aggregate of approximately 96,685 additional shares of
Common Stock to the investors as a result of our inability to file a
registration statement under the Securities Act covering the shares sold in such
private placement. In order to avoid issuing such additional shares to
investors, we were required to file a registration statement by April 2, 2006.
All issuances of securities described above under this Part II, Item 26,
were issued pursuant to the exemptions from registration provided by Section
4(2) of the Securities Act and Regulation D promulgated thereunder.
42
Item 27. Exhibits
Exhibit Nos.
- ------------
2.1 Plan and Agreement of Merger, dated April 6, 2005, by and between
the Registrant and Coastal Energy Services, Inc. (incorporated
herein by reference to Exhibit 2.1 of Registrant's Form 8-K report,
filed April 7, 2005).
3.1 Registrant's Amended and Restated Articles of Incorporation
(incorporated herein by reference to Exhibit 3.1 to registrant's
Form 8-K report, filed January 19, 2006).
3.2 By-Laws of the Registrant (incorporated herein by reference to
Exhibit 3.2 of Registrant's registration statement on Form SB-2,
filed June 25, 2004).
4.1 Form of 10% Convertible Promissory Note, issued by the Registrant in
November 2005 (incorporated herein by reference to Exhibit 99.1 of
Registrant's Form 8-K report, filed November 16, 2005).
4.2 Form of Warrant to Purchase Shares of Common Stock, issued by the
Registrant to the placement agent in November 2005 (incorporated
herein by reference to Exhibit 99.2 of Registrant's Form 8-K report,
filed November 16, 2005).
5.1 Opinion of Eaton & Van Winkle LLP (incorporated herein by reference
to the Registrant's Registration Statement on Form SB-2 filed on
June 13, 2006).
10.1 Limited Liability Company Agreement of New Albany-Indiana, LLC,
dated as of November 15, 2005, by and among the Registrant, Rex
Energy Operating Corp. and Rex Energy Wabash, LLC (incorporated
herein by reference to the Registrant's Form 10-KSB Report filed on
March 31, 2006).
10.2 Purchase and Sale Agreement, dated as of November 15, 2005, between
New Albany-Indiana, LLC and Aurora Energy Ltd. (incorporated herein
by reference to the Registrant's Form 10-KSB Report filed on March
31, 2006).
10.3 Form of Stock Option Agreement issued in April 2005 by the
Registrant to Barrie Damson and Alan Gaines (incorporated herein by
reference to Exhibit 99.1 of Registrant's Form 8-K report, filed May
3, 2005).
10.4 Purchase Agreement with Source Rock Resources, Inc. (incorporated
herein by reference to Exhibit 10.7 of Registrant's 10-KSB, filed
March 31, 2006).
10.5* Form of Registration Rights Agreement for February Private
Placement.
23.1* Consent of accountants for use of their report.
99.1 Mutual Termination Agreement, dated June 8, 2006, among the
Registrant, its affiliates, Rex Energy and the affiliates of Rex
Energy (incorporated herein by reference to the Registrant's Current
Report on Form 8-K filed on June 8, 2006).
99.2 Mutual Release Agreement dated June 8, 2006 (incorporated herein by
reference to the Registrant's Current Report on Form 8-K filed on
June 8, 2006).
99.3 Mutual Non-Disparagement Agreement dated June 8, 2006 (incorporated
herein by reference to the Registrant's Current Report on Form 8-K
filed on June 8, 2006).
Numbers with (*) are filed herewith.
43
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) For the purpose of determining any liability under the Securities Act, treat
each such post-effective amendment as a new registration statement relating to
the securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to Rule
424;
(ii) Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
(iii) The proportion of any other free writing prospectus relating to the
offering containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned small
business issuer; and
(iv) Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchase.
44
(5) For the purpose of determining liability under the Securities Act to any
purchaser:
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is a part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
45
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of New York, State of New York on August 1, 2006.
BASELINE OIL & GAS CORP.
By: /s/ Barrie Damson
----------------------
Barrie Damson
Chairman and CEO
46
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints Barrie Damson and
Richard Cohen, or either of them, his true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any or all amendments to this
registration statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacities Date
/s/ Barrie Damson Chairman and CEO August 1, 2006
- -----------------------
Barrie Damson
/s/ Richard Cohen Chief Financial Officer August 1, 2006
- -----------------------
Richard Cohen
/s/ Alan Gaines Vice Chairman and Director August 1, 2006
- -----------------------
Alan Gaines
/s/ Richard d'Abo Director August 1, 2006
- -----------------------
Richard d'Abo
47
BASELINE OIL & GAS CORP.
INDEX OF EXHIBITS FILED WITH REGISTRATION STATEMENT
Exhibit Nos.
- ------------
10.5 Form of Registration Rights Agreement for February Private
Placement.
23.1 Consent of Malone & Bailey, PC for use of its report.
48