SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): April 12 2007
BASELINE OIL & GAS CORP.
(Exact Name of Registrant as Specified in its Charter)
Nevada 333-116890 30-0226902
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State of Commission IRS Employer
Incorporation File Number I.D. Number
11811 N. Freeway (I-45), Suite 200, Houston, Texas 77060
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Address of principal executive offices
Registrant's telephone number: (281) 445-5880
20022 Creek Farm, San Antonio, Texas 78259
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Introduction - Completion of Stephens County Acquisition and Financing and Exit
from "Shell Company" Status
Baseline Oil & Gas Corp. a Nevada corporation ("we" or the "Company")
submits this current report on Form 8-K in connection with the following events:
o Our purchase on April 12, 2007 of certain oil and gas assets located in
Stephens County, Texas (the "Stephens County Acquisition") pursuant to that
certain Purchase and Sale Agreement (as amended, the "Purchase Agreement"),
dated as of December 20, 2006, among the Company and each of Statex Petroleum I,
L.P. and Charles W. Gleeson LP, as sellers. A description of the Stephens County
Acquisition is set forth below under the heading "Item 2.01-- Completion of
Acquisition or Disposition of Assets" and the Purchase Agreement was attached as
Exhibit 10.1 to our Current Report on Form 8-K, previously filed with the
Securities and Exchange Commission (the "Commission") on December 21, 2006.
o Our entry on April 12, 2007 into that certain term loan and revolving
credit facility (the "Loan Transaction"), as set forth below under the heading
"Item 1.01--Entry into a Material Definitive Agreement". We financed the
Stephens County Acquisition largely through funds advanced to us by
institutional lenders under the Loan Transaction. As part the Loan Transaction,
we issued Warrants (as defined below) to two lenders participating therein. A
description of the Warrants issuance is set forth below under the heading "Item
3.02-- Unregistered Sales of Equity Securities."
o Upon completion of the Stephens County Acquisition, termination of our
status as 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").
Descriptions of our business operations, management and ownership structure, and
certain financial information are set forth below under the heading "Item 5.06--
Change in Shell Company Status" in accordance with those regulations promulgated
by the Commission under the Exchange Act for companies exiting from "shell
company" status.
Item 1.01 Entry into a Material Definitive Agreement.
Entry into Credit Facility with Drawbridge Special Opportunities Fund LP, as
Administrative Agent, and the lenders named therein
On April 12, 2007, we entered into a Credit Agreement (the "Credit
Agreement") among the Company, Drawbridge Special Opportunities Fund LP
("Drawbridge"), as Administrative Agent and the lenders named therein and party
thereto (the "Lenders"). A copy of the Credit Agreement is filed as Exhibit 99.1
hereto. Capitalized terms used herein and not defined shall have the meanings
ascribed them in the Credit Agreement.
Subject to the satisfaction of a Borrowing Base formula, numerous
conditions precedent and covenants, the Credit Agreement provides for a
revolving credit commitment of up to $54.7 million and a Term Loan Commitment of
$20.3 million. Unless earlier payment is required under the Credit Agreement,
Revolving Loans must be paid on or before April 12, 2010 and Term Loans on or
before October 12, 2010. As security for all the Company's obligations under the
Credit Agreement, we granted Drawbridge a security interest in and a first lien
on, all of our existing and after-acquired assets including, without limitation,
the Statex Assets that we acquired in the Stephens County Acquisition. In
addition to the foregoing, we granted the Lenders an overriding royalty interest
ranging between 2% and 3% in (i) our existing Oil and Gas Properties and (ii)
Oil and Gas Properties that we acquire after the date hereof until the Credit
Agreement is terminated.
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Under the Credit Agreement, interest on Revolving Loans accrues at the
Prime Rate that is in effect from time to time, while interest on Term Loans
accrues at the Prime Rate (that is in effect from time to time) or 7.5%,
whichever is greater, plus 3%. In connection with our purchase of the Statex
Assets and repayment of the March 2007 Bridge Financing (as discussed elsewhere
in this Current Report under "Item 5.06 Change in Shell Company Status - Part I
- - Item 2 Management's Discussion and Analysis of Financial Statements or Plan of
Operation"), on April 12, 2007 we drew down $9.7 million as a Revolving Loan. In
addition, we drew down $20.3 million as a Term Loan.
We have agreed to pay the Administrative Agent, (i) for the account of
each Revolving Lender, pro rata in accordance with their respective commitments,
a commitment fee equal to $173,102 in the aggregate, (ii) for the account of
each Term Lender, pro rata in accordance with their respective commitments, a
commitment fee equal to $300,000 in the aggregate, and (iii) an "Administrative
Fee" of $25,000 semi-annually on each August 15 and February 15 that the Credit
Agreement is in effect.
The foregoing disclosure is intended merely as a summary of the material
provisions of the Credit Agreement, which is incorporated by reference. For the
complete terms of the Credit Agreement, reference should be made to Exhibit 99.1
hereto.
Entry into Hedge Arrangement
In accordance with a requirement of the Credit Agreement, we also entered
into a Swap Agreement ("Swap Agreement") with Macquarie Bank Limited, a copy of
which is filed as Exhibit 99.2 hereto, which Swap Agreement provides that we put
in place, for each month through the third anniversary of April 12, 2007,
separate swap hedges, as adjusted from time to time as specified therein, with
respect to notional volumes which are approximately 75% of the reasonably
anticipated projected production from Proved Developed Producing Reserves (as
defined in the Credit Agreement) for each of crude oil and natural gas,
calculated separately; pursuant to the requirements of the Credit Agreement.
Immediately subsequent to the Loan Transaction, we entered into a hedging
arrangement under the Swap Agreement with Macquarie Bank Limited, providing for
a fixed price of $68.20 per barrel for a three year period, commencing June 1,
2007. The hedging arrangement is based upon a minimum of 11,000 barrels in the
first year and provides for monthly settlements.
The foregoing disclosure is intended merely as a summary of the material
provisions of the Swap Agreement, which is incorporated herein by reference. For
the complete terms of the Swap Agreement, reference should be made to Exhibit
99.2 hereto.
Item 3.02 Unregistered Sale of Equity Securities.
Granting of Warrants to Certain Lenders in Loan Transaction
As further consideration for the Loan Transaction disclosed under Item
1.01 above, we issued warrants to Drawbridge and D.B. Zwirn Special
Opportunities Fund, L.P., another lender participating therein, which warrants
are exercisable for up to an aggregate of 3.2 million shares of our common
stock, par value $.001 per share ("Common Stock"), at an exercise price of $0.50
per share. Pursuant to certain warrant agreements (the "Warrants") executed with
these two lenders, any unexercised warrants expire on April 11, 2014. The
Warrants, forms of which are filed as Exhibits 99.3 and 99.4 hereto, also afford
the holders certain anti-dilution protection. In connection with the issuance of
the Warrants we also entered into a Registration Rights Agreement dated April
12, 2007 with each of the holders of the Warrants, under which we granted
piggy-back registration rights, demand registration rights and shelf
registration rights to these holders. A copy of the Registration Rights
Agreement is filed as Exhibit 99.5 hereto.
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The foregoing disclosure is intended merely as a summary of the material
provisions of the Warrants and the Registration Rights Agreement, which are
incorporated by reference. For the complete terms of the Warrants and the
Registration Rights Agreement, reference should be made to Exhibits 99.3, 99.4
and 99.5 hereto.
Item 1.02 Termination of a Material Definitive Agreement.
Cancellation of Stock Options
Concurrently with the closing of the Loan Transaction, as of April 12,
2007, Alan Gaines, our Chairman, and Barrie Damson, a former officer and
director of our Company, each surrendered stock options to purchase 1.6 million
shares of Common Stock each at an exercise price of $0.05 per share, resulting
in the cancellation of options for an aggregate of 3.2 million shares of Common
Stock. The cancelled options represented a portion of individual option grants
for up to 6 million shares originally granted to each of these individuals in
April 2005.
Item 2.01 Completion of Acquisition or Disposition of Assets.
The Stephens County Acquisition
On April 12, 2007 (the "Closing Date"), we acquired the following assets
from Statex Petroleum I, L.P. and Charles W. Gleeson LP, as sellers
(collectively, the "Sellers") under the Purchase Agreement, as amended on each
of January 25, 2007 and March 9, 2007: (i) leasehold interests, royalty
interests, net profit interests, productions payments, operating rights, and
similar interest attributable to identified oil, gas and mineral leases, and the
leasehold interest created thereby with respect to 4600 acres located in north
Texas ("Properties"); (ii) all wells on the Properties or lands pooled, unitized
or communitized therewith and all oil, gas, minerals or substances produced
therefrom; (iii) all agreements relating to the Properties; (iv) surface and
subsurface machinery and equipment, supplies, facilities or other personal
property on or under the Properties that relate to production, treatment,
storage, or transportation of hydrocarbons; and (v) all records relating to the
foregoing (collectively, the "Statex Assets"). Regarding environmental defects,
other than the express remedies provided for in the Purchase Agreement, we
acquired the Statex Assets in "as is, where is" condition. Copies of the
Purchase Agreement and the Second Amendment to the Purchase and Sale Agreement
dated March 9, 2007 ("Second Amendment") are attached as Exhibits 10.1 and 99.1
to our Current Reports on Forms 8-K filed with the Commission on December 21,
2006 and March 15, 2007, respectively.
The purchase price we paid for the Statex Assets was $28 million in cash
and was funded by advances under the Loan Transaction and previous deposits made
by us pursuant to the Purchase Agreement. We paid a $1,000,000 performance
deposit to Sellers upon execution of the Purchase Agreement and an additional
$300,000 to Sellers upon execution of the Second Amendment, which aggregate sum
was credited against the cash purchase price at the closing. In addition, at
closing we paid interest on the purchase price for each day during the period
from January 15, 2007, until the Closing Date at an annual interest rate of 9
1/4% or one percent (1%) over the prime rate of JPMorgan Chase Bank, NA in the
aggregate approximate amount of $600,000. We also assumed certain obligations,
which were considered in the calculation of the cash purchase price. The assumed
obligations included, but are not limited to: (i) obligations occurring on or
after the Effective Date related to ownership or operation of, and production
allocable to, the Statex Assets; (ii) obligations under all agreements existing
on the Effective Date and affecting the Statex Assets; (iii) obligations related
to certain overproduction imbalances or imbalances owed by Seller under certain
transportation agreements; and (iv) obligations related to plugging,
abandonment, removal, disposal, site clearance and similar activities. We also
assumed all environmental obligations without regard to when the act, omission
or event that gave rise to such obligations. The effective date of the transfer
to us of the Statex Assets is deemed as of February 1, 2007 (the "Effective
Date") notwithstanding the transfer of ownership at the Closing Date.
Accordingly, we are entitled to amounts realized from and accruing to the Statex
Assets and are liable for expenditures relating to the Statex Assets after the
Effective Date.
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Item 5.06 Change in Shell Company Status.
Prior to the Closing of the Statex Acquisition described above under the
heading "Item 2.01 Completion of Acquisition or Disposition of Assets" we were a
"shell company" as that term is defined in Rule 12b-2 promulgated under the
Exchange Act. However, upon completing the Stephens County Acquisition we ceased
to be a shell company. Accordingly, we provide below the following Form 10-SB
registration statement-type disclosures concerning our business, properties,
management (personnel and compensation) and ownership, including recent
issuances of equity and debt securities, and financial position, as of the dates
and periods identified below.
PART I
Item 1 Description of Business.
General.
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 Energy Services, Inc. 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.
Coastal was formed to engage in the energy business, and following the
merger, we began pursuing opportunities in the energy industry and particularly,
in the oil and gas industries. Our efforts most recently culminated in the
following two transactions causing us, when taken together, to cease being a
shell company:
o our redemption on March 16, 2007 of our prior membership interest in
a joint venture for a direct working interest in approximately
171,000 acres in the Illinois Basin located in southern Indiana
known to contain New Albany Shale, as more particularly described
below under the heading "-Southern Indiana Oil, Gas and Mineral
Rights in New Albany Shale" and elsewhere in our Current Report on
Form 8-K previously filed with the Commission on March 19, 2007; and
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o our purchase on April 12, 2007 in the Stephens County Acquisition of
the Statex Assets, including those wells and properties located on
approximately 4600 acres in north Texas, as more particularly
described elsewhere in this Current Report on Form 8-K under the
heading "Item 2.01 Completion of Acquisition or Disposition of
Assets" and below under "- Northern Texas Oil, Gas and Mineral
Rights - Stephens County Acquisition".
Prior to the Stephens County Acquisition, and for our fiscal year ended
December 31, 2006, we were still a "shell company" and as such, had only
conducted nominal operations and had only nominal assets.
As discussed below, our business activities will focus on the continued
development of our Indiana (long life, natural gas reserves) and Texas (long
life, oil and gas reserves) asset base regions. We expect significant `organic
growth potential' based upon the drilling and workover opportunities in these
two regions.
Southern Indiana Oil, Gas and Mineral Rights - New Albany Shale.
From November 25, 2005 until March 16, 2007, we held a 50% economic and
voting membership interest in New Albany-Indiana, LLC, a Delaware limited
liability company ("New Albany"), a joint venture with Rex Energy Operating
Corp. ("Rex Energy"), a privately held Delaware corporation, and since January
20, 2006, certain of Rex Energy's affiliates and assigns, formed 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. Rex Energy Wabash, LLC, an affiliate of Rex Energy is the managing
member of New Albany and responsible for its day-to-day operations.
On March 16, 2007, pursuant to that certain Membership Interest Redemption
Agreement of even date between us and New Albany, we redeemed our membership
interest in New Albany for a direct assignment to us of an undivided 40.423%
working interest in and to all oil and gas properties, rights, and assets of New
Albany (collectively, the "New Albany Assets"). The reduction in our interest
from 50% to a 40.423% reflected an adjustment of our membership interest in New
Albany at the time of the redemption, as a result of outstanding capital calls
owned by us but assumed by the affiliates and/or assigns of Rex Energy, the
other joint venture partner.
The New Albany Assets represented the following working interests acquired
by New Albany during our 2006 fiscal year:
o By that Purchase and Sale Agreement dated November 15, 2005
between New Albany and Aurora Energy Ltd., a Nevada corporation ("Aurora"), New
Albany purchased on February 1, 2006 an undivided 48.75% working interest (40.7%
net revenue interest) in (i) certain oil, gas and mineral leases covering
approximately 80,000 acres in several counties in Indiana and (ii) all of
Aurora's rights under a certain Farmout and Participation Agreement with a third
party. The total purchase price to New Albany for the acquisition of the working
interests, together with the grant of an option 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 (estimated to be 68,000 acres),
at a fixed price of $25 per net acre, was $10,500,000. Of the total purchase
price, we paid an aggregate of $5,250,000. Subsequent to February 7, 2006, New
Albany acquired leases covering an additional 42,000 acres. We obtained funding
to pay our share of New Albany's purchase price for this acquisition through
private placements of (i) our convertible notes and stock in November 2005 and
(ii) shares of our common stock in February 2006, as discussed in this Item 5.06
below under the headings "Part I - Item 6 "Management's Discussion and Analysis
or Plan of Operations" and "Part II - Item 4 "Recent Sales of Unregistered
Securities".
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o 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 covering approximately 21,000 acres in Knox and Sullivan Counties in
Indiana, which we believe contain New Albany Shale formation stratum. The
purchase price paid by New Albany was $735,000, of which we paid half.
Subsequently, New Albany acquired a working interest in approximately 20,000
additional acres in this region. Rex Energy operates the wells drilled on this
acreage.
o In June 2006, New Albany entered into a Joint Operating Agreement
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 interest covering
8,700 acres, targeting the New Albany Shale formation in Greene County, Indiana.
Under this joint operating agreement, El Paso serves as operator.
After redeeming our membership interest in New Albany on March 16, 2007,
we now own the following assets:
o 19.7% working interest in the Aurora/Wabash Area of Mutual
Interest (AMI), consisting of approximately 122,000 gross acres (approximately
24,400 acres net to us), seven New Albany natural gas pilot wells (four
horizontal and three vertical wells), one natural gas compression/treating
facility, two salt water disposal wells, three Devonian Reef gas wells (5%
working interest to us) and three horizontal wells currently scheduled to be
drilled in 2007;
o 18.2% working interest in the Rex Knox County AMI, consisting of
approximately 41,000 total acres (approximately 7,380 acres net to us) acquired
from Source Rock, and five horizontal wells currently scheduled to be drilled in
2007; and
o 6.9% working interest in the El Paso AMI, consisting of
approximately 8,000 acres (560 acres net to us) and one or two horizontal wells
currently scheduled to be drilled in 2007.
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.
6
Prior to redeeming our membership interest, we had explored acquiring the
50% membership interest in New Albany not owned by us, together with all rights
of New Albany in the Aurora Agreement and certain assets directly from Rex
Energy and its affiliates, including working and royalty interests in oil and
gas leases as operator and non-operator, located in Illinois, Indiana,
Pennsylvania, West Virginia, Texas, New Mexico, Virginia and New York, that
contain approximately 2,028 gross producing oil and natural gas wells. As
previously disclosed in our Current Reports on Forms 8-K filed with the
Commission on January 17, 2006, we entered into a purchase agreement dated
January 16, 2006 (the "Rex Purchase Agreement") to purchase these assets for
approximately $73.2 million in cash and shares of our Common Stock and, in
accordance therewith issued a total of 12,069,250 shares of our Common Stock to
certain designees of the selling parties who were designated to become part of
our management. By that Mutual Termination Agreement (the "Termination
Agreement") dated June 8, 2006, the parties mutually terminated the transactions
contemplated by the Rex Purchase Agreement and also entered into a mutual
release and non-disparagement agreement. In exchange for the earlier termination
of the Rex Purchase Agreement and our release of the selling parties from any
liability thereunder, the 12,069,250 shares of our Common Stock previously
issued were surrendered and cancelled. Nothing in the Termination Agreement, the
release or the non-disparagement agreement affected our rights with respect to
New Albany. As a result of the termination of the Rex Purchase Agreement, none
of the additional anticipated changes (including changes to management, our
board of directors or the relocation of our headquarters) previously disclosed
in our Annual Report on Form 10-KSB for the year ended December 31, 2005
transpired.
North Texas Oil, Gas and Mineral Rights - Stephens County Acquisition
As discussed elsewhere in this Current Report under the heading "Item 2.01
Completion of Acquisition or Disposition of Assets," on April 12, 2007, we
acquired effective as of February 1, 2007 the Statex Assets, consisting of
working interests in approximately 4600 acres known as the Eliasville field
(also called the Stephens County Regular Field) located in Stephens County in
north Texas or roughly ninety miles west of Fort Worth.
These working interests acquired include various: (i) leasehold interests,
royalty interests, net profit interests, production payments, operating rights,
and similar interests attributable to identified oil, gas and mineral leases,
and the leasehold interest created thereby; (ii) all wells thereon or lands
pooled, unitized or communitized therewith and all oil, gas, minerals or
substances produced therefrom; (iii) all agreements relating thereto; (iv)
surface and subsurface machinery and equipment, supplies, facilities or other
personal property thereon or thereunder that relate to production, treatment,
storage, or transportation of hydrocarbons; and (v) all records relating to the
foregoing.
The field was discovered in the 1920's and produces primarily from the
Caddo Lime oil formation at a depth of 3300 feet. Currently the field produces
660 bopd and 100 mcfpd, resulting in 520 boepd of net production, with an
average net revenue interest of 77%. There are 81 oil wells producing in the
field, and it is an active waterflood with 54 injection wells. There are eight
leases which total approximately 4600 acres and there are two central operating
facilities and three tank batteries. After the waterflood was initiated in the
1980's, oil production peaked at 1500 bopd from the central six leases which
have produced 18 to 22 million barrels of oil and recovered 25% to 30% of the
original oil in place. The two western leases have not been incorporated into
the waterflood of the central leases and the western leases have recovered only
12% to 18% of the original oil in place.
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Anticipated development programs include 21 idle wells which are workover
candidates as future Caddo oil producers and there is significant infill
drilling potential on the acreage. The eastern and central leases have not been
fully developed on well spacing down to 15 to 20 acres and we anticipate twelve
wells to be initially planned on these leases. The western leases are developed
on 80 acre spacing or greater and 42 infill locations and eight re-entries have
been identified on the western leases.
Employees.
Other than Thomas Kaetzer, our Chairman and Chief Executive Officer, and
Richard Cohen, our Chief Financial Officer, we do not currently have any other
employees.
Item 2 Management's Discussion and Analysis of Financial Statements or Plan
of Operation.
The following discussion is meant to assist you in understanding our plan
of operations and financial position and should be read in conjunction with our
financial statements and the pro forma financial information, together with the
notes to our financial statements and pro forma financial information, set forth
in this Current Report. To the extent our discussion contains forward-looking
information, we desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This report contains a number
of forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, future results and events
and financial performance. All statements made in this Current Report other than
statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to future reserves,
cash flows, revenues, adequacy of funds from operations, statements expressing
general optimism about future operating results and non-historical information,
are forward-looking statements. Our discussion concerning results of future
exploration, exploitation, development, and acquisition expenditures as well as
expense and reserve levels are forward-looking statements. In particular, the
words "believe," "expect," "intend," "anticipate," "estimate," "may," "will,"
variations of such words and similar expressions identify forward-looking
statements, but are not the exclusive means of identifying such statements and
their absence does not mean that the statement is not forward-looking. These
forward-looking statements are subject to certain risks and uncertainties,
including those discussed below and are based upon management's current
expectations and reasonable assessments of the risks and uncertainties about our
business, long-term strategy and financial condition. However, we cannot
guarantee that our expectations or assessments are accurate or that our goals
and projections can or will be met. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. We do not undertake any obligation to
revise these forward-looking statements to reflect any future events or
circumstances or otherwise.
We have not had any revenues from operations in each of the last two
fiscal years, as our business operations have consisted principally of oil and
gas exploration activities through our participation in the New Albany joint
venture. We have no operating history upon which our operations plan or future
prospects can be evaluated. Prior to the Stephens County Acquisition, with its
expected production revenue, our operating revenue did not cover our operating
expenses. Our ability to generate future revenue, if any, will depend upon
whether we can successfully develop and implement our plan of operation.
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Our business and prospects must be also considered in light of the risks
and uncertainties frequently encountered by companies in the oil & gas industry.
The successful development of oil and gas fields is highly uncertain and we
cannot reasonably estimate or know the nature, timing and estimated expenses of
the efforts necessary to complete the development of, or the period in which
material net cash inflows are expected to commence from, any oil and gas
production from our existing fields or other fields, if any, acquired in the
future. Risks and uncertainties associated with oil & gas production include:
o reservoir performance and natural field decline;
o changes in operating conditions and costs, including costs of third
party equipment or services such as drilling rigs and shipping;
o the occurrence of unforeseen technical difficulties, including
technical problems that may delay start-up or interrupt production;
o the outcome of negotiations with co-venturers, governments,
suppliers, or other third party operators;
o our ability to manage expenses successfully;
o regulatory developments, such as de-regulation of certain energy
markets or restrictions on exploration and production under laws and
regulations related to environmental or energy security matters; and
o changes in oil, gas and petrochemical prices and changes in margins
on gasoline and other refined products based upon supply and demand
for oil and gas affected by general economic growth rates and
conditions, supply disruptions, new supply sources and the
competitiveness of alternative hydrocarbon or other energy sources.
Plan of Operation
With our completion of the Loan Transaction in April 2007, we believe that
we now have adequate funds available under our revolving line of credit to focus
on exploratory and production activities at our recently acquired north Texas
and southern Indiana holdings.
Our intended strategy is to focus on the development of these two asset
bases, with the expectation that the north Texas waterflood can provide us with
long life oil reserves and the southern Indiana resource lay can provide us with
long life, natural gas potential, together with a substantial upside potential.
We also believe that these two fields provide us with significant organic growth
potential.
We will manage our operations and evaluate our fields from our new office
location in Houston, Texas. While the majority of the effort will be spent on
developing these two properties, we will continue to look for additional
incremental acquisitions to make in the vicinity of our current fields.
Stephens County Regular field/Eliasville Field. The Stephens County
Regular field (also called the Eliasville Field) is located in Stephens County,
in north Texas, roughly ninety miles west of Fort Worth. The field was
discovered in the 1920's and produces primarily from the Caddo Lime oil
formation at a depth of 3300 feet. Currently the field produces 660 bopd and 100
mcfpd, resulting in 520 boepd of net production, with an average net revenue
interest of 77%.
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In addition to the expected cash flow from the existing production from
the Stephens County Acquisition, we expect that the existing waterflood on the
central acreage can be further developed and that the waterflood can be expanded
to the western acreage.
There are 81 oil wells producing in the field, and it is an active
waterflood with 54 injection wells. There are eight leases which total
approximately 4600 acres and there are two central operating facilities and
three tank batteries. After the waterflood was initiated in the 1980's, oil
production peaked at 1500 bopd from the central six leases which have produced
18 to 22 million barrels of oil and recovered 25% to 30% of the original oil in
place. The two western leases have not been incorporated into the waterflood of
the central leases and the western leases have recovered only 12% to 18% of the
original oil in place.
Stephens County provides immediate development opportunities. There are 21
idle wells which are workover candidates as future Caddo oil producers and there
is significant infill drilling potential on the acreage. We anticipate
developing the 21 workovers and initially drilling five wells in this area
during 2007. The eastern and central leases have not been fully developed on
well spacing down to 15 to 20 acres and twelve wells are initially planned on
these leases. The western leases are developed on 80 acre spacing or greater and
42 infill locations and eight re-entries have been identified on the western
leases.
Proved reserves have been estimated by a third party engineering firm to
be 3.6 million boe (net) with a pre-tax PV10 value of $49.9 million at $59/bbl
and $1.77/mcf. Of the proved reserves, 70% are PDP, 10% PDNP and 20% are PUD
reserves. In addition, another 1.7 mmboe (net) reserves are classified as
probable/possible reserves for expanding the waterflood to the west (approximate
$25 million of additional PV10 potential).
In addition to the waterflood expansion, we intend to investigate the full
development potential on the 4600 acre lease-hold. We believe the Caddo Lime oil
formation is a good candidate for an Alkaline Surfactant Polymer (ASP) flood,
and this enhanced oil recovery technique will be evaluated in 2007. There also
is shallow gas production in this region, and the natural gas potential for the
Marble Falls and Duffer gas formations will be evaluated during 2007, together
with the identification of additional leases which may be attractive in the
area. In addition, the Barnett Shale is located at approximately 4900 feet in
this area, and the production potential of the Barnett Shale in this region has
not been evaluated.
New Albany Shale. We currently have a direct working interest in the
development of 171,000 gross acres in the five county southern Indiana New
Albany Shale formation in southern Indiana.
We own an 18% to 19% working interest in approximately 163,000 acres in
five counties in southern Indiana, of which the remaining 41,000 acres and
122,000 acres are operated under an AMI covering this acreage by Rex Energy and
Aurora, respectively(plus an option on an additional 68,000 gross acres). These
companies currently plan to drill eight horizontal wells (in which we have a
18-19% working interest) and one vertical Devonian Reef well (in which we have a
4-5% working interest) initially this year in the 163,000 acre AMI's. Additional
wells may be drilled, depending on rig availability, results of wells drilled,
and agreement with our partners. Four pilot test wells drilled in 2006 will also
be tested this year.
10
We also participate in an 8700 acre AMI which is in the same area of the
New Albany Shale. El Paso Energy Inc., is operator of this AMI and Rex Energy,
Aurora and other partners participate with us. Currently one well is drilling,
in which we have just under a 7% working interest in this AMI.
To date, we have invested $8.1 million in the acquisition of our interest
in the 171,000 acres and the drilling of seven New Albany pilot test wells and
four Devonian Reef wells. As mentioned above, ten new wells are planned for
2007. Of the wells already drilled, the seven New Albany Shale wells are to be
tested for natural gas and water rates, and then tied in for sales. The New
Albany Shale wells produce some water initially and have to be pumped off in
order to achieve steady gas production. Of the four Devonian Reef wells drilled,
two have tested gas (1 at nearly 400mcfpd) and 2 were dry holes.
We intend to continue to participate in the New Albany Shale development,
and based on the results of the ten wells to be drilled during 2007, will work
with our partners to evaluate and prioritize future drilling. We anticipate that
as many as 500 to 1,000 horizontal wells could be eventually drilled on the
current leasehold, depending on success and drainage areas of the horizontal
wells.
The industry has reported a range of natural gas production rate reserve
potential in the New Albany Shale Play; however, because there is not extensive
production history from horizontal wells completed in the New Albany Shale, we
have no proven reserves booked to its acreage position. Currently available
public information indicates that each horizontal well should drain 160 to 320
acres at a depth of 1500 to 2500 feet. Estimated reserves are in the range of
0.7 bcf to nearly 2 bcf per well, depending on initial production rates. Wells
have had reported test rates of 50 mcfpd to 1,000 mcfpd, and `typical' wells are
currently expected to produce 300 mcfpd or more.
The ability to better predict production rates and reserves per well, as
well as establishing the best methodology to drill and complete the horizontal
wells, will allow us and our partners to better understand the economics of each
well, and the overall play in general. We believe that a more complete
understanding and longer term production histories will drive the future
drilling activity and accelerated development potential of the New Albany Shale
play, as well as will influence our continuing participation and funding needs
in 2008 and beyond.
Liquidity and Sources of Capital
We currently have approximately $45 million available to us under our
revolving credit facility under the Loan Transaction, subject to our
satisfaction of financial and other covenants contained in our Credit Agreement.
In connection with the Stephens County Acquisition and our repayment of the
March 2007 Bridge Financing (as defined and discussed below under the heading "-
March 2007 Bridge Financing"), on April 12, 2007 we drew down approximately $9.7
million as a Revolving Loan and $20.3 million as a Term Loan.
We also expect to receive proceeds from production associated with those
wells operating in north Texas we purchased as part of the Stephen County
Acquisition. Included under the heading "Item 9.01 Financial Statements and
Exhibits" are pro forma financial information and related notes that give pro
forma effect as of December 31, 2006 of the Stephens County Acquisition. This
pro forma financial information is derived from and should be read in
conjunction with our audited financial statements and that the statements of
Combined Revenues and Direct Operating Expenses relating to the Stephens County
Acquisition as of and for the periods ended December 31, 2006, copies of which
are attached as exhibits to this Current Report under the heading "Item 9.01
Financial Statements and Exhibits".
Accordingly, we currently believe, based upon our forecasts and our
liquidity and capital requirements for the near-term future, that the
combination of our expected internally-generated cash, the borrowings under our
credit facility and our working capital, will be adequate to meet our
anticipated capital and liquidity requirements for the next twelve months.
11
Should our estimated capital needs be erroneous and our costs and expenses
prove to be greater than we currently anticipate, or should we change our
current operations plan in a manner that will increase or accelerate our
anticipated costs and expenses, the depletion of our working capital would be
accelerated. Although we anticipate that adequate funds will remain available to
us under the Loan Transaction, if we were unable to access such funding by
reason of our failure to satisfy borrowing covenants under the Credit Agreement
we would have to use other alternative resources. To the extent it becomes
necessary to raise additional cash in the future if our current cash and working
capital resources are depleted, we will seek to raise it through the public or
private sale of debt or our equity securities, funding from joint venture or
strategic partners, or a combination of the foregoing. We may also seek to
satisfy indebtedness without any cash outlay through the private issuance of
debt or equity securities. The sale of additional equity securities or
convertible debt securities would result in dilution to our shareholders. We
cannot give you any assurance that we will be able to secure the additional cash
or working capital we may require to continue our operations in such
circumstances.
April 2007 Credit Facility.
Our Credit Agreement executed April 12, 2007 provides for a revolving
credit commitment of up to $54.7 million and a Term Loan Commitment of $20.3
million. Unless earlier payment is required under the Credit Agreement,
Revolving Loans must be paid on or before April 12, 2010 and Term Loans on or
before October 12, 2010. Interest on Revolving Loans accrues at the Prime Rate
that is in effect from time to time, while interest on Term Loans accrues at the
Prime Rate (that is in effect from time to time) or 7.5%, whichever is greater,
plus 3%. Funds available to us are subject to our satisfaction of a Borrowing
Base formula and a number of standard industry conditions precedent and
covenants.
As security under the Credit Agreement, we have granted lenders a security
interest in and a first lien on, all of our existing and after-acquired assets
including, without limitation, the Statex Assets that we acquired in the
Stephens County Acquisition. In addition to the foregoing, we granted the
Lenders an overriding royalty interest ranging between 2% and 3% in (i) our
existing Oil and Gas Properties and (ii) Oil and Gas Properties that we acquire
after the date hereof until the Credit Agreement is terminated.
Private Placement of Equity and Debt
Previously, we have financed current expenses and our business operations
chiefly through the following private placements of equity and debt securities
issued by our Company:
November 2005 Placement. In November 2005, we completed the offering and
sale of $2.375 million in units of consisting of 10% convertible promissory note
and shares of common stock in privately negotiated transactions with accredited
investors. 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, excluding interest.
12
February 2006 Placement. On February 1, 2006, we completed a private
placement to accredited investors in which we received gross proceeds of $9
million 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) 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. C.K. Cooper & Company and Gilford
Securities, Incorporated acted as our placement agents. Approximately $4 million
of the net proceeds were used to fund our portion of the Aurora and Source Rock
acquisitions by New Albany.
March 2007 Bridge Financing. On March 15, 2007, we borrowed $1.7 million
from a single accredited investor in the form of a Senior Secured Debenture, due
September 15, 2007, in the principal amount of $1.7 million, bearing interest at
a rate of 16% per annum (the "Debenture"). The investor also received a common
stock purchase warrant to purchase up to 3,000,000 shares of our common stock at
an exercise price of $0.50 per share any time prior to September 15, 2012. Our
obligations under the Debenture were secured by a mortgage and security interest
in the properties located in the New Albany Shale area of Indiana in which we
hold any leasehold and/or working interests and a continuing security interest
in certain of our assets and properties other than the mortgaged property. The
Debenture became payable in full upon our consummation of an equity or debt
financing of $15 million or more and, following the Loan Transaction, we repaid
the Debenture in full on April 12, 2007. We also paid a closing fee of $170,000
on the date on which the outstanding principal amount plus accrued interest was
repaid. In connection with the March 2007 Bridge Financing, we delivered to
Casimir Capital LP, a placement fee of $170,000 and warrants to purchase up to
340,000 shares of our Common Stock at an exercise price of $0.50 per share.
Contractual Obligations
Except for (i) the hedging arrangement entered into under the Swap
Agreement, as discussed elsewhere in this Current Report under the heading "Item
1.02 Entry into Material Agreement - Entry into Hedge Arrangement," which
hedging arrangement is to be settled on a monthly basis, commencing June 1, 2007
and (ii) those convertible notes issued under the November 2005 Placement, which
provide for us to make quarterly interest payments of approximately $59,000,
payable either in cash or shares of our Common Stock, we do not currently have
any contractual obligations.
Off-Balance-Sheet Arrangements.
We have no off balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources that is material to any investor in
our securities.
Item 3 Description of Property.
Corporate Headquarters. We lease approximately 2500 square feet of office
space in Houston, Texas to house our corporate offices. Our lease arrangement is
month-to-month and provides for rent of $2,600 per month.
As of our year ended December 31, 2006, we had only an indirect
contractual right (pursuant to our interest in New Albany), in those oil and gas
leases and other rights acquired by New Albany during 2006 in the New Albany
Shale area in Indiana.
Southern Indiana - New Albany Shale. As of March 16, 2007, the date we
redeemed our membership interest in New Albany to acquire a direct working
interest in the oil and gas leases and other properties held by New Albany, we
acquired tracts of land covering approximately 171,000 surface acres in southern
Indiana.
13
Although the industry has reported a range of natural gas production rate
reserve potential in the New Albany Shale Play, there is not extensive
production history from horizontal wells completed in the New Albany Shale and
we have no proven reserves booked to its acreage position. Currently available
public information indicates that each horizontal well should drain 160 to 320
acres at a depth of 1500 to 2500 feet. Estimated reserves are in the range of
0.7 bcf to nearly 2 bcf per well, depending on initial production rates. Wells
have had reported test rates of 50 mcfpd to 1,000 mcfpd, and `typical' wells are
expected to produce 300 mcfpd or more.
North Texas - Stephens County Acquisition. As of April 12, 2007, the date
of the Stephens County Acquisition, we acquired tracts of land covering
approximately 4600 surface acres in north Texas. The Eliasville field (also
called the Stephens County Regular Field) produces primarily from the Caddo Lime
oil formation at a depth of 3300 feet.
Currently the field produces 660 bopd and 100 mcfpd, resulting in 520
boepd of net production, with an average net revenue interest of 80%. There are
80 oil wells producing in the field, and it is an active waterflood with 54
injection wells. There are 8 leases which total approximately 4600 acres and
there are 2 central operating facilities and 3 tank batteries. After the
waterflood was initiated in the 1980's, oil production peaked at 1500 bopd from
the central 6 leases which have produced 18 to 22 million barrels of oil and
recovered 25% to 30% of the original oil in place. The 2 western leases have not
been incorporated into the waterflood of the central leases and the western
leases have recovered only 12% to 18% of the original oil in place.
Proved reserves have been estimated by a third party engineering firm to
be 3.6 million boe (net) with a pre-tax PV10 value of $49.9 million at $59/bbl
and $1.77/mcf. Of the proved reserves, 70% are PDP, 10% PDNP and 20% are PUD
reserves. In addition, another 1.7 mmboe (net) reserves are classified as
probable/possible reserves for expanding the waterflood to the west (approximate
$25 million of additional PV10 potential).
Information in response to this item is contained in the financial
statements for Statex Petroleum I, LP attached under the heading "Item 9.01
Financial Statements and Exhibits."
14
Item 4 Security Ownership of Certain Beneficial Owners.
As of April 16, 2007, we had 31,436,488 shares of Common Stock
outstanding. The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of that date 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 and Address Amount and Nature of Percent of
of Beneficial Owner (1) Beneficial Ownership (2) Outstanding Shares (2)
----------------------- ------------------------ ----------------------
Thomas Kaetzer
(Chairman and Chief Executive Officer) 666,665 (3) 2.1%
Alan Gaines
(Vice Chairman and Director) 7,624,250 (4) 23.0%
Richard Cohen
(Chief Financial Officer) 475,000 (5) 1.5%
Richard d'Abo
(Director) 1,186,000 (6) 3.7%
Barrie Damson
37 Franklin Street
Westport, CT 06880 7,624,250 (7) 23.0%
Superius Securities Group Inc.
Profit Sharing Plan
94 Grand Avenue
Englewood, NJ 07631 1,633,637 (8) 5.1%
Lakewood Group LLC
242 4th Street
Lakewood, NJ 08701 3,000,000 (9) 8.7%
All Officers & Directors as a Group
(4 persons) 9,951,915 (3)(4)(5)(6) 29.0%
- --------------
(*) Less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner
reported above is 11811 N. Freeway (I-45), Suite 200, Houston, Texas 77060.
(2) A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from March 31, 2007. Each beneficial owner's
percentage is determined by assuming that options that are held by such person
(but not any other person), and which are exercisable within 60 days from March
31, 2007, have been exercised.
(3) Refers to options to purchase (i) up to 1,000,000 shares of Common
Stock at an exercise price of $0.50 per share, of which 333,333 underlying
shares are currently vested, (ii) up to 500,000 shares of Common Stock at an
exercise price of $0.60 per share, of which 166,666 shares are currently vested,
and (iii) up to 500,000 shares of Common Stock at an exercise price of $1.00 per
share, of which 166,666 shares are currently vested. Each option is subject to a
vesting schedule, as follows: (i) up to 1/3rd of the underlying Common Stock
exercisable at any time from and after December 20, 2006, (ii) up to an
additional 1/3rd of the underlying Common Stock exercisable at any time from and
after December 20, 2007, and (iii) up to the remaining 1/3rd of the underlying
Common Stock exercisable at any time from and after December 20, 2008; provided,
that Mr. Kaetzer's employment has not been terminated by us for cause or by Mr.
Kaetzer without good reason.
(4) Includes options currently exercisable to purchase up to 1,730,000
shares of Common Stock at an exercise price of $0.05 per share. Excluded are
1,670,000 and 1,600,000 shares of Common Stock underlying stock options
previously outstanding, which stock options Mr. Gaines surrendered for
cancellation on March 15, 2007 and April 12, 2007, respectively.
(5) Includes 175,000 shares of Common Stock underlying a stock option
exercisable at $0.94 per share, and 100,000 shares of Common Stock underlying a
stock option exercisable at $0.56 per share.
15
(6) Includes 250,000 shares underlying a stock option exercisable at $.05
per share.
(7) Includes options currently exercisable to purchase up to 1,730,000
shares of Common Stock at an exercise price of $0.05 per share. Excluded are
1,670,000 and 1,600,000 shares of Common Stock underlying stock options
previously outstanding, which stock options Mr. Damson surrendered for
cancellation on March 15, 2007 and April 12, 2007, respectively.
(8) Includes 525,000 shares of Common Stock underlying a convertible note
in the aggregate principal amount of $250,000 from our November 2005 financing.
(9) Represents 3,000,000 shares of Common Stock underlying warrants
exercisable at $0.50 per share granted in connection with our March 2007 Bridge
Financing.
Item 5 Directors and Executive Officers, Promoters and Control Persons.
The following table sets forth information as of April 16, 2007 with
respect to the current directors and executive officers of the Company:
Name Age Position with the Company
-------------- --- -------------------------------------
Thomas Kaetzer 47 Chairman, Chief Executive Officer (1)
Alan Gaines 51 Vice Chairman and Director
Richard Cohen 56 Chief Financial Officer
Richard d'Abo 50 Director
- --------------
(1) Effective March 21, 2007, Barrie Damson resigned as Chairman and Chief
Executive Officer, as a result of which Mr. Kaetzer was promoted from
President/COO to Chairman/CEO.
The business experience of each director and named executive officer of
the Company is set forth below:
Mr. Thomas Kaetzer. Mr. Kaetzer was promoted to our chairman and chief
executive officer on March 21, 2007. He previously was our president and chief
operating officer, titles he held since December 2006. He brings 25 years of
experience in the oil and gas industry. Mr. Kaetzer began his career with Texaco
Inc., where, from 1981 to 1995, he held various positions of increasing
responsibility. Such positions provided him with a solid foundation in the
evaluation, exploitation and management of oil and gas assets. He has both
onshore and offshore experience in operations and production management, asset
acquisition, asset rationalization, development, drilling and workovers in the
continental U.S., Gulf of Mexico, North Sea, Colombia, Saudi Arabia, China and
West Africa. In 1995, Mr. Kaetzer left Texaco and formed Southwest Texas Oil &
Gas Co., which subsequently merged into GulfWest Energy Inc. in 1998. Mr.
Kaetzer served as President/Chief Operating Officer of GulfWest from 1999 to
2004, and as Vice President of Operations for its successor, Crimson Exploration
Inc., from 2005 to July 2006. Since August 2006, Mr. Kaetzer has worked as a
consultant to several companies in the oil and gas industry. Mr. Kaetzer earned
his B.S. from the University of Illinois in 1981 and his M.S. in petroleum
engineering from Tulane University in 1988.
16
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 at 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. 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.
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. 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.
Audit Committee.
We do not have an audit committee or another committee performing similar
functions.
Item 6 Executive Compensation.
Prior to hiring Thomas Kaetzer as our President and Chief Operating
Officer, the Company had not paid salaries to any individual, although in
December 2005 we began to pay to Richard M. Cohen, Inc., a company of which
Richard M. Cohen, our Chief Financial Officer, is sole shareholder, officer and
director, a monthly consulting fee of $7,500. In connection with our employment
of Mr. Kaetzer in December 2006, we agreed to pay him a salary and other
compensation pursuant to his employment agreement with us, as described in more
detail below in the Summary Compensation Table and under the sub-heading
"Employment Agreement".
17
The following table shows the compensation of our executive officers for
the fiscal years ended December 31, 2006 and December 31, 2005:
Summary Compensation Table
Long-Term Compensation
----------------------------
Annual Awards
Compensation
--------------------------------------------------------
Name and Securities Underlying All Other
Principal Position Year Salary ($) Options (#) Compensation
- -------------------------------------------------------------------------------------------------------------------
Barrie Damson (Chief Executive
Officer) (1) 2006 $ 0 None n/a
Thomas Kaetzer (President and Chief 2,000,000 shares of Common
Operating Officer) (2) 2006 $15,833 (2) Stock n/a
Richard Cohen
(Chief Financial Officer) (3) 2006 $90,000 None n/a
175,000 shares of Common
2005 $ 7,500 (3) Stock n/a
- --------------
(1) Mr. Damson joined our board of directors and became our Chairman and
Chief Executive Officer as of February 1, 2006. Mr. Damson resigned as Chairman
and Chief Executive Officer, effective March 21, 2007
(2) Mr. Kaetzer became our President and Chief Operating Officer as of
December 5, 2006. In 2006 he was paid an amount equal to one month's salary at
an annualized salary of $190,000 as provided for in his employment agreement.
See the subsection below entitled "Employment Contracts" in this "Item 6 --
Executive Compensation." Mr. Kaetzer was promoted to Chairman and Chief
Executive Officer on March 21, 2007, upon the resignation of Mr. Damson.
(3) Mr. Cohen became our Chief Financial Officer in December 2005, a which
time he became the first employee of the Company to receive a salary. Mr.
Cohen's salary is $7,500 per month.
Option Grants in the Last Fiscal Year.
As shown in the below table, during fiscal year ended December 31, 2006,
the Company granted stock options to our named executive officers, as follows:
Option Grants In Last Fiscal Year (2006)
No. of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise
Name Year Granted (1) Fiscal Year Price Expiration Date
- --------------------------- ---- ------------- ------------ -------- ---------------
Barrie Damson
(Chief Executive Officer) 2006 0 0% N/A N/A
Thomas Kaetzer
(President and Chief
Operating Officer) 2006 1,000,000 (1) 50% $0.50 12/20/2011
2006 500,000 (1) 25% $0.60 12/20/2011
2006 500,000 (1) 25% $1.00 12/20/2011
Richard Cohen
(Chief Financial Officer) 2006 0 0% N/A N/A
- --------------
(1) Each option shall vest and be exercised in whole or in part, as
follows: (i) up to 1/3rd of the underlying Common Stock at any time from and
after December 20, 2006, (ii) up to an additional 1/3rd of the underlying Common
Stock at any time from and after December 20, 2007, and (iii) up to the
remaining 1/3rd of the underlying Common Stock at any time from and after
December 20, 2008; provided, that Mr. Kaetzer's employment has not been
terminated by us for cause or by Mr. Kaetzer without good reason.
18
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
During 2006, none of our named executive officers or directors exercised
any options to purchase shares of Common Stock. The following table sets forth,
for each of our named executive officers and directors, the number and value of
vested and unvested options held as of December 31, 2006 and the value of any
in-the-money stock options, vested and unvested, as of such date.
No. of Securities Value of Unexercised In-The-Money Options at
Name Underlying Options Granted December 31, 2006 (1)
- ------------- ---------------------------------- --------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Barrie Damson 5,000,000 (2) 0 $ 2,800,000 --
Alan Gaines 5,000,000 (2) 0 $ 2,800,000 --
Thomas Kaetzer 666,665 1,333,335 $ 38,333 $ 76,667
Richard d'Abo 250,000 0 $ 140,000 --
Richard Cohen 175,000 0 -- --
- --------------
(1) The last sale price of the Common Stock on December 29, 2006 (the last
trading date of the fiscal year) was $0.61.
(2) In 2005, we awarded options to purchase up to 6,000,000 shares of our
Common Stock at an exercise price per share of $0.05 to each of Barrie Damson
and Alan Gaines. However, in connection with our grant of options to Thomas
Kaetzer pursuant to hiring him as our President and Chief Operating Officer, Mr.
Gaines and Mr. Damson each agreed to the cancellation of options to acquire
1,000,000 shares of our Common Stock.
19
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.
Employment Agreement.
Our employment agreement, dated December 20, 2006, with Thomas Kaetzer,
provides that Mr. Kaetzer shall serve as our President and Chief Operating
Officer effective as of December 5, 2006 and ending on December 30, 2008, unless
earlier terminated or extended under the terms of such agreement. In
consideration for such employment, the Company shall, among other things, pay
Mr. Kaetzer an annual salary of $190,000. In addition to his annual salary, if
Mr. Kaetzer remains in our employ on December 5, 2007 he shall be entitled to a
performance bonus of $50,000. In addition, during the second year of his
employment and thereafter (if his employment is extended), he may be entitled to
a performance bonus, solely at the discretion of our board of directors. Mr.
Kaetzer is further eligible under his employment agreement to participate,
subject to any eligibility, co-payment and waiting period requirements, in all
employee health and/or benefit plans offered or made available to our executive
officers. Upon termination by Mr. Kaetzer for specified good reasons in the
event of a merger or acquisition resulting in a diminution of his authority and
duties, the relocation of his offices outside Houston, Texas of residence, or
his termination by us other than for cause, the terminating executive officer
will be entitled to receive from us: (i) a severance payment equal to 12-months
of his then-current base salary plus pro rata bonus and fringe benefits
otherwise due at time of termination; (ii) any unpaid bonus from preceding year
of employment; and (iii) accrued but unused vacation days during the year such
termination occurs.
In addition, his employment agreement provides for us to issue to him
three non-qualified stock options to purchase up to an aggregate of 2 million
shares of our Common Stock pursuant to three stock option agreements, as
described in more detail elsewhere in this Current Report. Each Option is
exercisable as to one third of the optioned shares on each of the grant date and
the first and second anniversary dates thereafter, and each such agreement
provides that if Mr. Kaetzer's employment is terminated by the Company for cause
or by Mr. Kaetzer without good reason, unvested Options shall immediately be
forfeited, and that if his employment is terminated by the Company without cause
or voluntarily by Mr. Kaetzer with good reason, optioned shares that would have
vested on the next vesting date will immediately vest and become exercisable in
proportion to the number of months he was employed during the 12-month period
following the immediately preceding vesting date.
Mr. Kaetzer has further agreed under his employment agreement that, during
the respective term of his employment and for a one-year period after his
termination (other than its termination by him for good reason or by us without
cause), not to engage, directly or indirectly, as an owner, employee, consultant
or otherwise, in any business engaged in the exploration, drilling or production
of natural gas or oil within a ten (10) mile radius from any property that we
then have an ownership, leasehold or participation interest. He is further
prohibited during the above time period from soliciting or inducing, directly or
indirectly, any of our then-current employees or customers, or any customers of
ours during the one year preceding the termination of his employment.
Mr. Kaetzer was promoted to Chairman and Chief Executive Officer on March
21, 2007 and, except for his title, his employment agreement continues to govern
the terms of his employment.
We have no other employment agreements with any of our other named
executive officers.
20
Item 7 Certain Relationships and Related Transactions and Director
Independence.
Relationships and Related Transactions.
As previously disclosed on our Current Report on Form 8-K filed with the
Commission on January 29, 2007, on January 26, 2007 then Chairman and Chief
Executive Officer Barrie Damson and Vice Chairman and director Alan Gaines each
made a loan of $50,000 to us to be used for our short-term working capital needs
and evidenced by promissory notes. The notes bear interest at an annual rate of
six percent (6%) and matures, as extended by amendment dated April 10, 2007, on
the earlier to occur of (i) the date on which we close an equity offering in
which we obtain gross proceeds in excess of three million dollars ($3,000,000)
or (ii) October 13, 2010.
Director Independence.
The OTC Bulletin Board, on which our common stock is currently traded,
does not maintain director independence standards. However, our board of
directors has determined that Richard d'Abo and Alan Gaines are "independent"
within the meaning of The Nasdaq Stock Market's director independence standards.
In particular, our board of directors has determined that neither Mr. d'Abo nor
Mr. Gaines has a material relationship with us (either directly or as a partner,
shareholder or officer of an organization that has a relationship with us) that
would interfere with the exercise of independent judgment.
Item 8 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 April 16, 2007,
there are a total of 31,436,488 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) 10,745,000 shares of Common
Stock issuable pursuant to outstanding stock options, (ii) up to 4,937,500
shares of Common Stock that are issuable upon conversion of $2,375,000 principal
amount of convertible promissory notes and (iii) 7,274,090 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. No shares of preferred stock are
currently issued or outstanding. In accordance with the Company's Articles of
Incorporation, the board of directors may, by resolution, issue 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.
21
PART II
Item 1 Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholders Matters.
Market Information.
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 table below sets forth the high and low bid
information for our Common Stock for the last two fiscal years and the interim
quarterly period ended March 31, 2007. 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.
2007 Quarter Ended High Bid Price Low Bid Price
---------------------- ------------------ -----------------
3/31/2007 $ 0.65 $ 0.37
2006 Quarter Ended High Bid Price Low Bid Price
---------------------- ------------------ -----------------
12/31/2006 $ 0.75 $ 0.35
9/30/2006 1.19 0.67
6/30/2006 3.25 1.10
3/31/2006 3.25 0.85
2005 Quarter Ended High Bid Price Low Bid 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 April 16, 2007, we have outstanding options to purchase up to
7,545,000 shares of Common Stock, warrants to purchase up to 7,274,090 shares of
Common Stock and notes convertible into up to 4,937,500 shares of Common Stock.
Holders of Securities.
As of April 16, 2007, there were approximately 188 holders of record of
our Common Stock.
Our Common Stock is covered by a Commission 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.
22
Dividends.
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 our Company were purchased by us or any
"affiliated purchaser" of ours during fiscal years 2005 or 2006.
Securities Authorized for Issuance Under Equity Compensation Plans.
The following table provides information as of December 31, 2006 about our
equity compensation arrangements:
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a)
- -------------------------------- -------------------- -------------------- ----------------------------
Equity compensation plans 0 0 n/a
approved by security holders
Equity compensation plans not 13,985,000 $ 0.18 n/a
approved by security holders (1)
Total (1) 13,985,000 $ 0.18 n/a
- --------------
(1) Consists of warrants and options granted to our employees, officers,
directors and consultants, to the extent vested and exercisable (within the
meaning of Rule 13d-3(d)(1) promulgated by the Commission under the Securities
and Exchange Act of 1934, as amended) as of December 31, 2006.
23
Set forth below is a description of the individual compensation
arrangements or equity compensation plans not currently approved by our security
holders pursuant to which the 14,719,090 shares of our Common Stock included in
the chart above were issuable as of December 31, 2006:
o Option granted April 1, 2005 to a consultant in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 500,000 shares of our Common
Stock at an exercise price of $0.30 per share;
o Options granted April 29, 2005 to directors, officers and consultants in
consideration of services performed on our behalf, which options expire five
years from grant date and, after adjusting for the cancellation of an aggregate
of 8,540,000 shares of Common Stock underlying certain of the option grants, are
currently exercisable to purchase up to an aggregate of 4,160,000 shares of our
Common Stock at an exercise price of $0.05 per share;
o Options granted December 20, 2005 to third parties in connection with
potential acquisition transaction, which options expire three years from grant
date and are currently exercisable to purchase up to 50,000 shares of our Common
Stock at an exercise price of $1.00 per share;
o Option granted December 27, 2005 to an officer in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 175,000 shares of our Common
Stock at an exercise price of $0.94 per share;
o Option granted August 15, 2006 to a consultant in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 100,000 shares of our Common
Stock at an exercise price of $1.01 per share;
o Option granted October 20, 2006 to a consultant in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 100,000 shares of our Common
Stock at an exercise price of $0.50 per share;
o Option granted November 14, 2006 to a consultant in consideration of
services performed on our behalf, which option expires five years from grant
date and is currently exercisable to purchase up to 360,000 shares of our Common
Stock at an exercise price of $0.50 per share;
o Option granted December 20, 2006 to an officer in consideration of
services to be performed on our behalf, which option expires five years from
grant date and, subject to a vesting schedule, is currently exercisable with
respect to 333,333 shares of our Common Stock at an exercise price of $0.50 per
share;
o Option granted December 20, 2006 to an officer in consideration of
services to be performed on our behalf, which option expires five years from
grant date and, subject to a vesting schedule, is currently exercisable with
respect to 166,666 shares of our Common Stock at an exercise price of $0.60 per
share; and
o Option granted December 20, 2006 to an officer in consideration of
services to be performed on our behalf, which option expires five years from
grant date and, subject to a vesting schedule, is currently exercisable with
respect to 166,666 shares of our Common Stock at an exercise price of $1.00 per
share.
24
Item 2 Legal Proceedings.
We are not currently subject to any pending litigation proceedings.
Item 3 Changes in and Disagreements with Accountants.
None.
Item 4 Recent Sales of Unregistered Securities.
As of April 16, 2007, we have 31,436,488 shares of Common Stock issued and
outstanding, plus options, warrants and convertible promissory notes that are
convertible into or exercisable for up to an additional 19,756,590 shares of
Common Stock.
All issuances of securities described under this "Item 4 - Recent Sales of
Unregistered Securities," were issued pursuant to exemptions from registration
provided by Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
Issuances Prior to the Coastal Merger.
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.
On April 1, 2005, Coastal granted a stock option to purchase 500,000
shares of Coastal common stock at $0.30 per share to a consultant. 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 Following the Coastal 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
then 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.
25
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. Under the merger, we assumed the obligations of these notes. The face
amount of each 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 these notes, including accrued interest thereon, were converted
into a total of 1,820,000 shares of our Common Stock, such shares including
certain "kicker" shares that were provided for pursuant to the 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 us. 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. Of the options granted on April 29, 2005, options exercisable for
8,540,000 shares issued to one former and one current officer have been since
canceled and an option for 250,000 shares of Common Stock has been exercised.
In the November 2005 Placement, we sold in a private placement to
accredited investors $2,375,000 of units, with 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
product of the aggregate principal amount of each November Note purchased
multiplied by twenty percent (20%), by (2) $0.50. Each November Note matures
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. We received total gross proceeds in the November 2005 Placement of
$2,375,000. Purchasers of the units 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 4,987,500 November Conversion Shares (assuming
that the holders elect to receive shares of Common Stock in lieu of cash
interest through maturity). In connection with the November 2005 Placement, we
paid a placement agent (i) a $237,500 commission (ten percent (10%) of the gross
proceeds), (ii) a $23,750 non-accountable expense allowance (one percent (1%) of
the gross proceeds) and (iii) a five year warrant to purchase 475,000 shares of
Common Stock (the "Warrant Shares"), at an exercise of $0.50 per share. Holders
of November Shares, November Conversion Shares (including those which may be
issued as interest payments) and Warrant Shares are among the securities
included for registration in our registrations statement on Form SB-2 initially
filed with the Commission on June 13, 2006, and declared effective on October
20, 2006. As of April 16, 2007, we had issued to holders of November Notes an
aggregate of 468,750 shares of our Common Stock in lieu of cash interest having
accrued over the five quarterly periods since the date of issuance.
On December 27, 2005, we granted to Richard Cohen, our Chief Financial
Officer, 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.
On August 15, 2006, we granted to a consultant, The Wall Street Group,
options to purchase 100,000 shares of Common Stock, exercisable immediately and
until the fifth anniversary of the date of grant at the price of $1.01 per
share.
26
On October 20, 2006, we granted to Carey Birmingham, a former officer,
options to purchase 100,000 shares of Common Stock, exercisable immediately and
until the fifth anniversary of the date of grant at the price of $0.50 per
share.
On December 20, 2006, in connection with the execution of the employment
agreement between us and Thomas Kaetzer, as our President and Chief Operating
Officer, we granted Mr. Kaetzer three non-qualified stock options to purchase up
to an aggregate of 2 million shares of our Common Stock. These options are
governed under three stock option agreements, one of which relates to an option
to purchase up to 1 million shares at $0.50 per share for an exercise price
(equal to the closing sale price on the date preceding option grant date), and
the other two which related to options to purchase up to 500,000 shares each at
$0.60 per share and $1.00 per share, respectively. Each option is subject to a
vesting schedule pursuant to which: (i) up to 1/3rd of the underlying Common
Stock are exercisable at any time from and after December 20, 2006, (ii) up to
an additional 1/3rd of the underlying Common Stock are exercisable at any time
from and after December 20, 2007, and (iii) up to the remaining 1/3rd of the
underlying Common Stock are exercisable at any time from and after December 20,
2008; provided, that Mr. Kaetzer's employment has not been terminated by us for
cause or by Mr. Kaetzer without good reason.
Also in December 2006, we granted an option, exercisable at $0.50 per
share, to purchase up to 360,000 shares of our Common Stock to Masstar
Investments, Inc., a Texas corporation, pursuant to a consulting agreement
between us and Masstar Investments, Inc.
On January 4, 2007, we granted to Richard Cohen, our Chief Financial
Officer, for services performed on our behalf additional options to purchase
100,000 shares of Common Stock, exercisable immediately and until the fifth
anniversary of the date of grant at the price of $0.56 per share.
Issuances In Connection with Rex Energy Transactions.
As of January 16, 2006, we issued, an aggregate of 12,069,250 shares of
our Common Stock to certain designees of Rex Energy in consideration of Rex
Energy and its affiliates' entering into the Rex Purchase Agreement. As of
December 20, 2005, we also issued three-year stock options to certain designees
of Rex Energy exercisable for up to an aggregate of 50,000 shares of our Common
Stock at an exercise price of $1.00 per share.
Pursuant to the Termination Agreement, the Rex parties surrendered for
cancellation all of the 12,069,250 shares of our Common Stock previously issued
to them. In connection with the surrender of these shares, the $1,206,925 of
stock subscription receivables relating to the shares were eliminated as an
adjustment to equity. Pursuant to release executed as part of the Termination
Agreement, we and the Rex parties have agreed to release and hold each other
harmless from all Claims stemming from Controversies (each as defined in the
release executed as part of the Termination Agreement) arising out of our
dealings with one another.
Issuances in connection with our February 2006 Placement.
In the February 2006 Placement, on February 1, 2006 we issued to
accredited investors an aggregate of 8,181,819 shares of our newly-issued Common
Stock at $1.10 per share for gross proceeds of $9 million. We paid aggregate
placement agent commissions of $675,000 (or 7.5% of the gross proceeds) 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 2006 Placement, we became obligated to
issue an aggregate of 445,920 additional shares of Common Stock through October
6, 2006, to the investors as a penalty for our failing to file and have declared
effective 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
and to have it declared effective by June 2, 2006. On October 20, 2006, our
registration statement on Form SB-2 was declared effective by the Commission.
27
Issuances in connection with our March 2007 Bridge Financing
As part of our March 2007 Bridge Financing, in which we borrowed $1.7
million from a single accredited investor in the form of a Senior Secured
Debenture due September 15, 2007 and bearing interest at a rate of 16% per annum
(the "Debenture"), we granted to investor a warrant to purchase up to 3,000,000
shares of our common stock at an exercise price of $0.50 per share, which
warrant is exercisable at any time prior to September 15, 2012. We granted the
investor "piggy-back" registration rights for the shares issuable upon the
exercise of the warrant. The investor is entitled to and affords the Investor
certain protection with respect to the exercise price.
In connection with the March 2007 Bridge Financing, we delivered to
Casimir Capital LP, a placement fee of $170,000 and warrants to purchase up to
340,000 shares of our Common Stock at an exercise price of $0.50 per share.
Issuances in connection with our April 2007 Credit Facility
Concurrently with the closing of the Loan Transaction, two of our
principal stockholders, consisting of Alan Gaines, our Chairman, and Barrie
Damson, a former officer and director of the Company, surrendered stock options
to purchase 1,600,000 shares of Common Stock each at an exercise price of $0.05
per share, resulting in the cancellation of options for an aggregate of
3,200,000 shares of Common Stock. The cancelled options were a portion of
individual option grants for up to 6 million shares originally granted to each
of these individuals in April 2005.
Item 5 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 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 insurance 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.
28
Part F/S
The historical financial statements and the pro forma financial
information required by Form 10-SB are included below under "Item 9.01 Financial
Statements and Exhibits"
Part III
Item 1 Index to Exhibits.
The information required by this Item 1 to Part III of Form 10-SB
Information is included below under "Item 9.01 Financial Statements and
Exhibits"
Item 2 Description of Exhibits.
The information required by this Item 2 to Part III of Form 10-SB
Information is included below under "Item 9.01 Financial Statements and
Exhibits"
Item 9.01 Financial Statements and Exhibits.
Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page No.
(a) Financial Statements of Baseline Oil & Gas Corp.
Report of Independent Registered Public Accounting Firm .......... 32
Balance Sheet at December 31, 2006 ............................... 33
Statement of Expenses for years ended December 31, 2006 and 2005
and for the period from June 29, 2004 (Inception) through December
31, 2006 ......................................................... 34
Statement of Cash Flows for years ended December 31, 2006 and 2005
and for the period from June 29, 2004 (Inception) through December
31, 2006 ......................................................... 35
Statement of Changes in Stockholders' Equity/(Deficit) for the
period from June 29, 2004 (Inception) through December 31, 2006 .. 36
Notes to Financial Statements .................................... 37-45
29
Page No.
(b) Financial Statements of Businesses Acquired.
Report of Independent Registered Public Accounting Firm .......... 47
Statements of Combined Reserves and Direct Operating Expenses Oil
and Gas Properties Purchased From Statex Petroleum I, L.P. and
Charles W. Gleason, L.P .......................................... 48
Notes to Financial Statements .................................... 49-53
(c) Pro Forma Financial Information of Baseline Oil & Gas Corp.
Introduction - Unaudited Pro Forma Condensed Financial Statements. 55
Unaudited Pro Forma Condensed Statement of Operations For the Year
Ended December 31, 2006 .......................................... 56
Unaudited Pro Forma Condensed Statement of Operations For the Year
Ended December 31, 2005 .......................................... 57
Unaudited Pro Forma Condensed Balance Sheet as of December 31,
2006.............................................................. 58
Notes to Unaudited Pro Forma Condensed Financial Statements ...... 59-63
30
(a) Financial Statements of Baseline Oil & Gas Corp.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Baseline Oil & Gas Corp.
(A Development Stage Company)
Houston, Texas
We have audited the accompanying balance sheet of Baseline Oil & Gas Corp.
("Baseline") as of December 31, 2006, and the related statements of expenses,
cash flows and changes in stockholders' equity (deficit)for the two year period
then ended and for the period from June 29, 2004 (Inception) through December
31, 2006. 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 audits 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,
2006, 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
- -----------------------
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
April 12, 2007
32
BASELINE OIL & GAS CORP.
(A Development Stage Company)
BALANCE SHEET
December 31, 2006
ASSETS
Cash and marketable securities $ 123,678
Prepaid and other current assets 125,000
------------
Total current assets 248,678
Deferred debt issuance costs, net of
amortization of $237,192 88,947
Deferred financing costs 99,631
Property acquisition - deposit 1,000,000
Unproven leasehold acquisition costs 7,810,135
------------
Total assets $ 9,247,391
============
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable $ 82,873
Other payables 50,029
Accrued liabilities 171,471
Derivative liability 104,896
Short term debt and current portion of long term debt, net of discount 1,948,001
------------
Total current liabilities 2,357,270
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,
31,342,738 shares issued and outstanding 31,343
Additional paid-in-capital 28,423,418
Deficit accumulated during the development stage (21,564,640)
------------
Total stockholders' equity 6,890,121
------------
Total liabilities & stockholders' equity $ 9,247,391
============
See accompanying summary of accounting policies
and notes to financial statements.
33
BASELINE OIL & GAS CORP.
(A Development Stage Company)
STATEMENTS OF EXPENSES
Years Ended December 31, 2006 and 2005 and the
Period from June 29, 2004 (Inception) through December 31, 2006
Inception
Year Ended Year Ended Through
December 31, December 31, December 31,
2006 2005 2006
----------------------------------------------------------
Selling, general
and administrative $ 2,386,364 $ 17,305,279 $ 19,781,452
Interest (income) (117,630) -- (117,630)
Interest expense 1,691,788 392,565 2,085,197
(Gain) on derivative liability (400,775) -- (400,775)
Other expense 213,137 1,605 216,396
----------------------------------------------------------
Total expense 3,772,884 17,699,449 21,564,640
----------------------------------------------------------
Net loss $ (3,772,884) $ (17,699,449) $ (21,564,640)
==========================================================
Basic and diluted loss per share $ (0.11) $ (1.20)
Weighted average common shares
outstanding 33,989,119 14,777,299
See accompanying summary of accounting policies
and notes to financial statements.
34
BASELINE OIL & GAS CORP.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006 and 2005 and the
Period from June 29, 2004 (Inception) through December 31, 2006
Year Year Inception
Ended Ended Through
December 31, December 31, December 31,
2006 2005 2006
---------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,772,884) $ (17,699,449) $ (21,564,640)
Adjustments to reconcile net loss to
cash used in operating activities:
Share based compensation 720,874 16,499,670 17,220,544
Unrealized gain on derivative liability (400,775) -- (400,775)
Amortization of debt discount 1,206,577 305,825 1,512,402
Stock issued as penalty for delayed registration 594,000 -- 594,000
Stock issued in lieu of cash interest 187,500 -- 187,500
Amortization of debt issuance costs 237,192 29,649 266,841
Changes in:
Prepaid and other assets (125,000) -- (125,000)
Accounts payable and accruals 158,467 79,204 313,482
-------------- --------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (1,194,049) (785,101) (1,995,646)
-------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposit on acquisition (1,000,000) -- (1,000,000)
Deferred acquisition costs (99,631) -- (99,631)
Property acquisition costs (6,060,135) (1,750,000) (7,810,135)
-------------- --------------- ---------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (7,159,766) (1,750,000) (8,909,766)
-------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of note payable (16,496) -- (16,496)
Proceeds from sale of common stock, net 8,275,000 16,590 8,291,590
Proceeds from exercise of options 12,500 -- 12,500
Proceeds from convertible notes - 2,725,000 2,741,496
-------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,271,004 2,741,590 11,029,090
-------------- --------------- ---------------
NET CHANGE IN CASH (82,811) 206,489 123,678
Cash balance, beginning of period 206,489 -- --
-------------- --------------- ---------------
Cash balance, end of period $ 123,678 $ 206,489 $ 123,678
============== =============== ===============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 50,000 $ -- $ 50,000
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.
35
BASELINE OIL & GAS CORP.
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIT)
For the Period from June 29, 2004 (Inception) through December 31, 2006
Deficit
Accumulated
Additional During the
Common Paid In Development
Shares Stock Capital Stage Totals
-------------------------------------------------------------------------------------
Balances, 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, December 31, 2004 (92,307)
200,000 200 (200) (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 cost -- -- 355,788 -- 355,788
Net loss -- -- -- (17,699,449) (17,699,449)
-------------------------------------------------------------------------------------
Balances, December 31, 2005 20,270,000 20,270 18,791,179 (17,791,756) 1,019,693
Shares issued in connection with merger 12,069,250 12,069 1,194,856 -- 1,206,925
Proceeds from issuance of common stock 8,181,818 8,182 8,991,818 -- 9,000,000
Equity issuance costs -- -- (1,230,671) -- (1,230,671)
Shares issued on conversion of debt 1,820,000 1,820 357,289 -- 359,109
Return of shares issued in connection with
merger (12,069,250) (12,069) (1,194,856) -- (1,206,925)
Shares issued to pay interest 375,000 375 187,125 -- 187,500
Shares based compensation -- -- 720,874 -- 720,874
Shares issued as penalty for delayed
registration 445,920 446 593,554 -- 594,000
Option exercise 250,000 250 12,250 -- 12,500
Net loss -- -- -- (3,772,884) (3,772,884)
-------------------------------------------------------------------------------------
Balances, December 31, 2006 31,342,738 $ 31,343 $ 28,423,418 $ (21,564,640) $ 6,890,121
=====================================================================================
See accompanying summary of accounting policies
and notes to financial statements.
36
BASELINE OIL & GAS CORP.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Organization
Baseline Oil & Gas Corp. ("Baseline" or the "Company") 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, on
April 12, 2007 Baseline acquired significant oil and natural gas assets from
Statex Petroleum I, L.P. and Charles W. Gleeson LP. Such assets consist of
operated and non-operated working interests in leases located in Stephens County
Texas, and approximately 81 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
For purposes of the statement of cash flows, Baseline considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. There were no cash equivalents as of December 31, 2006.
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.
37
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.
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
The basic net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted net loss per
common share is computed by dividing the net loss adjusted on an "as if
converted" basis, by the weighted average number of common shares outstanding
plus potential dilutive securities. For the years ended December 31, 2006 and
2005, there were no dilutive securities outstanding.
Income Taxes
Baseline recognizes deferred tax assets and liabilities based on differences
between the financial reporting and tax bases of assets and liabilities using
the enacted tax rates and laws that are expected to be in effect when the
differences are expected to be recovered. Baseline provides a valuation
allowance for deferred tax assets for which it does not consider realization of
such assets to be more likely than not.
Stock Compensation
On January 1, 2006, Baseline adopted SFAS No. 123 (R), "Share-Based Payment."
SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under SFAS 123 are no
longer an alternative to financial statement recognition. Baseline adopted SFAS
123(R) using the modified prospective method which requires the application of
the accounting standard as of January 1, 2006. The consolidated financial
statements as of and for the year ended December 31, 2006 reflect the impact of
adopting SFAS 123(R). In accordance with the modified prospective method, the
consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R).
During the fiscal year ended December 31, 2005, Baseline granted 13,675,000
options to purchase common stock to employees. 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.
38
Year
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.
NOTE 2 - INCOME TAXES
Deferred tax assets - NOLs $ 969,241
Less: valuation allowance (969,241)
------------
Net deferred tax asset $ --
============
Baseline has net operating loss carry-forwards of approximately $2,850,000 at
December 31, 2006, which begin expiring in 2024.
NOTE 3 - CONVERTIBLE NOTES
On April 6, 2005 (the effective date), Baseline acquired 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.
Upon the effective date of the Coastal merger, Baseline assumed the obligations
with respect to $350,000 of convertible promissory notes. The notes, issued in
April 2005, were convertible at any time into shares of Baseline's common stock
at a rate of $0.25 per share, accrued interest at the rate of 10% per annum and
matured in April 2006 (twelve months from the date of issuance). Upon
conversion, each holder of these convertible promissory notes is entitled to
receive an additional number of shares equal to 20% of the face amount of the
convertible promissory notes. The impact of these additional shares results in
an effective conversion rate of $0.21 per share. Based on the effective
conversion rate of $0.21 per share, Baseline has recognized a beneficial
conversion feature on the notes of $231,401 which was recorded as a debt
discount. The discount was amortized over the life of the notes. 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 plus
accrued interest into 1,820,000 shares of Baseline's common stock.
39
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 ("November 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 Company. Purchasers of
the Units received in the aggregate 950,000 shares and, upon conversion of the
Notes, will receive an additional 4,750,000 Shares. Each quarter Baseline pays
interest of $59,380 to the holders in the form of $12,500 in cash and 93,750
shares of Baseline common. Baseline recorded a debt discount of $680,500 in
connection with the initial issuance 950,000 shares based on 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 total discount, $1,708,000, is being
amortized over the life of the November Note using the effective interest
method. As of December 31, 2006, $1,281,001 of the discount had been amortized
resulting in a net balance for the November Note of $1,948,001.
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, 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 $16,590. 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.
On January 16, 2006, Baseline entered into a definitive Purchase Agreement
("Purchase Agreement") to purchase certain assets from Rex Energy Operating
Corp. ("Rex Energy") and its affiliates (collectively the "Rex Parties"), and
the 50% membership in the New Albany -Indiana, LLC ("New Albany") that we did
not already own. 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 common shares of our
Common Stock valued at $1,206,925 or $0.10 per share. The issuance of such
shares was 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 accounted for the aforementioned shares as a stock subscription
receivable.
40
On June 8, 2006, Baseline entered into a Mutual Termination Agreement
("Termination Agreement") and Mutual Release Agreement ("Release Agreement")
with 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).
Pursuant to the termination agreement, the Rex Parties surrendered for
cancellation of the aforementioned, 12,069,250 shares of our common stock,
previously issued to them pursuant to the Stock Agreement. In connection with
the surrender of these shares, the $1,206,925 of stock subscription receivable
relating to the shares was eliminated as an adjustment to equity. After giving
effect to the cancellation of such shares, we have 31,342,730 shares of common
stock and options, warrants and convertible promissory notes to purchase up to
an additional 19,562,840 shares of common stock outstanding as of December 31,
2006. Pursuant to the Release Agreement, we and the Rex Parties have agreed to
release and hold each other harmless from all Claims stemming from Controversies
(each as defined in the Release Agreement) arising out of our dealings with one
another.
On February 1, 2006 Baseline completed a private placement of $9,000,000 by
selling an aggregate of 8,181,818 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. Baseline agreed to register the resale of the shares of common
stock issuable upon exercise of the Placement Warrants. 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 $104,896 at December 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 December
31, 2006, $0.761 expected volatility of 224%; risk free interest rate of
approximately 4.82%; and a term of two years and four months. The resulting
unrealized change in fair value of $400,775 from February 1, 2006 was recorded
in the statement of expenses as a gain on derivative liability.
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.
On October 20, 2006, Baseline's registration statement was declared effective.
In November 2006, Baseline issued an aggregate of 445,920 shares of Common Stock
with a value of $594,000 to investors in our February 2006 private offering.
Such shares were issued as a result of Baseline's failure to timely register the
shares purchased in the private offering.
On November 15, 2006, Baseline issued an aggregate of 375,000 shares of Common
Stock with a value of $187,500 to holders of November Notes in payment of
accrued interest through November 15, 2006.
On November 16, 2006, Wayne Brannan exercised an option to purchase 250,000
shares of Common Stock at $0.05 per share. Baseline issued 250,000 shares to Mr.
Brannan in exchange for $12,500.
41
NOTE 5 - STOCK OPTION GRANTS
On April 1, 2005, Baseline 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 Coastal merger noted above, see
Note 3, 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 4) 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. As is discussed in Note 4, on June 8,
2006, Baseline terminated the Purchase Agreement with Rex Energy.
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 2006, Baseline's Board of Directors granted the following stock options,
which are immediately exercisable with the exception of the options issued to
Thomas Kaetzer as detailed below:
On August 15, 2006, Baseline granted a stock option to The Wall Street Group, a
consultant, exercisable for up to 100,000 shares of Common Stock at an exercise
price of $1.01 per share.
On October 20, 2006, Baseline granted a stock option to Carey Birmingham, its
former president, exercisable for up to 75,000 shares of Common Stock at an
exercise price of $0.50 per share.
On October 20, 2006, Baseline granted a stock option to David Loev, exercisable
for up to 25,000 shares of Common Stock at an exercise price of $0.50 per share.
On November 14, 2006, Baseline granted a stock option to Masstar Inc., a
consultant, exercisable for up to 360,000 shares of Common Stock at an exercise
price of $0.50 per share.
On November 16, 2006 Wayne Brannan exercised an option to purchase 250,000
shares at $0.05 share.
42
On December 16, 2006, Baseline granted stock options to Thomas Kaetzer, then
COO, now CEO, exercisable for up to 1,000,000, 500,000 and 500,000 shares of
Common Stock exercisable at $0.50, $0.60 and $1.00 per share respectively. Mr.
Kaetzer's options vest in three equal parts on; 1) the date of grant, 2) the 1st
anniversary the date of grant, and 3) 2nd anniversary of the date of grant.
Coinciding with the issue of Mr. Kaetzer's options, Messers Gaines and Damson
agreed to cancel in aggregate options to purchase 2,000,000 shares with an
exercise price of $0.05 per share.
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 13,675,000 $ 0.07
Cancelled or expired -- --
Exercised -- --
----------
Outstanding as of December 31, 2005 13,675,000 $ 0.07
Granted during 2006 2,560,000 $ 0.64
Cancelled or expired (2,000,000) 0.05
Exercised (250,000) 0.05
----------
Outstanding as of December 31, 2006 13,985,000 $ 0.18
----------
Exercisable as of December 31, 2006 13,985,000 $ 0.18
----------
Options Outstanding and exercisable at December 31, 2006:
Exercisable
Number Remaining Number of
Exercise Price of Shares Life Shares
------------------------------------------
$0.05 10,700,000 3.3 10,700,000
$0.30 500,000 3.3 500,000
0.50 - $1.01 2,785,000 4.8 1,451,667
---------- -----------
13,985,000 12,651,667
========== ===========
NOTE 6 - 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.
43
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 February 28, 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).
On July 21, 2006 Baseline transferred $88,714 to New Albany to fund the purchase
of working interests in additional acreage acquired from Source Rock Resources,
Inc.
On July 31, 2006 Baseline transferred $200,938 to New Albany to fund the
purchase of working interests in additional acreage acquired from Aurora.
On October 26, 2006, Baseline transferred $680,643 to New Albany to fund its
share of the pilot drilling program on the acreage acquired from Aurora and the
acquisition of additional acreage from Source Rock Resources, Inc.
On November 8, 2006 Baseline transferred $250,105 to New Albany to fund its
share of the pilot drilling program on the acreage acquired from Aurora
On November 17, 2006 Baseline transferred $175,013 to New Albany to fund its
share of the pilot drilling program on the acreage acquired from Aurora
NOTE 7 - REGISTRATION STATEMENT-PENALTY INTEREST SHARES
As part of its Common Stock Offering in February 2006 (see Note 4), Baseline was
subject to a Registration Rights Agreement requiring it to file a registration
statement under the Securities Act by April 2, 2006. The company did not file by
April 2, but did so on June 13, 2006. As a result, Baseline incurred a $540,000
penalty, which was paid by issuing 445,920 common shares in November 2006.
NOTE 8 - SUBSEQUENT EVENTS
On December 20, 2006 Baseline Oil & Gas entered into a Purchase and Sale
Agreement ( "agreement") with Statex Petroleum I, L.P. and Charles W Gleeson LP
for a number of oil and gas producing properties in Stephens County in West
Texas. The purchase price was $ 28,000,000 plus interest from January 15, 2007
until date of closing. Upon execution of the agreement we paid a $1,000,000
non-refundable deposit to be credited against the purchase price at the closing
scheduled to take place on or before March 9, 2007. On March 9, 2007 we entered
into an amendment to the agreement whereby for an additional deposit of $300,000
paid by March 16, 2007 the deadline to close on the purchase of the Stephens
County assets was extended until April 16, 2007 and the effective date for the
transfer of the assets was changed from December 1, 2006 to February 1, 2007.
Baseline closed this acquisition on April 12, 2007.
On January 4, 2007, Baseline granted a stock option to Richard Cohen, CFO,
exercisable for up to 100,000 shares of Common Stock at an exercise price of
$0.56 per share.
On January 26, 2007 Barrie Damson our Chairman and CEO and Alan Gaines our Vice
Chairman and a director each made a loan of $50,000 to the Company to be used
for short term working capital needs. The loans, in the form of promissory
notes, bear interest at an annual rate of 6% and mature on the earlier to occur
of (i) the date on which we close a financing transaction in which we obtain
proceeds in excess of $5,000,000 or (ii) July 26, 2007.
44
On February 15, 2007, Baseline issued an aggregate of 93,750 shares of Common
Stock to holders of November Notes in payment of interest for the three months
ended February 15, 2007.
On March 15, 2007 Baseline closed a private bridge financing whereby we borrowed
$1,700,000 from a single accredited investor, Lakewood Capital ("Lakewood"). The
Company issued to Lakewood a Senior Secured Debenture ("Debenture") bearing
interest at 16%, a common stock purchase warrant to purchase up to 3,000,000
shares of our common stock at an exercise price of $0.50 per share, and entered
into a security agreement collateralized by the assets of the New Albany LLC. In
addition we are required to pay Lakewood a closing fee of $170,000 on the date
when the outstanding principal and accrued interest are paid. If Baseline
consummates a debt or equity financing of $15,000,000 or more the Debenture must
be paid in full. The proceeds from the Lakewood financing were used to pay the
additional deposit of $300,000 on the Stephens County property, satisfy a
capital call of $300,000 payable to Rex to maintain an interest in the New
Albany LLC, pay existing payables on Stephens County, and pay a $170,000 fee to
Casamir Capital, the placement agent. Additionally, The Company issued Casamir
Capital a warrant exercisable for up to 340,000 shares of Common Stock at an
exercise price of $0.50 per share. Concurrently with the closing of the Lakewood
financing, Barrie Damson and Alan Gaines each cancelled stock options to
purchase 1,670,000 shares of the company's common stock at an exercise of $0.05.
On March 16, 2007 we delivered $300,000 to New Albany-Indiana LLC ( "New Albany
") to pay a portion of the outstanding capital calls that we, as a member of New
Albany, were required to make. Pursuant to a Membership Interest Redemption
Agreement between the Company and New Albany, we then redeemed our membership
interest in the New Albany for the direct assignment to the Company of an
undivided 40.423% working interest in and to all oil and gas properties, rights,
and assets of New Albany. The New Albany assets have been pledged to Lakewood
under a mortgage to secure the assets of Lakewood Debenture.
Effective March 21, 2007, Barrie Damson resigned as Chairman and CEO of Baseline
Oil and Gas Corp. As a result of Mr. Damson's departure, the Company appointed
Mr. Thomas Kaetzer to fill the vacancy on the Board and promoted Mr. Kaetzer
from President/COO to Chairman/CEO.
45
(b) Financial Statements of Businesses Acquired.
46
Report of Independent Registered Public Accounting Firm
To the Shareholders of Baseline Oil & Gas Corp.
Houston, Texas
We have audited the accompanying Statements of Combined Revenues and Direct
Operating Expenses of the Oil and Gas Properties ("Statex Properties") Purchased
from Statex Petroleum I, L.P. and Charles W. Gleason, L.P. (the "Financial
Statements") for the years ended December 31, 2006 and 2005. These Financial
Statements are the responsibility of Baseline Oil & Gas Corp.'s management. Our
responsibility is to express an opinion on the Financial Statements based on our
audits.
We conducted our audit in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits 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 Statement. 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 our audits
provide a reasonable basis for our opinion.
The accompanying Financial Statements were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission as
described in Note 2. The presentation is not intended to be a complete
presentation of the properties described above.
In our opinion, the Financial Statements referred to above present fairly, in
all material respects, the Combined Revenues and Direct Operating Expenses of
the Oil and Gas Properties Purchased from Statex Petroleum I, L.P. and Charles
W. Gleason, L.P. as described in Note 1 for the years ended December 31, 2006
and 2005, in conformity with U.S. generally accepted accounting principles.
/s/ Malone & Bailey, PC
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
April 9, 2007
47
Baseline Oil & Gas Corp.
Statements of Combined Revenues and Direct Operating Expenses
of Oil and Gas Properties Purchased From
Statex Petroleum I, L.P. and Charles W. Gleason, L.P.
For the Years Ended
December 31,
2006 2005
------------ ------------
Revenues $ 12,522,236 $ 10,732,108
Direct operating expenses 6,446,934 5,016,266
------------ ------------
Excess of revenues over direct operating expenses $ 6,075,302 $ 5,715,842
============ ============
The accompanying notes are an integral part of the financial statements.
48
Baseline Oil & Gas Corp.
Statement of Combined Revenues and Direct Operating Expenses
of Oil and Gas Properties Purchased From
Statex Petroleum I, L.P. and Charles W. Gleason, L.P.
Notes to Financial Statements
(1) The Properties
On December 20, 2006, Baseline Oil & Gas, Corp. ("Baseline" or the "Company")
entered into a Purchase and Sale Agreement to purchase certain oil and has
properties (the "Properties") owned by Statex Petroleum I, L.P. and Charles W.
Gleeson L.P. (collectively, the "Seller") for $28,600,000. On April 12, 2007,
Baseline finalized the acquisition of the Properties.
(2) Basis For Presentation
The statement of combined revenues and direct operating expenses has been
derived from the Seller's historical financial records and is prepared on the
accrual basis of accounting. Revenues and direct operating expenses as set forth
in the accompanying statement includes revenues from oil and gas production, net
of royalties, and associated direct operating expenses related to the net
revenue interest and net working interest, respectively. These revenues and
expenses in the Properties represent Baseline's acquired interest.
During the periods presented, the Properties were not accounted for or operated
as a separate division of the Seller. Accordingly, full separate financial
statements prepared in accordance with generally accepted accounting principles
do not exist and are not practicable to obtain in these circumstances.
This statement varies from an income statement in that it does not show certain
expenses, which were incurred in connection with the ownership of the
Properties, such as general and administrative expenses, and income taxes. These
costs were not separately allocated to the Properties in the Seller's historical
financial records and any pro forma allocation would be both timing consuming
and expensive and would not be a reliable estimate of what these costs would
actually have been had the Properties been operated historically as a stand
alone entity. In addition, these allocations, if made using the historical
Seller general and administrative structures and tax burdens, would not produce
allocations that would be indicative of the historical performance of the
Properties had they been assets of Baseline, due to the greatly varying size,
structure, and operations between Baseline and the Seller. This statement does
not include provisions for depreciation, depletion and amortization as such
amounts would not be indicative of future costs and those costs which would be
incurred by Baseline upon allocation of purchase price. Accordingly, the
financial statement and other information presented are not indicative of the
financial condition or results of operations of the Properties going forward due
to the changes in the business and the omission of various operating expenses.
For the same reason, primarily the lack of segregated or easily obtainable
reliable data on asset values and related liabilities, a balance sheet is not
presented for the Properties.
49
At the end of the economic life of the Properties, certain restoration and
abandonment costs will be incurred by the respective owners of the Properties.
No accrual for these costs is included in the direct operating expenses.
(3) Commitments and Contingencies
Baseline is not aware of any legal, environmental or other commitments or
contingencies relating to the Properties that would have a material effect on
the statement of combined revenues and direct operating expenses.
(4) Revenue Recognition
It is Baseline's policy to recognize revenue when production is sold to a
purchaser at a fixed or determinable price.
(5) Supplemental Oil and Gas Information (Unaudited)
A. General.
The estimated net proved oil and gas reserves and the present value of estimated
cash flows from those reserves from the Properties acquired by Baseline are
summarized below. The reserves were estimated by Pressler Petroleum Consultants,
Inc. ("Pressler") in a report dated February 27, 2007 as of December 31, 2006.
The reserve study was paid for by Baseline and was based on information provided
by the Seller to Pressler. The December 31, 2006 reserve study was the only
determination of proved reserves that is available therefore there will be no
revisions of reserve estimates because no previous determination of estimates
exists. Likewise there was no detail of extensions, discoveries and improved
recovery for the periods below because there was no basis in which to determine
when a discovery or extension was actually made.
B. Estimated Oil and Gas Reserve Quantities.
There was no determination of proven reserves at December 31, 2005. The only
reserve study was done as of December 31, 2006. For the table below, the
December 31, 2006 proved reserve total was adjusted for the actual production
activity to determine what the proved reserves would have been at December 31,
2005 based on the reserve study as of December 31, 2006.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and projecting future rates of production. The following reserve data
related to the Properties represent estimates only and should not be construed
as being exact. The reliability of the estimates at any point in time depends on
both quality and quantity of the technical and economic data, the performance of
the reservoirs, as well as extensive engineering judgment. Consequently, reserve
estimates are subject to revision as additional data becomes available during
the producing life of a reservoir. The evolution of technology may also result
in the application of improved recovery techniques, such as supplemental or
enhanced recovery projects, which have the potential to increase reserves beyond
those currently envisioned.
50
Estimates of proved reserves are derived from quantities of crude oil and
natural gas that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
operating and economic conditions and rely upon a production plan and strategy.
Statement of Financial Accounting Standards No. 69, Disclosures About Oil and
Gas Producing Activities ("FAS 69"), requires calculation of future net cash
flows using a 10% annual discount factor and year-end prices, costs and
statutory tax rates, except for known future changes such as contracted price
and legislated tax rates.
All of the reserves relating to the Properties are located in the United States.
Estimated Oil and Gas Information:
Oil
Equivalent
Oil (Bbls) Gas (Mcf) (BOE)
-------------------------- ----------
Total Proved Reserves
Balance - December 31, 2005 3,781,640 373,648 3,843,915
Production (193,250) (29,588) (198,181)
Purchases of reserve in-place -- -- --
Extensions, discoveries and improved recovery -- -- --
Transfers/sales of reserve in place -- -- --
Revisions of previous estimates -- -- --
--------- ---------- ---------
Ending reserves - December 31, 2006 3,588,390 344,060 3,645,734
========= ========== =========
Proved developed reserves: 2,881,390 303,470 2,931,968
========= ========== =========
Oil
Equivalent
Oil (Bbls) Gas (Mcf) (BOE)
-------------------------- ----------
Total Proved Reserves
Balance - December 31, 2004 3,972,921 405,090 4,040,436
Production (191,281) (31,442) (196,521)
Purchases of reserve in-place -- -- --
Extensions, discoveries and improved recovery -- -- --
Transfers/sales of reserve in place -- -- --
Revisions of previous estimates -- -- --
--------- ---------- ---------
Balance - December 31, 2005 3,781,640 373,648 3,843,915
========= ========== =========
Proved developed reserves: 3,025,312 328,810 3,080,114
========= ========== =========
51
C. Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves.
The following disclosures concerning the standardized measure of future cash
flows from proved oil and gas reserves are presented in accordance with FAS 69.
As prescribed by FAS 69, the amounts shown are based on prices and costs at the
end of each period and a 10% annual discount factor.
Future cash flows are computed by applying fiscal year-end prices of natural gas
and oil to year-end quantities of proved natural gas and oil reserves. Future
operating expenses and development costs are computed primarily by the Company
by estimating the expenditures to be incurred in developing and producing the
Properties' proved natural gas and oil reserves at the end of the year based on
year end costs and assuming continuation of existing economic conditions. Future
income taxes are based on currently enacted statutory rates.
The standardized measure of discounted future net cash flows is not intended to
represent the replacement costs or fair value of the Properties' natural gas and
oil reserves. An estimate of fair value would take into account, among other
things, anticipated future changes in prices and costs, and a discount factor
more representative of the time value of money and the risks inherent in reserve
estimates of natural gas and oil producing operations.
The standardized measure of discounted future net cash flows from the Company's
estimated proved gas reserves is provided for the financial statement user as a
common base for comparing oil and gas reserves of enterprises in the industry
and may not represent the fair market value of the Company's oil and gas
reserves or the present value of future cash flows of equivalent reserves due to
various uncertainties inherent in making these estimates. Those factors include
changes in oil and gas prices from year end prices used in the estimates,
unanticipated changes in future production and development costs and other
uncertainties in estimating quantities and present values of oil and gas
reserves.
The Standardized Measure of Discounted Future Net Cash Flows relating to the
Properties' proved oil and gas reserves is as follows:
Years Ended December 31,
---------------------------------
2006 2005
------------- -------------
Future cash inflows $ 212,297,137 $ 220,860,507
Future production costs (116,402,890) (122,846,877)
Future development costs (5,142,900) (5,142,900)
------------- -------------
Future net cash flows before income taxes 90,751,347 92,870,730
Future income tax (30,428,739) (31,311,622)
------------- -------------
Future net cash flows 60,322,608 61,559,108
Discount at 10% annual rate (27,145,174) (27,701,599)
------------- -------------
Standardized measure of discounted future
net cash flows $ 33,177,434 $ 33,857,509
============= =============
52
The principal changes in the standardized measure of discounted future net cash
flows relating to proved oil and gas reserve are summarized below:
Years Ended December 31,
-------------------------------
2006 2005
------------ ------------
Standardized measure, beginning of year $ 33,857,509 $ 14,578,422
Sales, net of production costs (6,884,367) (5,715,842)
Net change in prices, net of production costs 2,620,732 32,530,132
Extensions and discoveries -- --
Development costs incurred -- --
Accretion of discount, changes in
production rates and other 3,034,480 2,426,554
Change in income tax 549,080 (9,961,757)
Revision of quantity estimates -- --
------------ ------------
End of year $ 33,177,434 $ 33,857,509
============ ============
53
(b) Pro Forma Financial Information.
54
Baseline Oil & Gas Corp.
Unaudited Pro Forma Condensed Financial Statements
The following unaudited pro forma condensed financial statements and related
notes are presented to show the pro forma effects of the acquisition of the
Properties from the Seller.
The pro forma condensed statements of operations are presented to show income
from continuing operations as if the acquisition of the Properties occurred
effective January 1, 2005. The pro forma condensed balance sheet is based on the
assumption that the acquisition of the Properties occurred effective December
31, 2006.
Pro forma data are based on assumptions and include adjustments as explained in
the notes to the unaudited pro forma condensed financial statements. The pro
forma data are not necessarily indicative of the financial results that would
have been attained had the acquisition of the Properties occurred on the dates
referenced above and should not be viewed as indicative of operations in future
periods. The unaudited pro forma condensed financial statements should be read
in conjunction with notes thereto, Baseline's Annual Report on Form 10-KSB for
the year ended December 31, 2006 and the Statement of Combined Revenues and
Direct Operating Expenses Purchased of Oil and Gas Properties Purchased From
Statex Petroleum I, L.P. and Charles W. Gleason, L.P. included herein.
55
Baseline Oil & Gas Corp.
Unaudited Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 2006
Baseline Properties Pro Forma
Historical Historical Adjustments Pro Forma
---------------------------------------------------------- ------------
Revenues $ -- $ 12,522,236 $ -- $ 12,522,236
---------------------------------------------------------- ------------
Direct operating costs -- 6,446,934 -- 6,446,934
Depreciation, depletion and amortization -- -- 1,434,299 (a) 1,434,299
General & administrative 2,386,364 -- -- 2,386,364
Gain on derivative liability (400,775) -- -- (400,775)
Financing costs, net 1,787,295 -- 3,600,010 (b)(c) 5,387,305
---------------------------------------------------------- ------------
3,772,884 6,446,934 5,034,309 15,254,127
---------------------------------------------------------- ------------
Income (loss) before income taxes (3,772,884) 6,075,302 (5,034,309) (2,731,891)
Provision for income tax -- -- -- --
---------------------------------------------------------- ------------
Net income (loss) to common $ (3,772,884) $ 6,075,302 $(5,034,309) $ (2,731,891)
========================================================== ============
Basic and diluted earnings per share $ (0.11) $ (0.08)
Weighted shares outstanding 33,989,119 33,989,119
The accompanying notes to the unaudited pro forma condensed financial statements
are an integral part of these statements.
56
Baseline Oil & Gas Corp.
Unaudited Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 2005
Baseline Properties Pro Forma
Historical Historical Adjustments Pro Forma
---------------------------------------------------------- ------------
Revenues $ -- $ 10,732,108 $ -- $ 10,732,108
---------------------------------------------------------- ------------
Direct operating costs -- 5,016,266 -- 5,016,266
Depreciation, depletion and
amortization -- -- 1,422,285 (a) 1,422,285
General & administrative 17,305,279 -- 1,292,000 (d) 18,597,279
Financing costs, net 394,170 -- 3,600,010 (b)(c) 3,994,180
---------------------------------------------------------- ------------
17,699,449 5,016,266 6,314,295 29,030,010
---------------------------------------------------------- ------------
Income (loss) before income taxes (17,699,449) 5,715,842 (6,314,295) (18,297,902)
Provision for income tax -- -- -- --
---------------------------------------------------------- ------------
Net income (loss) to common $(17,699,449) $ 5,715,842 $(6,314,295) $(18,297,902)
========================================================== ============
Basic and diluted earnings per share $ (1.20) $ (1.24)
Weighted shares outstanding 14,777,299 14,777,299
The accompanying notes to the unaudited pro forma condensed financial statements
are an integral part of these statements.
57
Baseline Oil & Gas Corp.
Unaudited Pro Forma Condensed Balance Sheet
as of December 31, 2006
Baseline Pro Forma
Historical Adjustments Pro Forma
----------------------------------- -----------
Assets
Current assets $ 248,678 $ -- $ 248,678
Net property, plant and equipment 7,810,135 30,015,320 (1)(2)(3) 37,825,455
Other assets 1,188,578 (1,000,000) (4) 188,578
----------------------------------- -----------
Total Assets $ 9,247,391 $ 29,015,320 $38,262,711
=================================== ===========
Liabilities and shareholders' equity
Current liabilities 2,357,270 -- $ 2,357,270
Long-term debt 28,656,704 (5)(6) 28,656,704
Other non-current liabilities -- -- --
Shareholders equity 6,890,121 358,616 (6)(7) 7,248,737
----------------------------------- -----------
Total liabilities and shareholders equity $ 9,247,391 $ 29,015,320 $38,262,711
=================================== ===========
The accompanying notes to the unaudited pro forma condensed financial statements
are an integral part of these statements.
58
Baseline Oil & Gas Corp.
Notes to Unaudited Pro Forma Condensed Financial Statements
Basis of Presentation
The unaudited pro forma statement of operations for the year ended December 31,
2005, is based on the audited financial statements of Baseline for the year
ended December 31, 2005, the audited the Statements of Combined Revenues and
Direct Operating Expenses of Oil and Gas Properties Purchased From Statex
Petroleum I, L.P. and Charles W. Gleason, L.P. for the year ended December 31,
2005 and the adjustments and assumptions described below.
The unaudited pro forma statement of operations for the year ended December 31,
2006, and the unaudited pro forma balance sheet as of December 31, 2006, are
based on the audited financial statements of Baseline as of and for the year
ended December 31, 2006, the audited Statements of Combined Revenues and Direct
Operating Expenses of Oil and Gas Properties Purchased From Statex Petroleum I,
L.P. and Charles W. Gleason, L.P. for the year ended December 31, 2006, and the
adjustments and assumptions described below.
Pro forma adjustments:
The unaudited pro forma statements of operations reflect the following
adjustments:
a. Record incremental depreciation, depletion and amortization expense,
using units of production method, resulting from the purchase of the
Properties.
b. Record interest expense associated with Revolving Loan A and Term
Loan B from Petrobridge Investment Management, LLC ("Petrobridge")
c. Record amortization of the $473,320 commitment fee paid and the
$1,177,296 fair market value of Warrants issued to Petrobridge. The
amounts are being amortized over the life of the notes.
d. Record $1,292,000 in non-deal related expenses.
The unaudited pro forma balance sheet reflects the following adjustments
associated with the acquisition of the Properties as of December 31, 2006.
1. Record the purchase price of the Statex Properties, $28,600,000.
2. Record the $473,320 commitment fee paid to Petrobridge and the
$642,000 in other deal related closing costs.
3. Record $300,000 incremental investment in New Albany Indiana
properties.
4. Application of deposit to purchase Statex Properties.
5. Record the $30,307,320 borrowed from Petrobridge in the form of the
$10,307,320 Revolving Loan A and $20,300,000 Term Loan B.
6. Record amortization of the $473,320 commitment fee and the debt
discount of $1,177,296 associated with the issuance of warrants to
purchase 3,200,000 shares of stock issued to Petrobridge.
7. Record $1,292,000 in non-deal related expenses.
59
Baseline Oil & Gas Corp.
Pro Forma Supplemental Oil and Gas Disclosures
(Unaudited)
A. General.
The following table sets forth certain unaudited pro forma information
concerning Baseline's proved oil and gas reserves as of December 31, 2006 and
2005, giving effect to the purchase of the Properties from the Seller as if it
had occurred on January 1, 2005. There are numerous uncertainties inherent in
estimating quantities of proved reserves and projecting future rates of
production. The following reserve data related to the Properties represent
estimates only and should not be construed as being exact. The reliability of
these estimates at any point in time depends on both the quality and quantity of
the technical and economic data, the performance of the reservoirs, as well as
extensive engineering judgment. Consequently, reserve estimates are subject to
revision as additional data becomes available during the producing life of a
reservoir. The evolution of technology may also result in the application of
improved recovery techniques, such as supplemental or enhanced recovery
projects, which have the potential to increase reserves beyond those currently
envisioned.
B. Estimated Oil and Gas Reserve Quantities.
There was no determination of proven reserves at December 31, 2005. The only
reserve study was done as of December 31, 2006. For the table below, the
December 31, 2006 proved reserve total was adjusted for the actual production
activity to determine what the proved reserves would have been at December 31,
2005 based on the reserve study as of December 31, 2006.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and projecting future rates of production and timing of development
expenditures. Estimates of proved reserves are derived from quantities of crude
oil and gas that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
operating and economic conditions and rely upon a production plan and strategy.
The following reserve data represents estimates only and should not be construed
as being exact.
All of the reserves are located in the United States.
60
Estimated oil and gas information:
Barrel Oil Equivalent Reserves (BOE)
-----------------------------------------------
Total proved reserves: Baseline Properties Pro Forma
-----------------------------------------------
Balance, December 31, 2005 -- 3,843,915 3,843,915
Production -- (198,181) (198,181)
Purchases of reserve in--place -- -- --
Extensions, discoveries and improved recovery -- -- --
Transfers/sales of reserve in place -- -- --
Revisions of previous estimates -- -- --
-----------------------------------------------
Balance, December 31, 2006 -- 3,645,734 3,645,734
===============================================
Proved developed reserves at December 31, 2006 -- 2,931,968 2,931,968
===============================================
Barrel Oil Equivalent Reserves (BOE)
-----------------------------------------------
Total proved reserves: Baseline Properties Pro Forma
-----------------------------------------------
Balance, December 31, 2004 -- 4,040,436 4,040,436
Production -- (196,521) (196,521)
Purchases of reserve in--place -- -- --
Extensions, discoveries and improved recovery -- -- --
Transfers/sales of reserve in place -- -- --
Revisions of previous estimates -- -- --
-----------------------------------------------
Balance, December 31, 2005 -- 3,843,915 3,843,915
===============================================
Proved developed reserves at December 31, 2005 -- 3,080,114 3,080,114
===============================================
61
Pro Forma Standardized Measure of Discounted Future Net Cash Flows:
The following is a summary of pro forma standardized measure of discounted
future net cash flows from proved oil and gas reserves of Baseline and the
Properties as of December 31, 2006 and 2005, net of income tax expense and
includes the effects of the acquisition of the Properties. Future cash flows are
computed by applying fiscal year-end prices of natural gas and oil to year-end
quantities of proved natural gas and oil reserves. Future operating expenses and
development costs are computed Baseline by estimating the expenditures to be
incurred in developing and producing the Properties' proved natural as and oil
reserves at the end of the year, based on year end costs and assuming
continuation of existing economic conditions. Future income taxes are based on
currently enacted statutory rates.
This information should be viewed only as a form of standardized disclosure
concerning possible future cash flows that would result under the assumptions
used but should not be viewed as indicative of fair market value nor be
considered indicative of any trends. Reference should be made to Baseline's
financial statements for the year-ended December 31, 2006 and the Statements of
Combined Revenues and Direct Operating Expenses Purchased of Oil and Gas
Properties Purchased from Statex Petroleum I, L.P. and Charles W. Gleason, L.P.
included herein, for a discussion of the assumptions used in preparing the
information presented.
Year Ended December 31, 2006
---------------------------------------------------------
Baseline Properties Pro Forma
---------------------------------------------------------
Future cash inflows $ -- $ 212,297,137 $ 212,297,137
Future production costs -- (116,402,890) (116,402,890)
Future development costs -- (5,142,900) (5,142,900)
---------------------------------------------------------
Future net cash flows before income taxes -- 90,751,347 90,751,347
Future income tax -- (30,428,739) (30,428,739)
---------------------------------------------------------
Future net cash flows -- 60,322,608 60,322,608
Discount at 10% annual rate -- (27,145,174) (27,145,174)
---------------------------------------------------------
Discounted future net cash flow $ -- $ 33,177,434 $ 33,177,434
=========================================================
Year Ended December 31, 2005
---------------------------------------------------------
Baseline Properties Pro Forma
---------------------------------------------------------
Future cash inflows $ -- $ 220,860,507 $ 220,860,507
Future production costs -- (122,846,877) (122,846,877)
Future development costs -- (5,142,900) (5,142,900)
Future income tax -- (31,311,622) (31,311,622)
---------------------------------------------------------
Future net cash flows -- 61,559,108 61,559,108
Discount at 10% annual rate -- (27,701,599) (27,701,599)
---------------------------------------------------------
Discounted future net cash flow $ -- $ 33,857,509 $ 33,857,509
=========================================================
62
The principal changes in the pro forma standardized measure of discounted future
net cash flows relating to proven oil and gas reserve is as follows:
Year Ended December 31, 2006
---------------------------------------------------------
Baseline Properties Pro Forma
---------------------------------------------------------
Beginning of year $ -- $ 33,857,509 $ 33,857,509
Sales, net of production costs -- (6,884,367) (6,884,367)
Net change in prices, net of production costs -- 2,620,732 2,620,732
Extensions and discoveries -- -- --
Development costs incurred -- -- --
Accretion of discount, changes in production
rates and other -- 3,034,480 3,034,480
Change in income tax -- 549,080 549,080
Revision of quantity estimates -- -- -
--------------------------------------------------------
End of year $ -- $ 33,177,434 $ 33,177,434
========================================================
Year Ended December 31, 2005
---------------------------------------------------
Baseline Properties Pro Forma
---------------------------------------------------
Beginning of year $ -- $ 14,578,422 $ 14,578,422
Sales, net of production costs -- (5,715,842) (5,715,842)
Net change in prices, net of production costs -- 32,530,132 32,530,132
Extensions and discoveries -- -- --
Development costs incurred -- -- --
Accretion of discount, changes in production
rates and other -- 2,426,554 2,426,554
Change in income tax -- (9,961,756) (9,961,756)
Revision of quantity estimates -- -- --
---------------------------------------------------
End of year $ -- $ 33,857,509 $ 33,857,509
===================================================
63
Exhibits.
Exhibit No. Description
- ----------- -----------
99.1 Credit Agreement, dated as of April 12, 2007, among the Company,
as Borrower, and each of the lenders from time to time party
hereto, and Drawbridge Special Opportunities Fund LP, as
administrative agent for the lenders.
99.2 2002 Master Agreement and Schedule, dated April 12, 2007, between
the Company and Macquarie Bank Limited
99.3 Warrant issued April 12, 2007 to Drawbridge Special Opportunities
Fund LP
99.4 Warrant issued April 12, 2007 to D.B. Zwirn Special Opportunities
Fund, L.P.
99.5 Registration Rights Agreement, dated as of April 12, 2007, among
the Company and each of Drawbridge Special Opportunities Fund LP
and D.B. Zwirn Special Opportunities Fund, L.P.
99.6 Press Release of the Company, dated April 18, 2007, announcing
completion of acquisition of North Texas producing properties.
64
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: April 18, 2007
BASELINE OIL & GAS CORP.
By: /s/ Thomas Kaetzer
-------------------------
Thomas Kaetzer,
Chief Executive Officer
65
Exhibit Index
Exhibit No. Description
- ----------- -----------
99.1 Credit Agreement, dated as of April 12, 2007, among the Company,
as Borrower, and each of the lenders from time to time party
hereto, and Drawbridge Special Opportunities Fund LP, as
administrative agent for the lenders.
99.2 2002 Master Agreement and Schedule, dated April 12, 2007, between
the Company and Macquarie Bank Limited
99.3 Warrant issued April 12, 2007 to Drawbridge Special Opportunities
Fund LP
99.4 Warrant issued April 12, 2007 to D.B. Zwirn Special Opportunities
Fund, L.P.
99.5 Registration Rights Agreement, dated as of April 12, 2007, among
the Company and each of Drawbridge Special Opportunities Fund LP
and D.B. Zwirn Special Opportunities Fund, L.P.
99.6 Press Release of the Company, dated April 18, 2007, announcing
completion of acquisition of North Texas producing properties.