SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-QSB |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2007 |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to ________________ Commission file number 333-116890 BASELINE OIL & GAS CORP. (Exact name of small business as specified in its charter) Nevada 30-0226902 (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 11811 N. Freeway (I-45), Suite 200, Houston, TX 77060 (Address of principal executive offices) (281) 591-6100 (Issuer's telephone number, including area code) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes |_| No |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 31,436,488 shares of Common Stock, $.001 per share, as of May 12, 2007. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| PART I FINANCIAL INFORMATION Item 1. Financial Statements. BASELINE OIL & GAS CORP. (A Development Stage Company) BALANCE SHEETS (Unaudited) March 31, December 31, 2007 2006 ------------------------------- ASSETS Cash and marketable securities $ 488,177 $ 123,678 Deferred debt issuance costs, net of amortization of $453,118 and $262,379, respectively 1,531,809 88,947 Prepaid and other current assets 200,000 125,000 ------------ ------------ Total current assets 2,219,986 337,625 Deferred acquisition costs 29,739 -- Deferred financing costs 399,385 99,631 Property acquisition - deposit 1,300,000 1,000,000 Unproven leasehold acquisition costs 8,092,302 7,810,135 ------------ ------------ Total assets $ 12,041,412 $ 9,247,391 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Accounts payable $ 177,985 $ 82,873 Other payables 134,456 50,029 Accrued liabilities 43,056 171,471 Derivative liability 58,461 104,896 Short term debt and current portion long term debt, net of discount 3,932,668 1,948,001 ------------ ------------ Total current liabilities 4,346,626 2,357,270 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, 31,436,488 and 31,342,738 shares issued and outstanding, respectively 31,437 31,343 Additional paid-in-capital 30,033,969 28,423,418 Deficit accumulated in the development stage (22,370,620) (21,564,640) ------------ ------------ Total stockholders' equity 7,694,786 6,890,121 ------------ ------------ Total liabilities & stockholders' equity $ 12,041,412 $ 9,247,391 ============ ============ See accompanying summary of accounting policies and notes to financial statements. 1 BASELINE OIL & GAS CORP. (A Development Stage Company) STATEMENTS OF EXPENSES Three Months Ended March 31, 2007 and 2006 and the Period from June 29, 2004 (Inception) through March 31, 2007 (Unaudited) Three Months Ended Inception Through March 31, March 31, 2007 2006 2007 -------------------------------------------------- Selling, general and administrative $ 288,106 $ 366,956 $ 20,069,558 Interest (income) (758) (22,030) (118,388) Interest expense 565,067 469,138 2,650,264 (Gain) Loss on derivative liability (46,435) 99,973 (447,210) Other expense -- -- 216,396 -------------------------------------------------- Total expense 805,980 914,037 22,370,620 -------------------------------------------------- Net loss $ (805,980) $ (914,037) $(22,370,620) ================================================== Basic and diluted net loss per share $ (0.03) $ (0.03) Basic and diluted weighted average shares outstanding 31,342,738 35,557,242 See accompanying summary of accounting policies and notes to financial statements. 2 BASELINE OIL & GAS CORP. (A Development Stage Company) STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2007 and 2006 and the Period from June 29, 2004 (Inception) through March 31, 2007 (Unaudited) Three Months Ended Inception Through March 31, March 31, 2007 2006 2007 ------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (805,980) $ (914,037) (22,370,620) Adjustments to reconcile net loss to cash used in operating activities: Share based compensation 55,371 -- 17,275,915 Unrealized (gain)/loss on derivative liability (46,435) 99,973 (447,210) Amortization of debt discount 284,667 342,517 1,797,069 Stock issued as penalty for delayed registration -- -- 594,000 Stock issued in lieu of cash interest 46,875 -- 234,375 Amortization of debt issuance costs 205,850 59,298 472,691 Changes in: Prepaid and other assets (75,000) (56,250) (200,000) Accounts payable and accruals (174,895) 64,541 89,837 ------------ ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (509,547) (403,958) (2,553,943) CASH FLOWS FROM INVESTING ACTIVITIES Deposit on acquisition (300,000) -- (1,300,000) Deferred financing costs (329,493) -- (429,124) Property acquisition costs (282,167) (3,903,584) (8,092,302) ------------ ------------ ------------ NET CASH FLOWS USED IN INVESTING ACTIVITIES (911,660) (3,903,584) (9,821,426) CASH FLOWS FROM FINANCING ACTIVITIES Payment of note payable (14,294) (16,496) (30,790) Proceeds from sale of common stock, net -- 8,275,000 8,291,590 Proceeds from exercise of stock options -- -- 12,500 Proceeds from issuance of debt and notes 1,800,000 -- 4,590,246 ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 1,785,706 8,258,504 12,863,546 ------------ ------------ ------------ NET CHANGE IN CASH 364,499 3,950,962 488,177 Cash balance, beginning of period 123,678 206,489 -- ------------ ------------ ------------ Cash balance, end of period $ 488,177 $ 4,157,451 $ 488,177 ============ ============ ============ SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 12,500 $ -- $ 62,500 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. 3 BASELINE OIL & GAS CORP. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Organization Baseline Oil & Gas Corp. ("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 that purchase agreement executed on April 12, 2007, Baseline acquired, effective as of February 1, 2007 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. Basis of Presentation The accompanying unaudited interim financial statements of Baseline have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with Baseline's audited 2006 annual financial statements and notes thereto. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements, which would substantially duplicate the disclosure required in Baseline's 2006 annual financial statements have been omitted. Use of Estimates The preparation of these financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - ISSUANCE OF COMMON STOCK On March 31, 2007, Baseline issued an aggregate of 93,750 shares of common stock, with a value of $46,875, in payment of accrued interest through February 15, 2007, to holders of 10% convertible promissory notes issued by Baseline in privately negotiated transactions involving the offer and sale of $2.375 million in units consisting of such notes and Common Stock. NOTE 3 - STOCK OPTION GRANTS 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 March 15, 2007, concurrently with the closing of the Lakewood financing (see NOTE 4), Alan Gaines, Baseline's Vice-Chairman, and Barrie Damson, a former officer and director of 4 BASELINE OIL & GAS CORP. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (Unaudited) Baseline, each cancelled stock options to purchase 1,670,000 shares of Baseline's common stock at an exercise price of $0.05. NOTE 4 - BRIDGE LOAN FINANCING On March 15, 2007, Baseline borrowed $1,700,000 from a single accredited investor, Lakewood Group, LLC ("Lakewood"). Baseline 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 Common Stock at an exercise price of $0.50 per share, and entered into a security agreement collateralized by the assets of Baseline. In addition Baseline is 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 an additional deposit of $300,000 on the Stephens County property, to partially satisfy a capital call in the New Albany-Indiana LLC (see NOTE 6), to pay existing payables on Stephens County, and to pay a $170,000 fee to Casimir Capital, the placement agent. Additionally, The Company issued Casimir 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 Common Stock at an exercise of $0.05. NOTE 5 - LOANS FROM FOUNDERS On January 26, 2007, Barrie Damson our former 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 Baseline closes a financing transaction in which it obtains proceeds in excess of $5,000,000 or (ii) July 26, 2007. NOTE 6 - INVESTMENT IN JOINT VENTURE AND REDEMPTION OF MEMBERSHIP INTEREST On March 16, 2007, Baseline delivered $300,000 to New Albany-Indiana LLC ("New Albany") to pay a portion of the outstanding capital calls that it, as a member of New Albany, was required to make. Pursuant to a Membership Interest Redemption Agreement between the Company and New Albany, Baseline then redeemed its membership interest in 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 were then pledged to Lakewood under a mortgage to secure the assets of Lakewood's Debenture. The reduction in our membership interest of 50% to a 40.423% direct working interest reflected an adjustment of our membership interest in New Albany at the time of our redemption, as a result of outstanding capital calls owed by us but assumed by the affiliates and/or assigns of Rex Energy, the other joint venture partner. 5 BASELINE OIL & GAS CORP. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (Unaudited) After redeeming its membership interest in New Albany on March 16, 2007, Baseline now owns 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 horizontal well drilled in 2007. NOTE 7 - SUBSEQUENT EVENTS On December 20, 2006, Baseline entered into a Purchase and Sale 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 "Statex Assets"). The purchase price was $28,000,000 plus interest from January 15, 2007 until date of closing. Upon execution of the agreement Baseline 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, Baseline 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 April 12, 2007, Baseline paid Lakewood a total of $1,892,000 to retire the Debenture. The payment included a repayment $1,700,000 in principal of the Debenture, a $170,000 closing fee and interest of $22,000 (see NOTE 4). On April 12, 2007, Baseline entered into a Credit Agreement (the "Credit Agreement") with Drawbridge Special Opportunities Fund LP ("Drawbridge"), as Administrative Agent and the lenders named therein and party thereto (the "Lenders"). The Credit Agreement provides for a revolving credit commitment of up to $54.7 million and a Term Loan Commitment of $20.3 million. Revolving Loans must be paid on or before April 12, 2010 and Term Loans on or before October 12, 2010. The Revolving Loans accrues interest at the Prime Rate and The Term Loans accrues interest at the Prime Rate or 7.5%, whichever is greater, plus 3%. As security for Baseline's obligations under the Credit Agreement, Baseline granted Drawbridge a security interest in and a first lien on, all of its existing and after-acquired assets including, without limitation, the Statex Assets. Additionally, Baseline granted the Lenders an overriding royalty interest ranging between 2% and 3% in (i) its existing Oil and Gas Properties and (ii) Oil and Gas Properties that it acquires after the lending date until the Credit Agreement is terminated. On 6 BASELINE OIL & GAS CORP. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (Unaudited) April 12, 2007 Baseline drew down $9.7 million as a Revolving Loan. In addition, Baseline drew down $20.3 million as a Term Loan. On April 12, 2007, in accordance with a requirement of the Credit Agreement, Baseline also entered into a Swap Agreement ("Swap Agreement") with Macquarie Bank Limited, which provides that Baseline puts in place, for each month through the third anniversary of April 12, 2007, separate swap hedges with respect to approximately 75% of the projected production from Proved Developed Producing Reserves. The swap hedges provide 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. On April 12, 2007, concurrently with the closing of the Drawbridge loan transaction, Alan Gaines, our Vice 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 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. 7 Item 2. Management's Discussion and Analysis or Plan of Operation. Cautionary Notice Regarding Forward Looking Statements Baseline Oil & Gas Corp. (referred to herein as "we" or the "Company") desires 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 annual 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, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward-looking statements. In particular, the words "believe," "expect," "intend," " anticipate," "estimate," "may," "plan," "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 known and unknown risks and uncertainties, which may cause our actual results, performance or achievements to differ materially from historical results as well as those expressed in, anticipated 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. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and as are those set forth in our annual reports filed with the Securities and Exchange Commission, together with the risks discussed in our press releases and other communications to shareholders issued by us from time to time, which attempt to advise interested parties of the risks and factors that may affect our business. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, but are not limited to, our ability to raise capital as and when required, the timing and extent of changes in prices for oil and gas, the availability of drilling rigs, competition, environmental risks, drilling and operating risks, uncertainties about the estimates of reserves, the prices of goods and services, legislative and government regulations, political and economic factors in countries in which we operate and implementation of our capital investment program. Overview 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. As disclosed in our Current Report on Form 8-K filed with the Commission on April 18, 2007, we exited from "shell company" status, 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") upon completing our acquisition of a number of oil and gas producing properties located in Stephens County in north Texas from Statex Petroleum I, L.P. and Charles W Gleeson LP (the "Stephens County Transaction"). Prior to the Stephens County Transaction and during the period covered by this quarterly report, we have only conducted nominal operations and have only nominal assets. Accordingly, we have no operating history upon which our operations plan or future prospects can be evaluated. 8 During this time we have not had any revenues from operations, as our business operations have consisted principally of oil and gas exploration activities through our participation in the New Albany joint venture discussed below. Prior to the Stephens County Transaction, 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. 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 by 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 Our intended strategy in the next twelve months will be to focus on oil and gas exploration, development and production within our two asset bases: one located in southern Indiana and the other in north Texas (acquired in April 2007). We believe that the north Texas waterflood can provide us with long life oil reserves and the southern Indiana resource play can provide us with long life, natural gas reserves. We also believe that these two fields provide us with significant growth potential through the drilling of new infill wells and workover of existing wells. However, the success or potential of either of these asset bases cannot be assured. 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 asset bases, we will continue to look for additional incremental acquisitions to make in the vicinity of our current fields. 9 New Albany Shale Asset Base. On March 16, 2007, pursuant to that certain Membership Interest Redemption Agreement of even date between us and New Albany-Indiana LLC ("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. The reduction from our membership interest of 50% to a 40.423% direct working interest reflected a downward adjustment of our membership interest in New Albany at the time of our redemption, as a result of outstanding capital calls owed by us but assumed by the affiliates and/or assigns of Rex Energy Operating Corp. ("Rex Energy"), the other joint venture partner. 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 and a Devonian well 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 horizontal well drilled in 2007. To date, we have invested $8.1 million in the acquisition of our interest in the 171,000 aggregate acres constituting the New Albany Shale asset base 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 drilled prior to 2007, 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 will have to be pumped off in order to achieve steady gas production. Of the four Devonian Reef wells drilled, two have tested gas 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 the productivity and reserve potential 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. 10 Stephens County Transaction Asset Base. On December 20, 2006 we entered into the Stephens County Transaction whereby we executed a purchase and sale agreement with Statex Petroleum I, L.P. and Charles W Gleeson LP to acquire a number of oil and gas producing properties in Stephens County in north Texas, as initially disclosed by us in our Current Report on Form 8-K filed with the SEC on December 21, 2006. The purchase price was approximately $28,600,000, which included 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. We closed the Stephens County Transaction on April 12, 2007, as disclosed by us in our Current Report on Form 8-K filed with the SEC on April 18, 2007. Assets in the Stephens County Transaction include: (i) the 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; (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) the 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. Giving effect to the Stephens County Transaction, 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 640 bopd and 100 mcfpd, resulting in 510 boepd of net production, with an average net revenue interest of 77%. In addition to the expected cash flow from the existing production from the Stephens County Transaction, 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. The two western leases have not been incorporated into the waterflood with the central leases and it is planned to expand the waterflood to the western leases. We believe the Stephens County Transaction 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. 11 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 Shale in this region has not been evaluated. Liquidity and Source of Capital 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 that certain revolving credit facility entered into in April 2007 and our working capital, will be adequate to fund our anticipated capital and liquidity requirements for the next twelve months in connection with our above plan of operations. As discussed below, on April 12, 2007 we entered into a $75 million revolving credit commitment and term loan under the April 2007 Credit Facility (as defined below), of which approximately $45 million is available to be drawn down by us at May 12, 2007, subject to and only in the event that we satisfy various financial and other covenants contained in the credit agreement. On April 12, 2007 we drew down approximately $9.7 million as a Revolving Loan and $20.3 million as a Term Loan in connection with the Stephens County Transaction and our repayment of the March 2007 Bridge Financing (as defined below). We also expect to receive proceeds during 2007 from production associated with those wells operating in north Texas we purchased as part of the Stephen County Transaction. At May 1, 2007, we had received approximate net proceeds of $500,000 attributable to production from these wells. 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 April 2007 Credit Facility, 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. As previously disclosed on our Current Report on Form 8-K filed with the Commission on April 18, 2007, under that credit agreement executed April 12, 2007 we acquired a revolving credit commitment of up to $54.7 million and a Term Loan Commitment of $20.3 million (the "April 2007 12 Credit Facility"). 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 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 oil and gas properties, rights and assets that we acquired in the Stephens County Transaction. 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. As part of the credit facility, we 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. In accordance with a requirement of the credit agreement, we also entered into a Swap Agreement ("Swap Agreement") with Macquarie Bank Limited, 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 March 2007 Bridge Financing. As previously disclosed on our Current Report on Form 8-K filed with the Commission on March 19, 2007, 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"). 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, upon funding under the April 2007 Credit Facility, 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. January 2007 Interim Funding. As previously disclosed on our Current Report on Form 8-K filed with the SEC 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 mature, 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. 13 Contractual Obligations Except for (i) the hedging arrangement entered into under the Swap Agreement, as discussed above in connection with the April 2007 Credit Facility, which hedging arrangement is to be settled on a monthly basis commencing June 1, 2007 and (ii) those convertible notes issued in privately negotiated transactions involving the offer and sale of $2.375 million in units consisting of 10% convertible promissory notes and shares of Common Stock (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. Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. At the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2007, the disclosure controls and procedures of the Company were effective to ensure that the information required to be disclosed in the Company's Exchange Act reports was recorded, processed, summarized and reported on a timely basis. There were no changes in internal controls over financial reporting that occurred during the fiscal quarter ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 14 PART II OTHER INFORMATION Item 1. Legal Proceedings. We are not currently subject to any pending litigation proceedings. Item 2. Unregistered Sales of Equity Securities. As of May 12, 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 equity securities described in this Item 2 were issued pursuant to exemptions from registration provided by Section 4(2) of the Securities Act and Regulation D promulgated thereunder. In connection with our entry into the April 2007 Credit Facility, we issued warrants to Drawbridge and D.B. Zwirn Special Opportunities Fund, L.P., another lender participating therein, which warrants are each exercisable for up to 1.6 million shares of our Common Stock, at an exercise price of $0.50 per share. Pursuant to certain warrant agreements executed with these two lenders, any unexercised warrants expire on April 11, 2014. The warrants 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. Concurrently with the closing of the April 2007 Credit Facility, Alan Gaines, our Chairman, and Barrie Damson, a former officer and director of our Company, each surrendered as of April 12, 2007 stock options to purchase 1.6 million shares of Common Stock 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. On March 31, 2007, we issued an aggregate of 93,750 shares of our Common Stock, having a value of $46,875, to holders of convertible notes under the November 2005 Placement, as payment of accrued interest through February 15, 2007. As part of our March 2007 Bridge Financing, 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 is afforded certain protection with respect to the exercise price. Also in connection with the March 2007 Bridge Financing, we delivered to Casimir Capital LP warrants to purchase up to 340,000 shares of our Common Stock at an exercise price of $0.50 per share, which warrants are exercisable at any time prior to September 15, 2012. 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. 15 Item 3. Defaults Upon Senior Securities. Not Applicable Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable Item 5. Other Information. (a) Reports on Form 8-K During the period covered by this Report, we filed Current Reports on Form 8-K on each of the following dates: (i) January 29, 2007 (announcing affiliate loan to the Company); (ii) March 15, 2007 (announcing amendment to purchase agreement in Stephens County Transaction); (iii) March 19, 2007 (announcing March 2007 Bridge Loan, redemption of New Albany ownership interest); and (iv) March 22, 2007 (announcing resignation of officer and director). Item 6. Exhibits. Exhibit Number Description -------------- ----------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer 32.2 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. BASELINE OIL & GAS CORP. Date: May 14, 2007 By: /s/ Thomas Kaetzer ---------------------------------------- Name: Thomas Kaetzer Title: Chairman, Chief Executive Officer Date: May 14, 2007 By: /s/ Richard M. Cohen ---------------------------------------- Name: Richard M. Cohen Title: Chief Financial Officer 17 INDEX TO EXHIBITS Exhibit Number Description -------------- ----------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer 32.2 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer 18