As filed with the Securities and Exchange Commission on July 5, 2007
Registration No. 333-134978
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
BASELINE OIL & GAS CORP.
(Name of registrant as specified in its charter)
Nevada 1311 30-0226902
(State or Jurisdiction (primary standard (IRS Employer
of Incorporation industrial classification Identification No.)
or Organization) code number)
11811 N. Freeway (I-45), Suite 200
Houston, Texas 77060
(281) 445-5880
(Address and telephone number of registrant's principal executive offices
and place of business)
Thomas Kaetzer, Chief Executive Officer
Baseline Oil & Gas Corp.
11811 N. Freeway (I-45), Suite 200
Houston, Texas 77060
(281) 445-5880
(Name, address and telephone number of agent for service)
Copies of communications to:
Matthew S, Cohen, Esq.
Eaton & Van Winkle LLP
3 Park Avenue, 16th Floor
New York, New York 10016
(212) 779-9910
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the offering. |_| ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
_____________
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
____________
Explanatory Note
This Post-Effective Amendment No. 1 to our Registration Statement on Form SB-2
is being filed to update the information contained in our prospectus to reflect
subsequent events, including Registrant's acquisition of working interests in
oil and gas properties during the second quarter of 2007.
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The information in this prospectus is not complete and is subject to change. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission of which this prospectus is a part is
declared effective.
Subject to Completion, Dated July 5, 2007
BASELINE OIL & GAS CORP.
16,999,328 Shares
Common Stock
This prospectus relates to the resale of up to 16,999,328 shares of our
common stock, par value $.001 per share (the "Common Stock"), by the selling
security holders listed in the prospectus commencing on page 15, consisting of
(i) 10,390,238 shares of Common Stock presently outstanding and held by selling
security holders; (ii) 4,750,000 shares of Common Stock that may be issuable
upon conversion of outstanding principal amount of convertible notes; and (iii)
up to 1,859,090 shares of our Common Stock that are issuable upon exercise of
stock options and common stock purchase warrants.
The transactions in which the selling security holders acquired the shares
of Common Stock covered by this prospectus are described in the section of this
prospectus entitled "Selling Security Holders."
The selling security holders, by themselves or through brokers and
dealers, may offer and sell the shares at prevailing market prices or in
transactions at negotiated prices. We will not receive any proceeds from the
selling security holders' resale of the shares of Common Stock. The selling
security holders will receive all proceeds from such sales. We will, in the
ordinary course of business, receive proceeds from the issuance of our Common
Stock upon exercise of the stock options and common stock purchase warrants.
It is not possible to determine the price to the public in any sale of the
shares of Common Stock by the selling security holders and the selling security
holders reserve the right to accept or reject, in whole or in part, any proposed
purchase of shares. Accordingly, the selling security holders will determine the
public offering price, the amount of any applicable underwriting discounts and
commissions and the net proceeds at the time of any sale. The selling security
holders will pay any underwriting discounts and commissions. The selling
security holders, and the brokers through whom sales of the securities are made,
will be "underwriters" within the meaning of Section 2(11) of the Securities Act
of 1933, as amended, referred to herein as the "Securities Act".
Our Common Stock is traded on the OTC Bulletin Board under the symbol
"BOGA". On July 3, 2007 the reported closing prices of our Common Stock on the
OTC Bulletin Board was $0.70.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. The selling security holders are offering to sell and seeking
offers to buy shares of our Common Stock only in jurisdictions where offers and
sales are permitted.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information from that
contained in this prospectus. No person is authorized in connection with this
prospectus to give any information or to make any representations about us, the
selling security holders, the securities or any matter discussed in this
prospectus, other than the information and representations contained in this
prospectus. If any other information or representation is given or made, such
information or representation may not be relied upon as having been authorized
by us or any selling security holder.
This prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy the securities in any circumstances under which the offer or
solicitation is unlawful.
The information contained in this prospectus is accurate only as of the
date of this prospectus, regardless of the time of delivery of this prospectus
or of any sale of our Common Stock. Neither the delivery of this prospectus nor
any distribution of securities in accordance with this prospectus shall, under
any circumstances, imply that there has been no change in our affairs since the
date of this prospectus.
The date of this prospectus is July __, 2007
TABLE OF CONTENTS
Page
----
Prospectus Summary .................................................... 1
Risk Factors .......................................................... 3
Cautionary Note Regarding Forwarding-Looking Statements ............... 13
Use of Proceeds ....................................................... 14
Determination of Offering Price ....................................... 14
Selling Security Holders .............................................. 15
Plan of Distribution .................................................. 24
Legal Proceedings ..................................................... 26
Directors, Executive Officers, Promoters and Control Persons .......... 27
Security Ownership of Certain Beneficial Owners and Management ........ 29
Description of Securities ............................................. 31
Interest of Named Experts and Counsel ................................. 32
Disclosure of Commission Position on Indemnification for Securities Act 32
Certain Relationships and Transactions and Corporate Governance ....... 33
Description of Business ............................................... 34
Plan of Operation ..................................................... 38
Description of Property ............................................... 45
Market for Common Equity and Related Stockholder Matters .............. 46
Executive Compensation ................................................ 49
Financial Statements .................................................. 52
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our Common Stock. You should read the entire
prospectus, including "Risk Factors" and our consolidated financial statements
and the related notes before making an investment decision.
In this prospectus, the "Company" and terms such as "we," "us" and "our,"
refer to Baseline Oil & Gas Corp., a Nevada corporation.
Our Company
We were incorporated in the State of Nevada on February 3, 2004 as College
Oak Investments, Inc. We changed our name on January 17, 2006 to Baseline Oil &
Gas Corp. On April 6, 2005, we entered into a merger transaction with Coastal
Energy Services, Inc., a Delaware corporation ("Coastal"), as described
elsewhere in this prospectus under "Business - General" which resulted in a
change in control of our Company.
Coastal was formed to engage in the energy business, and following the
merger transaction, we focused on business opportunities in the oil and gas
industries. Our efforts resulted in our acquisition of (1) a working interest in
approximately 171,000 gross acres in the southern Indiana New Albany Shale
formation, with its long life, natural gas potential, and (2) a working interest
in approximately 4600 gross acres located in Stephens County, north Texas, with
its long life oil reserves.
In connection with our recent acquisitions, we have relocated our
principal offices from 20022 Creek Farm, San Antonio, Texas 78259 to 1811 N.
Freeway (I-45), Suite 200, Houston, TX 77060. Our telephone number is (281)
445-5880.
The Offering
This prospectus relates to the resale of up to 16,999,328 shares of our
common stock, par value $.001 per share (the "Common Stock"), by the selling
security holders listed in the prospectus commencing on page 15, consisting of
(i) 10,390,238 shares of Common Stock presently outstanding and held by selling
security holders; (ii) 4,750,000 shares of Common Stock that may be issuable
upon conversion of outstanding principal amount of convertible notes; and (iii)
up to 1,859,090 shares of our Common Stock that are issuable upon exercise of
stock options and common stock purchase warrants.
The issuances of such securities to the selling security holders was made
in reliance upon exemptions from the registration requirements provided by
Section 4(2) of the Securities Act for private transactions. Additional
information concerning the transactions in which the rights to acquire the
shares covered by this prospectus were obtained by the selling security holders
are set forth in the section of this prospectus entitled "Selling Security
Holders."
Sales By Selling Security Holders
The selling security holders may offer the Common Stock pursuant to this
prospectus in varying amounts and transactions so long as this prospectus is
then current under the rules of the Securities and Exchange Commission ("SEC")
and we have not withdrawn the registration statement. The offering of Common
Stock may be through the facilities of the OTC Bulletin Board or such other
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exchange or reporting system where the Common Stock may be traded. Brokerage
commissions may be paid or discounts allowed in connection with such sales;
however, it is anticipated that the discounts allowed or commissions paid will
be no more than the ordinary brokerage commissions paid on sales effected
through brokers or dealers. To our knowledge, as of the date hereof, no one has
made any arrangements with a broker or dealer concerning the offer or sale of
the Common Stock. See "Plan of Distribution."
Outstanding Securities
As of July 3, 2007, there were 32,260,238 shares of our Common Stock
outstanding. On a fully-diluted basis, giving effect to and assuming the
exercise or conversion of all of our options, warrants and derivative
securities, we would have had outstanding an aggregate of approximately
51,779,328 shares of Common Stock at July 3, 2007.
Risks
An investment in the shares of our Company is subject to a number of
risks. We have set forth these risk factors below under the heading "Risk
Factors" which you should carefully review.
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RISK FACTORS
The reader should carefully consider each of the risks described below. If
any of the following risks develop into actual events, our business, financial
condition or results of operations could be materially adversely affected and
the trading price of the Common Stock could decline significantly.
Risks Relating to Our Business and the Oil and Natural Gas Industry.
A substantial or extended decline in oil and natural gas prices may adversely
affect our business, financial condition or results of operations and our
ability to meet our capital expenditure obligations and financial commitments.
The prices we receive for our oil and natural gas production heavily
influence our revenue, profitability, access to capital and future rate of
growth. Oil and natural gas are commodities and, therefore, their prices are
subject to wide fluctuations in response to relatively minor changes in supply
and demand. Historically, the markets for oil and natural gas have been
volatile. These markets will likely continue to be volatile in the future. The
prices we receive for our production, and the levels of our production, depend
on numerous factors beyond our control. These factors include, but are not
limited to, the following:
o changes in global supply and demand for oil and natural gas;
o the actions of certain foreign states, such as the governments
of Venezuela or Iran;
o the price and quantity of imports of foreign oil and natural
gas;
o political conditions, including embargoes, in or affecting
other oil producing activities;
o the level of global oil and natural gas exploration and
production activity;
o the level of global oil and natural gas inventories;
production or pricing decisions made by the Organization of
Petroleum Exporting Countries (OPEC);
o weather conditions;
o technological advances affecting energy consumption; and
o the price and availability of alternative fuels.
Lower oil and natural gas prices may not only decrease our revenues on a
per unit basis but also may reduce the amount of oil and natural gas that we can
produce economically. Lower prices will also negatively impact the value of our
proved reserves. A substantial or extended decline in oil or natural gas prices
may materially and adversely affect our future business, financial condition,
results of operations, liquidity or ability to finance planned capital
expenditures.
Drilling for and producing oil and natural gas are high risk activities with
many uncertainties that could adversely affect our business, financial condition
or results of operations.
Our future success will depend on the success of our exploitation,
exploration, development and production activities. Our oil and natural gas
exploration and production activities are subject to numerous risks beyond our
control, including the risk that drilling will not result in commercially viable
oil or natural gas production. Our decisions to purchase, explore, develop or
otherwise exploit prospects or properties will depend in part on the evaluation
of data obtained through geophysical and geological analyses, production data
and engineering studies, the results of which are often inconclusive or subject
to varying interpretations. Please read "- Reserve estimates depend on many
assumptions that may turn out to be inaccurate" (below) for a discussion of the
uncertainties involved in these processes. Our costs of drilling, completing and
operating wells is often uncertain before drilling commences. Overruns in
budgeted expenditures are common risks that can make a particular project
uneconomical. Further, many factors may curtail, delay or cancel drilling,
including the following:
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o delays imposed by or resulting from compliance with regulatory
requirements;
o pressure or irregularities in geological formations;
o shortages of or delays in obtaining equipment and qualified
personnel;
o equipment failures or accidents;
o adverse weather conditions;
o reductions in oil and natural gas prices;
o oil and natural gas property title problems; and
o market limitations for oil and natural gas.
If oil and natural gas prices decrease, we may be required to take write-downs
of the carrying values of our oil and natural gas properties, potentially
triggering earlier-than-anticipated repayments of any outstanding debt
obligations and negatively impacting the trading value of our securities.
Accounting rules require that we review periodically the carrying value of
our oil and natural gas properties for possible impairment. Based on specific
market factors and circumstances at the time of prospective impairment reviews,
and the continuing evaluation of development plans, production data, economics
and other factors, we may be required to write down the carrying value of our
oil and natural gas properties. Because our properties will likely serve as
collateral for advances under our future credit facilities, a write-down in the
carrying values of our properties could require us to repay debt earlier than we
would otherwise be required. A write-down would also constitute a non-cash
charge to earnings. It is likely that the cumulative effect of such a write-down
could also negatively impact the trading price of our securities.
We account for our oil and gas properties using the successful efforts
method of accounting. Under this method, all development costs and acquisition
costs of proved properties are capitalized and amortized on a
units-of-production basis over the remaining life of proved developed reserves
and proved reserves, respectively. Costs of drilling exploratory wells are
initially capitalized, but charged to expense if and when a well is determined
to be unsuccessful. We evaluate impairment of its proved oil and gas properties
whenever events or changes in circumstances indicate an asset's carrying amount
may not be recoverable. The risk that the company will be required to write down
the carrying value of its oil and natural gas properties increases when oil and
gas prices are low or volatile. In addition, write-downs would occur if we were
to experience sufficient downward adjustments to our estimated proved reserves
or the present value of estimated future net revenues.
Reserve estimates depend on many assumptions that may turn out to be inaccurate.
Any material inaccuracies in these reserve estimates or underlying assumptions
will materially affect the quantities and present value of our reserves.
The process of estimating oil and natural gas reserves is complex. It
requires interpretations of available technical data and many assumptions,
including assumptions relating to economic factors. Any significant inaccuracies
in these interpretations or assumptions could materially affect the estimated
quantities and present value of our reported reserves. In order to prepare our
estimates, we must project production rates and timing of development
expenditures. We must also analyze available geological, geophysical, production
and engineering data. The extent, quality and reliability of this data can vary.
The process also requires economic assumptions about matters such as oil and
natural gas prices, drilling and operating expenses, capital expenditures, taxes
and availability of funds. Therefore, estimates of oil and natural gas reserves
are inherently imprecise.
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Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves most likely will vary from our estimates. Any
significant variance could materially affect the estimated quantities and
present value of our reported reserves. In addition, we may adjust estimates of
proved reserves to reflect production history, results of exploration and
development, prevailing oil and natural gas prices and other factors, many of
which are beyond our control.
Prospects that we decide to drill may not yield oil or natural gas in
commercially viable quantities.
Our prospects are in various stages of evaluation. There is no way to
predict in advance of drilling and testing whether any particular prospect will
yield oil or natural gas in sufficient quantities to recover drilling or
completion costs or to be economically viable. The use of seismic data and other
technologies and the study of producing fields in the same area will not enable
us to know conclusively prior to drilling whether oil or natural gas will be
present or, if present, whether oil or natural gas will be present in commercial
quantities. We cannot assure you that the analogies we draw from available data
from other wells, more fully explored prospects or producing fields will be
applicable to our drilling prospects.
Special geological characteristics of the New Albany Shale area will require us
to use less-common drilling technologies in order for our development efforts to
be economically viable. The near-term focus of our development activities will
be concentrated to a large degree in the New Albany Shale area, which exposes us
to risks associated with prospect concentration.
Except for our proposed development and production activities in the 4600
acres of the north Texas asset region acquired in the Stephens County
Transaction in April 2007, our development activities are largely concentrated
in the 171,000 acre New Albany Shale area. New Albany Shale reservoirs are
complex, often containing unusual features that are not well understood by
drillers and producers. Successful operations in this area require specialized
technical staff expertise in horizontal drilling, with respect to which we have
limited experience.
The New Albany Shale contains vertical fractures. Results of past drilling
in the New Albany Shale have been mixed and are generally believed to be related
to whether or not a particular well bore intersects a vertical fracture. While
wells have been drilled into the New Albany Shale for years, most of those wells
have been drilled vertically. Where vertical fractures have been encountered,
production has been better. It is expected that horizontal drilling will allow
us to encounter more fractures by drilling perpendicular to the fracture planes.
While it is believed that the New Albany Shale is subject to some level of
vertical fracturing throughout the Illinois Basin, certain areas will be more
heavily fractured than others. If our area of interest is not subject to the
level of vertical fracturing that we expect, then our plan for horizontal
drilling might not yield our expected results.
Gas and water are produced together from the New Albany Shale. Water is
often produced in significant quantities, especially early in the producing life
of a well. We plan to dispose of this produced water by means of injecting it
into other porous and permeable formations via disposal wells located adjacent
to producing wells. If we are unable to find such porous and permeable
reservoirs into which to inject this produced water or if we are prohibited from
injecting because of governmental regulation, then our cost to dispose of
produced water could increase significantly, thereby affecting the economic
viability of producing the New Albany Shale wells.
The relative concentration of our near-term activities in the New Albany
Shale means that any impairments or material reductions in the expected size of
the reserves attributable to the Company's wells, any material harm to the
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producing reservoirs from which these wells produce or any significant
governmental regulation with respect to any of these wells, including
curtailment of production or interruption of transportation of production, could
have a material adverse effect on the Company's financial condition and results
of operations. We cannot control activities on properties that we do not operate
and are unable to ensure their proper operation and profitability.
We will not operate all of the properties in which we will own an
interest. As a result, we have limited ability to exercise influence over, and
control the risks associated with, the operations of these properties. The
failure of an operator of our wells to adequately perform operations, an
operator's breach of the applicable agreements or an operator's failure to act
in ways that are in our best interests could reduce our production and revenues.
The success and timing of our drilling and development activities on properties
operated by others therefore depend upon a number of factors outside of our
control, including the operator's
o timing and amount of capital expenditures;
o expertise and financial resources;
o inclusion of other participants in drilling wells; and
o use of technology.
The marketability of our natural gas production depends on facilities that we
typically do not own or control, which could result in a curtailment of
production and revenues.
The marketability of our production will depend in part upon the
availability, proximity and capacity of natural gas gathering systems, pipelines
and processing facilities. We generally deliver natural gas through gas
gathering systems and gas pipelines that we do not own under interruptible or
short-term transportation agreements. Under the interruptible transportation
agreements, the transportation of our gas may be interrupted due to capacity
constraints on the applicable system, for maintenance or repair of the system,
or for other reasons as dictated by the particular agreements. Our ability to
produce and market natural gas on a commercial basis could be harmed by any
significant change in the cost or availability of such markets, systems or
pipelines.
Our future acquisitions may yield revenues or production that vary significantly
from our projections.
In acquiring producing properties, we will assess the recoverable
reserves, future natural gas and oil prices, operating costs, potential
liabilities and other factors relating to the properties. Our assessments are
necessarily inexact and their accuracy is inherently uncertain. Our review of a
subject property in connection with our acquisition assessment will not reveal
all existing or potential problems or permit us to become sufficiently familiar
with the property to assess fully its deficiencies and capabilities. We may not
inspect every well, and we may not be able to observe structural and
environmental problems even when we do inspect a well. If problems are
identified, the seller may be unwilling or unable to provide effective
contractual protection against all or part of those problems. Any acquisition of
property interests may not be economically successful, and unsuccessful
acquisitions may have a material adverse effect on our financial condition and
future results of operations.
Our business may suffer if we lose our Chief Executive Officer.
Our success will be dependent on our ability to continue to employ and
retain experienced skilled personnel. We depend to a large extent on the
services of Thomas Kaetzer, our Chief Executive Officer and Chairman, the loss
of whom could have a material adverse effect on our operations. Although we have
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an employment agreement with Mr. Kaetzer which provides for notice before he may
resign and contains non-competition and non-solicitation provisions, we do not,
and likely will not, maintain key-man life insurance with respect to him or any
of our employees.
Hedging activities we engage in may prevent us from benefiting from price
increases and may expose us to other risks.
Following our entry into a credit facility in April 2007, we executed an
arrangement to use derivative instruments to hedge the impact of market
fluctuations on crude oil and natural gas prices. To the extent that we engage
in hedging activities, it may be prevented from realizing the benefits of price
increases above the levels of the hedges. In addition, we will be subject to
risks associated with differences in prices at different locations, particularly
where transportation constraints restrict our ability to deliver oil and gas
volumes to the delivery point to which the hedging transaction is indexed.
We have had a history of operating losses and we may have losses in the future.
Since our inception in June 2004, we have had limited operations and
nominal revenues. While we intend to increase our revenues through the New
Albany properties and the Stephens County Transaction properties and other
possible acquisitions, there can be no assurance that we will be successful.
Our ability to generate net income will be strongly affected by, among
other factors, our ability to successfully drill undeveloped reserves as well as
the market price of crude oil and natural gas. If we are unsuccessful in
drilling productive wells or the market price of crude oil and natural gas
declines, we may report additional losses in the future. Consequently, future
losses may adversely affect our business, prospects, financial condition,
results of operations and cash flows.
Our common stock is listed on the OTC Bulletin Board. Our common stock is
not quoted on the NASDAQ National Market System or listed on a national
securities exchange. The NASDAQ National Market System and national securities
exchanges require companies to fulfill certain requirements in order for their
shares to be listed and to continue to be listed. The securities of a company
may be ineligible for listing or, if listed, may be considered for delisting if
the company fails to meet certain financial thresholds, including if the company
has sustained losses from continuing operations and/or net losses in recent
fiscal years. There can be no assurance that we will not report additional
losses in the future or that we will be able to list or have quoted our common
stock on the NASDAQ National Market or a national securities exchange. An
inability to list our common stock could adversely affect our ability to raise
capital in the future by issuing common stock or securities convertible into or
exercisable for our common stock.
Continuing losses may mean that additional funding may not be available on
acceptable terms, if at all. If adequate funds are unavailable from our
operations or additional sources of financing, we might be forced to reduce or
delay acquisitions or capital expenditures, sell assets, reduce operating
expenses, refinance all or a portion of our debt, or delay or reduce important
drilling or enhanced production initiatives.
In addition, in that instance, we may seek to raise any necessary
additional funds through equity or debt financings, convertible debt financing,
joint ventures with corporate partners or other sources, which may be dilutive
to our existing shareholders and may cause the price of our common stock to
decline.
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Our anticipated debt service obligations and cash requirements to fund our
operations could harm our ability to operate our business.
In April 2007 we entered into term and revolving line of credit facilities
and borrowed approximately $30 million as part of the purchase price for the
Stephens County Transaction completed on April 12, 2007. The line of credit is
be available for borrowings to fund our working capital requirements and capital
requirements, and is secured by substantially all of our oil and natural gas
properties.
Our degree of leverage may have important consequences to you, including
the following:
o we may have difficulty satisfying our obligations under our
indebtedness and, if we fail to comply with these
requirements, an event of default could result;
o we may be required to dedicate a substantial portion of our
cash flow from operations to required payments on
indebtedness, thereby reducing the availability of cash flow
for working capital, capital expenditures and other general
corporate activities;
o covenants relating to future debt may limit our ability to
obtain additional financing for working capital, capital
expenditures and other general corporate activities;
o covenants relating to future debt may limit our flexibility in
planning for, or reacting to, changes in our business and the
industry in which we operate;
o we may be more vulnerable to the impact of economic downturns
and adverse developments in our business; and
o we may be placed at a competitive disadvantage against any
less leveraged competitors.
The occurrence of any one of these events could have a material adverse
effect on our business, financial condition, results of operations and future
business prospects.
The unavailability or high cost of drilling rigs, equipment, supplies, personnel
and oil field services could adversely affect our ability to execute on a timely
basis our exploration and development plans within our budget.
With the increase in the prices of oil and natural gas, we have
encountered an increase in the cost of securing drilling rigs, equipment and
supplies. Shortages or the high cost of drilling rigs, equipment, supplies and
personnel are expected to continue in the near-term. In addition, larger
producers may be more likely to secure access to such equipment by virtue of
offering drilling companies more lucrative terms. If we are unable to acquire
access to such resources, or can obtain access only at higher prices, not only
would this potentially delay our ability to convert our reserves into cash flow,
but it could also significantly increase the cost of producing those reserves,
thereby negatively impacting anticipated net income.
We may incur substantial losses and be subject to substantial liability claims
as a result of our oil and natural gas operations.
We are not insured against all risks. Losses and liabilities arising from
uninsured and underinsured events could materially and adversely affect our
business, financial condition or results of operations. Our oil and natural gas
exploration and production activities are subject to all of the
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operating risks associated with drilling for and producing oil and natural gas,
including the possibility of:
o environmental hazards, such as uncontrollable flows of oil,
natural gas, brine, well fluids, toxic gas or other pollution
into the environment, including groundwater and shoreline
contamination;
o abnormally pressured formations;
o mechanical difficulties, such as stuck oil field drilling and
service tools and casing collapses;
o fires and explosions;
o personal injuries and death; and
o natural disasters.
Any of these risks could adversely affect our ability to conduct
operations or result in substantial losses to the Company. We may elect not to
obtain insurance if we believe that the cost of available insurance is excessive
relative to the risks presented. In addition, pollution and environmental risks
generally are not fully insurable. If a significant accident or other event
occurs and is not fully covered by insurance, then that accident or other event
could adversely affect our results of operations, financial condition and cash
flows.
We may not have enough insurance to cover all of the risks that we face.
In accordance with customary industry practices, we maintain insurance
coverage against some, but not all, potential losses in order to protect against
the risks we face. We do not carry business interruption insurance. We may elect
not to carry insurance if our management believes that the cost of available
insurance is excessive relative to the risks presented. In addition, we cannot
insure fully against pollution and environmental risks. The occurrence of an
event not fully covered by insurance could have a material adverse effect on our
financial condition and results of operations.
We are subject to complex laws that can affect the cost, manner or feasibility
of doing business.
Exploration, development, production and sale of oil and natural gas are
subject to extensive federal, state, local and international regulation. We may
be required to make large expenditures to comply with governmental regulations.
Matters subject to regulation include:
o discharge permits for drilling operations;
o drilling bonds;
o reports concerning operations;
o the spacing of wells;
o unitization and pooling of properties; and
o taxation.
Under these laws, we could be liable for personal injuries, property
damage and other damages. Failure to comply with these laws also may result in
the suspension or termination of our operations and subject us to
administrative, civil and criminal penalties. Moreover, these laws could change
in ways that substantially increase our costs. Any such liabilities, penalties,
suspensions, terminations or regulatory changes could materially adversely
affect our financial condition and results of operations.
9
Our operations may cause us to incur substantial liabilities for failure to
comply with environmental laws and regulations.
Our oil and natural gas operations are subject to stringent federal, state
and local laws and regulations relating to the release or disposal of materials
into the environment or otherwise relating to environmental protection. These
laws and regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentration of substances that
can be released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, and impose substantial
liabilities for pollution resulting from our operations. Failure to comply with
these laws and regulations may result in the assessment of administrative, civil
and criminal penalties, incurrence of investigatory or remedial obligations or
the imposition of injunctive relief. Changes in environmental laws and
regulations occur frequently, and any changes that result in more stringent or
costly waste handling, storage, transport, disposal or cleanup requirements
could require us to make significant expenditures to maintain compliance, and
may otherwise have a material adverse effect on our results of operations,
competitive position or financial condition as well as the industry in general.
Under these environmental laws and regulations, we could be held strictly liable
for the removal or remediation of previously released materials or property
contamination regardless of whether we were responsible for the release or if
our operations were standard in the industry at the time they were performed.
We anticipate having substantial capital requirements that, if not met, may
hinder our operations.
We expect that following completion of the asset acquisition transaction,
we will experience substantial capital needs as a result of our planned
development and acquisition programs. We expect that additional external
financing will be required in the future to fund our growth. We may not be able
to obtain additional financing, and financing under a new credit facility on
acceptable terms may not be available in the future. Without adequate capital
resources, we may be forced to limit our planned oil and natural gas acquisition
and development activities and thereby adversely affect the recoverability and
ultimate value of our oil and natural gas properties. This, in turn, would
negatively affect our business, financial condition and results of operations.
Competition in the oil and natural gas industry is intense, which may adversely
affect our ability to compete.
We operate in a highly competitive environment for acquiring properties,
marketing oil and natural gas and securing trained personnel. Many of our
competitors possess and employ financial, technical and personnel resources
substantially greater than ours, which can be particularly important in the
areas in which we operate. Those companies may be able to pay more for
productive oil and natural gas properties and exploratory prospects and to
evaluate, bid for and purchase a greater number of properties and prospects than
our financial or personnel resources permit. Our ability to acquire additional
prospects and to find and develop reserves in the future will depend on our
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. We may not be able to compete
successfully in the future in acquiring prospective reserves, developing
reserves, marketing hydrocarbons, attracting and retaining quality personnel and
raising additional capital.
10
If our access to markets is restricted, it could negatively impact our
production, our income and ultimately our ability to retain our leases.
Market conditions or the unavailability of satisfactory oil and natural
gas transportation arrangements may hinder our access to oil and natural gas
markets or delay our production. The availability of a ready market for our oil
and natural gas production depends on a number of factors, including the demand
for and supply of oil and natural gas and the proximity of reserves to pipelines
and terminal facilities. Our ability to market our production depends in
substantial part on the availability and capacity of gathering systems,
pipelines and processing facilities owned and operated by third parties. Our
failure to obtain such services on acceptable terms could materially harm our
business.
Our productive properties may be located in areas with limited or no
access to pipelines, thereby necessitating delivery by other means, such as
trucking, or requiring compression facilities. Such restrictions on our ability
to sell our oil or natural gas have several adverse affects, including higher
transportation costs, fewer potential purchasers (thereby potentially resulting
in a lower selling price) or, in the event we were unable to market and sustain
production from a particular lease for an extended time, possibly causing us to
lose a lease due to lack of production.
Risks Relating to Our Common Stock
You may experience dilution of your ownership interests due to the future
issuance of additional shares of the Company's common stock
The Company may in the future issue its previously authorized and unissued
securities, which will result in the dilution of the ownership interests of its
present stockholders. The Company is currently authorized to issue 140,000,000
shares of common stock and 10,000,000 shares of preferred stock with such
designations, preferences and rights as determined by our Board of Directors. As
of July 3, 2007, we have issued 32,260,238 shares of our common stock. In
addition, we have outstanding options, warrants and convertible promissory notes
to purchase up to an additional 19,569,090 shares of the Company's common stock.
Issuance of additional shares of common stock may substantially dilute the
ownership interests of the Company's existing stockholders. The potential
issuance of such additional shares of common stock may create downward pressure
on the trading price of our common stock that in turn will require it to issue
additional shares to raise funds through sales of its securities. The Company
may also issue additional shares of its stock in connection with the hiring of
personnel, future acquisitions, future private placements of its securities for
capital raising purposes, or for other business purposes. This will further
dilute the interests of the Company's existing holders.
The market price of our common stock may be affected by low volume float.
While there has been a public market for our common stock on the OTC
Bulletin Board, our common stock is very thinly traded. Substantial sales of our
common stock, including shares issued upon the exercise of outstanding options
and warrants, in the public market, or the perception that these sales could
occur, may have a depressive effect on the market price of our common stock.
Such sales or the perception of such sales could also impair our ability to
raise capital or make acquisitions through the issuance of our common stock.
11
We have no plans to, and are currently unable to, pay dividends on our common
stock. You may not receive funds without selling your stock.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the expansion of our business. Our future dividend policy is within the
discretion of our Board of Directors and will depend upon various factors,
including our business, financial condition, results of operations, capital
requirements and investment opportunities. Our accumulated losses and
stockholders' deficits prevent us from being able to declare and pay dividends.
In addition, our proposed credit facility will prohibit us from paying
dividends.
We may issue shares of preferred stock having greater rights than our common
stock.
Although we have no current plans, arrangements, understandings or
agreements to issue any preferred stock, our certificate of incorporation
authorizes our Board of Directors to issue one or more series of preferred stock
and set the terms of the preferred stock without seeking any further approval
from our shareholders. Any preferred stock that is issued may rank ahead of our
common stock, with respect to dividends, liquidation rights and voting rights,
among other things. Provisions under Nevada law could delay or prevent a change
in control of our company, which could adversely affect the price of our common
stock. While we do not believe that we currently have any provisions in our
organizational documents that could prevent or delay a change in control of our
company (such as provisions calling for a staggered Board of Directors, or the
issuance of stock with super-majority voting rights), the existence of some
provisions under Nevada law could delay or prevent a change in control of our
Company, which could adversely affect the price of our common stock. Nevada law
imposes some restrictions on mergers and other business combinations between us
and any holder of 10% or more of our outstanding common stock.
Conflicts of interests for certain members of the present management exist with
regards to their obligations to the Company and their obligations to businesses
in which they continue to own interests and manage.
Mr. Alan Gaines is the Chairman of Dune Energy, Inc. ("Dune") and his
employment with Dune is governed by an Amended and Restated Employment Agreement
dated as of April 17, 2007 (the "Gaines Employment Agreement"). The Gaines
Employment Agreement provides for a three year term and may be extended.
Pursuant to the terms of the Gaines Employment Agreement, Mr. Gaines is required
to devote substantially all of his business time and efforts to the business of
Dune. Furthermore, the Gaines Employment Agreement provides that during its term
and for one year thereafter, Mr. Gaines may not directly or indirectly engage in
any business involved in the exploration, drilling, or production of natural gas
or oil, within any area owned by the Welder family of Victoria County, Texas.
There can be no guarantee that Mr. Gaines will be able to devote adequate time
to the affairs of the Company given his fiduciary and contractual obligations to
Dune.
The officers and directors of the Company are subject to the certain
duties imposed on them under the Nevada law, including a general requirement
that certain opportunities within the scope of the Company's proposed business
operations which come to their attention may be considered opportunities that
should be made available to the Company and the companies that they are
affiliated with on an equal basis. A breach of this requirement will be a breach
of the fiduciary duties of the officer and director. If the Company or any of
the other companies with which that officer or director is affiliated both
desire to take advantage of an opportunity, then those officers and directors
would abstain from negotiating and voting upon the business opportunity. Even in
the event these procedures are followed, we cannot assure you that conflicts of
interests among the Company, its officers and directors and Dune will not
develop.
12
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus contain some
forward-looking statements. Certain of the matters discussed concerning our
operations, cash flows, financial position, economic performance and financial
condition, including, in particular, future sales, product demand, competition
and the effect of economic conditions include forward-looking statements within
the meaning of section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, referred to herein as the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures, distribution channels,
profitability, new products, adequacy of funds from operations, these statements
and other projections and statements contained herein expressing general
optimism about future operating results and non-historical information, are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Investors are cautioned that our forward-looking statements are not
guarantees of future performance and actual results or developments may differ
materially from the expectations expressed in the forward-looking statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. We expressly disclaim a duty to provide updates to these forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this filing to reflect events or changes in circumstances or changes in
expectations or the occurrence of anticipated events.
We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
Form 10-KSB, Form 10-QSB and Form 8-K reports to the SEC. Also note that we
provide a cautionary discussion of risk and uncertainties under the caption
"Risk Factors" in this prospectus. These are factors that we think could
cause our actual results to differ materially from expected results. Other
factors besides those listed here could also adversely affect us. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995.
13
USE OF PROCEEDS
We will not receive any of the proceeds from the selling stockholders'
sale of the shares offered under this prospectus.
DETERMINATION OF OFFERING PRICE
We are not selling any of the Common Stock that we are registering. The
Common Stock will be sold by the selling security holders listed in this
prospectus. The selling security holders may sell the Common Stock at the market
price as of the date of sale or a price negotiated in a private sale. Our Common
Stock is traded on the OTC Bulletin Board under the symbol "BOGA". On July 3,
2007 the reported closing price for our Common Stock on the OTC Bulletin Board
was $0.70.
We have agreed to pay certain expenses in connection with the registration
of the securities offered by the selling security holders for resale pursuant to
this prospectus.
14
SELLING SECURITY HOLDERS
Based on information provided by the selling security holders, the table
below sets forth certain information, as of July 3, 2007 unless otherwise noted,
regarding the selling security holders. Certain of the selling security holders
(identified by more than one footnote reference after their name) are listed
more than once in the following table because they fall into multiple categories
of selling security holders. However, their shares are counted only once in
arriving at the total number of shares beneficially owned and being offered by
the selling stockholders.
Percentage ownership of common stock is based on 32,260,238 shares of our
Common Stock outstanding as of July 3, 2007. For purposes of calculating the
post-offering ownership of each selling security holder, the table also assumes
the sale of all of the securities being offered by such selling security holder.
Next to the name of each selling stockholder listed below that is not a
natural person (or the name of which is not identified with a natural person),
we have set forth in parentheses the name of the natural person who has the
power to exercise voting and/or investment power over the shares owned by such
selling stockholder. Except for C.K Cooper & Company and Gilford Securities,
Inc., who served as placement agents in our private offerings, no selling
stockholder is a registered broker-dealer.
The second column from the left in the table below lists the number of
shares of Common Stock beneficially owned by each selling stockholder, based on
his/her ownership of the shares of our Common Stock.
The third column from the left lists the shares of Common Stock being
offered pursuant to this prospectus by the selling stockholders.
The fourth column from the left assumes the sale of all of the shares
offered by the selling stockholders pursuant to this prospectus.
The selling stockholders may sell all, some or none of their shares in
this offering. See "Plan of Distribution."
Common stock beneficially
owned after the offering
Number of ----------------------------------
shares of
common stock Percentage
beneficially of
owned prior to Number of shares Outstanding
Name of selling security holders the offering (+) being offered Number of shares shares
- -------------------------------- ---------------- ------------- ---------------- -----------
Certain Holders of April 2005 Stock Options (1):
R. Scott Barter (2005 Defined
Contribution Plan)(1a) 500,000 500,000 0 0
Steven Barrenechea (1b) 250,000 250,000 0 0
15
Common stock beneficially
owned after the offering
Number of ---------------------------------
shares of
common stock Percentage
beneficially of
owned prior to Number of shares Outstanding
Name of selling security holders the offering (+) being offered Number of shares shares
- -------------------------------- ---------------- ------------- ---------------- -----------
Wayne Brannan 630,000 250,000 380,000 1.2 %
Carey Birmingham (1c) 508,000 100,000 408,000 1.3 %
David Loev (1d) 125,000 100,000 25,000 *
Investors in November 2005 Financing (2):
Frank J. Stanley III (2a) 143,000 135,000 8,000 *
Frank J. Stanley III IRA FCC (2a) 143,000 135,000 8,000 *
Jos Turtle Trust fbo Virginia N. Haydu
Dudley Johnson (2aa) 128,000 120,000 8,000 *
Superius Securities Group, Inc.
Profit Sharing Plan (2b)(James
Hudgins) 715,000 675,000 40,000 *
Meadowbrook Opportunity Fund, LLC (2c)
(Michael Ragins) 572,000 540,000 32,000 *
Richard M. Dearnley (2d) 286,000 270,000 16,000 *
Gus Blass II (2d) 286,000 270,000 16,000 *
Young & Franklin Retirement Trust (2dd) 256,000 240,000 16,000 *
Louis P. Buck (2d) 286,000 270,000 16,000 *
Disoway, Inc. (2bb) 640,000 600,000 40,000 *
Dudley D. Johnson (2dd) 256,000 240,000 16,000 *
T & J Associates (2a) (Thomas Richardson) 143,000 135,000 8,000 *
Daniel Murphy (2a) 143,000 135,000 8,000 *
Cheng H. Tai & Jen Hui Chiou (2b) 845,000 675,000 170,000 *
Jung Tai (2f) 169,000 135,000 34,000 *
Howard & Ruty Weiss (2d) 286,000 270,000 16,000 *
Michael H. Tai (2a) 169,000 135,000 34,000 *
MLC Management Company (2d) 286,000 270,000 16,000 *
Evdoxia Koritsoglu (2e) 71,500 67,500 4,000 *
Elsa Wexler (2e) 71,500 67,500 4,000 *
William Lawson (2e) 201,500 67,500 134,000 *
16
Common stock beneficially
owned after the offering
Number of ---------------------------------
shares of
common stock Percentage
beneficially of
owned prior to Number of shares Outstanding
Name of selling security holders the offering (+) being offered Number of shares shares
- -------------------------------- ---------------- ------------- ---------------- -----------
St. Andrews, Inc. (2d) (Todd Kaplan) 286,000 270,000 16,000 *
Selma C. Harman Revocable Trust
(Richard S. Harman, Trustee) (2a) 143,000 135,000 8,000 *
Robert J. Dresner Living Trust (2d) 286,000 270,000 16,000 *
Presley & Patricia Reed (2a) 143,000 135,000 8,000 0
Placement Agent in November 2005 Financing:
Gilford Securities, Inc.(A)(C)(3) 475,000 475,000 0 0
Holder of December 2005 Stock Option:
Richard M. Cohen (4) 475,000 175,000 300,000 *
Investors in February 2006 Financing (5):
Pemigewasset Partners L.P. 91,742 91,742 0 0
Pemigewasset Offshore Ltd. 13,709 13,709 0 0
Stephen Taylor 52,725 52,725 0 0
Dr. Steven Rosenberg and Robin
Rosenberg JT WROS 47,932 47,932 0 0
Jack Jankovic 47,932 47,932 0 0
James R. Stevens (B)(D)(E) 47,932 47,932 0 0
Ruth Winkle and William Winkle JT WROS 47,932 47,932 0 0
Neil Breslau 47,932 47,932 0
RFJM Partners LLC (Jeffrey Markowitz) 95,864 95,864 0 0
BRU Holding Co., LLC (Bruce Toll) 143,795 143,795 0 0
Kevin T. Tolbert 47,932 47,932 0 0
Leonidas Group LLC 47,932 47,932 0 0
Stephen Weingrow 47,932 47,932 0 0
Larry Schmalz 47,932 47,932 0 0
Scott M. Wallace 47,932 47,932 0 0
Loretta Diamond 47,932 47,932 0 0
17
Common stock beneficially
owned after the offering
Number of ----------------------------------
shares of
common stock Percentage
beneficially of
owned prior to Number of shares Outstanding
Name of selling security holders the offering (+) being offered Number of shares shares
- -------------------------------- ---------------- ------------- ---------------- -----------
Girdhar Korlipara 47,932 47,932 0 0
Frommer Investment Partners LP
(Sachin Shah) (B)(D)(E) 95,864 95,864 0 0
Mark Abrams 52,725 52,725 0 0
Michael Vandemaele 52,725 52,725 0 0
Tiedemann Trust Company TTEE Trust B
U/W Edward Burke Ross FBO
Amory L. Ross I/M 47,932 47,932 0 0
Bruce C. Conway 52,725 52,725 0 0
Kurt Eichler 47,932 47,932 0 0
Lawrence Antonucci 47,932 47,932 0 0
Saleh Alamoudi 47,932 47,932 0 0
Robert Holmes TTEE
The Holmes Family Trust UA DTD
4/24/87 52,725 52,725 0 0
Gus Blass II 210,900 210,900 0 0
Richard M. Dearnley 210,900 210,900 0 0
RCB Securities Profit Sharing Plan
(Robert Bedford) 52,725 52,725 0 0
Jay R. Kuhne 52,725 52,725 0 0
Howard Malman 36,908 36,908 0 0
Gerald Zeitz 52,725 52,725 0 0
Goldstein Family Associates, LLP
(Barry Goldstein) 26,363 26,363 0 0
Ronald Shear 52,725 52,725 0 0
Hwang Community Property Trust
(Li-San Hwang Trustee) 242,540 242,540 0 0
George H. Robinette III 68,543 68,543 0 0
Phil Frey Living Trust of 3/20/96
(Phil Frey Trustee) 71,706 71,706 0 0
Henry Bedinger Mitchell III 31,635 31,635 0 0
18
Common stock beneficially
owned after the offering
Number of ----------------------------------
shares of
common stock Percentage
beneficially of
owned prior to Number of shares Outstanding
Name of selling security holders the offering (+) being offered Number of shares shares
- -------------------------------- ---------------- ------------- ---------------- -----------
Janis Salin 52,725 52,725 0 0
Gary Brennglass 52,725 52,725 0 0
Cordillera Fund, L.P. (Stephen Carter) 418,637 418,637 0 0
Enable Growth Partners LP
(Mitch Levine) (B)(D)(E) 305,605 305,605 0 0
Enable Opportunity Partners LP
(Mitch Levine) (B)(D)(E) 50,236 50,236 0 0
Pierce Diversified Strategy Master Fund
LLC (Mitch Levine) (B)(D)(E) 62,796 62,796 0 0
Kaia Offshore Partners, LP
(Jack Alfandary) 104,715 104,715 0 0
Kaia Partners I LP (Jack Alfandary) 44,008 44,008 0 0
Vladimir Vagin 527,251 527,251 0 0
Fribourg Enterprises, Inc. 527,251 527,251 0 0
Israel Braunstein 105,450 105,450 0 0
Moses & Yetta Braunstein Trust
(Israel Braunstein) 105,450 105,450 0 0
Rachel B. Blass 105,450 105,450 0 0
Nicola Dimonda 52,725 52,725 0 0
Jodi Kirsch 47,932 47,932 0 0
Fountainhead Investments, Inc.
(Peter Zachariou) 47,932 47,932 0 0
David Cantor 23,937 23,937 0 0
Philip Clark 26,363 26,363 0 0
CMS Capital 94,905 94,905 0 0
Howard Weiss 63,270 63,270 0 0
Superius Securities Group Inc.
Profit Sharing Plan (James
Hudgins) 958,637 958,637 0 0
Stanford S. Warshawsky 101,232 101,232 0 0
Ronald Koenig 52,725 52,725 0 0
19
Common stock beneficially
owned after the offering
Number of ----------------------------------
shares of
common stock Percentage
beneficially of
owned prior to Number of shares Outstanding
Name of selling security holders the offering (+) being offered Number of shares shares
- -------------------------------- ---------------- ------------- ---------------- -----------
Peter D. Burack 21,090 21,090 0 0
Larry Lomrantz & Merle Robin Lomrantz,
Joint Tenants 10,545 10,545 0 0
Diamondback Master Fund, Ltd.
(Chad Loweth) 771,884 771,884 0 0
Daniel A. Burack 42,180 42,180 0 0
Bayberrie Partners (Elliott Jaffe) 101,232 101,232 0 0
Avedis Movsesian 21,090 21,090 0 0
Arthur & Marylin B. Levitt 95,865 95,865 0 0
Amiel David 68,543 68,543 0 0
Gerald Parselle Wilton 37,962 37,962 0 0
Milton Dressner 95,865 95,865 0 0
Gavin Scotti 95,865 95,865 0 0
Chris Engel 101,232 101,232 0 0
Louisa Ramsay 42,180 42,180 0 0
Henry D'Abo 95,855 95,855 0 0
Blair Harrison 52,725 52,725 0 0
Stiletto Capital Partners, LP
(Jonathan Sorensen) (B)(D)(E) 105,450 105,450 0 0
MLC Management Company 210,900 210,900 0 0
Tembo Associates LLC, Series C
(Jeffrey Tweedy) 143,412 143,412 0 0
Holders of Warrants Issued in February 2006
Financing (6):
C.K. Cooper & Company (Otilia
Chen)(A)(C)(6a) 122,728 122,728 0 0
Gilford Securities, Inc. (Robert Malley)
1A)(C)(6b) 81,818 81,818 0 0
The Altitude Group LLC
(Michael Kreizman)(6c) 45,454 45,454 0 0
Matthew Toboroff (6d) 4,545 4,545 0 0
20
Common stock beneficially
owned after the offering
Number of ----------------------------------
shares of
common stock Percentage
beneficially of
owned prior to Number of shares Outstanding
Name of selling security holders the offering (+) being offered Number of shares shares
- -------------------------------- ---------------- ------------- ---------------- -----------
Jacqueline Toboroff (6d) 4,545 4,545 0 0
---------- ---------- ---------
Totals: 18,789,328 16,999,328 1,790,000 5.0%
- ----------
(*) Less than one percent.
(+) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from July 3, 2007. Each beneficial owner's percentage is
determined by assuming that options and warrants that are held by such person
(but not any other person), and which are exercisable within 60 days from July
3, 2007, have been exercised.
(A) Is a registered broker dealer.
(B) Is an affiliate of a registered broker dealer.
(C) Is deemed to be an underwriter.
(D) Is not deemed to be an underwriter.
(E) Acquired its shares of common stock in the ordinary course of business and,
at the time of the acquisition, did not have any arrangements or understandings
with any person to distribute the securities.
(1) The individuals listed under this heading (except R. Scott Barter) are among
those who received stock options from us on April 29, 2005, exercisable for an
aggregate of 12,950,000 shares of our Common Stock at the exercise price of $.05
per share (the "April Options"), which April Options will expire on April 28,
2010.
(1a) Represents option granted on April 1, 2005, exercisable for 500,000 shares
of our Common Stock at the exercise price of $0.30 per share, which option
expires on April 1, 2010 and provides for "cashless exercise."
(1b) Includes April Options exercisable for 250,000 shares of our Common Stock.
Mr. Barrenechea was previously one of our Board members.
(1c) Includes April Options exercisable for 100,000 shares of our Common Stock.
Also includes option granted on October 20, 2006, exercisable for up to 75,000
shares of our Common Stock at an exercise price of $0.50 per share, which option
expires on October 20, 2011. Mr. Birmingham previously served as our President.
(1d) Includes April Options exercisable for 100,000 shares of our Common Stock.
Also includes option granted on October 20, 2006, exercisable for up to 25,000
shares of our Common Stock, at an exercise price of $0.50 per share, which
option expires on October 20, 2011.
(2) The individuals listed under this heading are investors in our November 2005
Financing, whereby we raised an aggregate gross amount of $2,375,000 and issued
convertible promissory notes to such individual investors in such aggregate
principal amount. Interest accrues on such notes at 10% per annum from date of
issuance to May 31, 2007 and thereafter, until maturity at 12% per annum. The
notes, as extended from initial maturity date of May 15, 2007 by those extension
agreements dated as of May 31, 2007 between us and each note holder (the
"Extension Agreements"), mature on November 15, 2007 or such date that we
consummate a merger, combination or sale of substantially all of our assets or
that more than fifty (50%) percent of our voting stock is purchased by a single
entity or person or group of affiliated entities or persons, whichever is
earlier. We issued an aggregate of 380,000 shares of our Common Stock to the
note holders in partial consideration for their entry into the Extension
Agreements. The principal amount of each such note, and interest accruing
thereon, may be converted at any time by the holder into shares of our Common
Stock at the conversion price of $0.50 per share. Upon making their investment,
each of the investors in our November 2005 Financing received a number of
"kicker" shares of Common Stock (the "November Kicker Shares") equal to 20% of
21
the dollar amount of such investor's investment divided by $0.50 (or 950,000
shares of Common Stock in the aggregate). In addition to shares issuable upon
conversion of the principal amount of the notes and the previously-issued
November Kicker Shares, we are also registering up to 582,380 additional shares
of our Common Stock for those investors holding notes, in the aggregate
principal amount of $1,875,000, who have elected to receive, in lieu of cash,
shares of our Common Stock that would be issuable if interest accruing under
such notes was converted (the "November Interest Shares"). The November Interest
Shares are calculated based upon accrued interest of eighteen months (through
original May 15, 2007 maturity date) at an interest rate of 10% per annum and a
conversion rate of $0.50 per share. None of the shares of Common Stock (i)
issued as partial consideration for the Extension Agreements or (ii) issuable as
interest payments accruing after May 15, 2007 under the notes is being
registered hereby and, upon issuance, any such shares will constitute
"restricted securities" as that term is defined under the Securities Act.
(2a) Holds a $50,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the holder
includes: 100,000 shares issuable upon conversion of the principal amount of
such note, 15,000 shares issuable as the November Interest Shares, and 20,000
shares previously issued as the November Kicker Shares. For purposes of this
selling security holders table, we list separately the shares beneficially owned
by Frank J. Stanley III and those held by Frank J. Stanley III IRA FCC even
though the former party beneficially owns the shares listed as held by the
latter party. The latter party does not beneficially own the shares listed as
held by the former party.
(2aa) Holds a $50,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the holder
includes: 100,000 shares issuable upon conversion of the principal amount of
such note and 20,000 shares previously issued as the November Kicker Shares.
Holder elected to receive interest accruing on such note in cash.
(2b) Holds a $250,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the holder
includes: 500,000 shares issuable upon conversion of the principal amount of
such note, 75,000 shares issuable as the November Interest Shares, and 100,000
shares previously issued as the November Kicker Shares.
(2bb) Holds a $250,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the holder
includes: 500,000 shares issuable upon conversion of the principal amount of
such note and 100,000 shares previously issued as the November Kicker Shares.
Holder elected to receive interest accruing on such note in cash.
(2c) Holds a $200,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the holder
includes: 400,000 shares issuable upon conversion of the principal amount of
such note, 60,000 shares issuable as the November Interest Shares, and 80,000
shares previously issued as the November Kicker Shares.
(2d) Holds a $100,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the holder
includes: 200,000 shares issuable upon conversion of the principal amount of
such note, 30,000 shares issuable as the November Interest Shares, and 40,000
shares previously issued as the November Kicker Shares.
(2dd) Holds a $100,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the holder
includes: 200,000 shares issuable upon conversion of the principal amount of
such note and 40,000 shares previously issued as the November Kicker Shares.
Holder elected to receive interest accruing on such note in cash.
(2e) Holds a $25,000 convertible note from our November 2005 Financing. The
number of shares of Common Stock listed as beneficially owned by the holder
includes: 50,000 shares issuable upon conversion of the principal amount of such
note, 7,500 shares issuable as the November Interest Shares, and 10,000 shares
previously issued as the November Kicker Shares.
(2f) The shares of Common Stock listed as beneficially owned by the holder
include 100,000 shares issuable to Jung Tai upon conversion of a $50,000
convertible note acquired in our November 2005 Financing, 15,000 shares issuable
to Jung Tai as the November Interest Shares and 20,000 shares previously issued
to Jung Tai as the November Kicker Shares. The shares identified in footnote
(1c) with respect to this holder are beneficially owned jointly by Jung Tai and
Duan Rong.
22
(3) As the placement agent in our November 2005 Financing, Gilford Securities,
Inc. received from us warrants immediately exercisable into an aggregate of
475,000 shares of our Common Stock at the exercise price of $0.50 per share.
Such warrants expire in November 2010 and have "cashless" exercise provisions.
475,000 of the shares listed as beneficially owned by Gilford Securities
represent the shares issuable upon exercise of such warrants.
(4) Mr. Cohen is our Chief Financial Officer and was granted a stock option on
December 27, 2005, exercisable for up to 175,000 shares of our Common Stock, at
an exercise price of $0.94 per share. The option expires on December 27, 2010.
Also granted a stock option on January 4, 2007, exercisable for up to 100,000
shares of our Common Stock, at an exercise price of $0.56 per share, which
option expires on January 4, 2012.
(5) The investors from our February 2006 Financing (defined herein) are listed
below under this heading. We raised an aggregate gross amount of $9,000,000 by
issuing to investors 8,181,818 shares of our Common Stock at the price of $1.10
per share (the "February 2006 Financing"). We are registering for each of the
investors in our February 2006 Financing the number of shares of Common Stock
which they acquired from us in such financing (which number is listed in the
second column to the right of each investor's name), plus certain additional
shares issuable pro rata to each such investor, pursuant to a Registration
Rights Agreement between us and such investor, as a result of our not filing a
registration statement under the Securities Act with respect to such investor's
shares by April 2, 2006 and not attaining effectiveness of such registration
statement by June 2, 2006. Such amounts are to be pro-rated for partial months.
We elected to pay our penalty in shares of additional Common Stock and, in the
registration statement originally filed with the SEC on June 13, 2006, we listed
additional shares, in the estimated aggregate amount of 673,920, separately
under the heading "Shares Issuable as Penalty". Such share amount was calculated
by taking the sum of (i) 1% of such investors' investment ($90,000) divided by
$2.94 (the closing price of the Common Stock on April 2, 2006), plus (ii)
$90,000 divided by $3.10 (the closing price of the Common Stock on May 2, 2006),
plus (iii) $90,000 divided by $2.43 (the closing price of the Common Stock on
June 1, 2006), plus (iv) $90,000 divided by $1.19 (the closing price of the
Common Stock on July 3, 2006, plus (v) $90,000 divided by $1.01 (the closing
price of the Common Stock on August 2, 2006, plus (vi) $90,000 divided by $0.80
(the closing price of the Common Stock on September 1, 2006, plus (vii) an
additional estimated 300,000 shares to cover additional delay beyond October 2,
2006. The original registration statement was declared effective by the SEC on
October 20, 2006, reducing to 445,920 the total number of shares actually issued
as a penalty in the February 2006 Financing, based upon the sum of (A) that
number of shares for the six preceding months, as calculated above PLUS (B)
$90,000 divided by $0.75 (the closing price of the Common Stock on October 2,
2006) pro rated through October 20, 2006. This penalty amount is allocated among
the investors in the Post-effective Amendment No. 1 to our registration
statement.
(6) C.K. Cooper & Company and Gilford Securities, Inc. were the placement agents
in our February 2006 Financing and, in connection therewith, received warrants
to purchase 122,728 and 81,818 shares, respectively, of our Common Stock. In
addition, for their assistance in the February 2006 Financing, we issued
warrants to purchase 45,454 shares of our Common Stock to the Altitude Group LLC
and warrants to purchase 4,545 shares to each of Matthew Toboroff and Jacqueline
Toboroff. Such warrants are immediately exercisable at the price of $1.32 per
share, expire in February 2009, and have "cashless exercise" provisions.
(6a) The shares of Common Stock listed as beneficially owned by C.K. Cooper &
Company are the shares issuable upon its exercise of such warrants issued to
C.K. Cooper in connection with the February 2006 Financing.
(6b) Of the shares of Common Stock listed as beneficially owned by Gilford
Securities, Inc., 81,818 of the shares are the shares issuable upon exercise of
such warrants issued to Gilford Securities in connection with the February 2006
Financing.
(6c) The shares of Common Stock listed as beneficially owned by The Altitude
Group LLC are the shares issuable upon its exercise of the warrants which we
issued to it in connection with the February 2006 Financing.
(6d) The shares of Common Stock listed as beneficially owned by each of Matthew
Toboroff and Jacqueline Toboroff are the shares issuable upon each of his/her
exercise of the warrants which we issued to him or her in connection with the
February 2006 Financing.
23
PLAN OF DISTRIBUTION
All fees, costs, expenses and fees in connection with the registration of
the Common Stock offered by this prospectus will be borne by us. Brokerage
commissions, if any, attributable to the sale of the Common Stock will be borne
by the selling security holders.
The selling security holders may sell the Common Stock directly or through
brokers, dealers or underwriters who may act solely as agents or may acquire
Common Stock as principals. The selling stockholders may distribute the Common
Stock in one or more of the following methods:
o ordinary brokers transactions, which may include long or short
sales;
o transactions involving cross or block trades or otherwise on
the open market;
o purchases by brokers, dealers or underwriters as principal and
resale by these purchasers for their own accounts under this
prospectus;
o "at the market" to or through market makers or into an
existing market for the Common Stock;
o in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales
made through agents;
o through transactions in options, swaps or other derivatives
(whether exchange listed or otherwise); or
o any combination of the above, or by any other legally
available means.
Selling security holders will not be restricted as to the price or prices
at which the selling security holders may sell their Common Stock. Sales of
Common Stock by the selling security holders may depress the market price of our
Common Stock since the number of shares which may be sold by the selling
security holders is very large compared to the historical average weekly trading
volume of our Common Stock, which has been quite low. Accordingly, if the
selling security holders were to sell, or attempt to sell, all of such
securities at once or during a short time period, we believe such a transaction
would dramatically adversely affect the market price of our Common Stock.
From time to time a selling security holder may pledge its Common Stock
under margin provisions of customer agreements with its brokers or under loans
with third parties. Upon a default by the selling security holder, the broker or
such third party may offer and sell any pledged securities from time to time.
In effecting sales, brokers and dealers engaged by a selling security
holder may arrange for other brokers or dealers to participate in the sales as
agents or principals. Brokers or dealers may receive commissions or discounts
from the selling security holder or, if the broker-dealer acts as agent for the
purchaser of such Common Stock, from the purchaser in amounts to be negotiated,
which compensation as to a particular broker dealer might be in excess of
customary commissions customary in the types of transactions involved.
Broker-dealers may agree with the selling security holders to sell a specified
number of shares of Common Stock at a stipulated price, and to the extent the
broker-dealer is unable to do so acting as agent for the selling security
holders, to purchase as principal any unsold securities at the price required to
fulfill the broker-dealer commitment to the selling security holder.
Broker-dealers who acquire securities as principal may then resell those
24
securities from time to time in transactions: in the over-the counter market or
otherwise; at prices and on terms prevailing at the time of sale; at prices
related to the then-current market price; or in negotiated transactions.
These resales may involve block transactions or sales to and through other
broker-dealers, including any of the transactions described above. In connection
with these sales, these broker-dealers may pay to or receive from the purchasers
of the Common Stock commissions as described above. The selling security holders
may also sell the Common Stock in open market transactions under Rule 144 under
the Securities Act, rather than under this prospectus.
The selling security holders and any broker-dealers or agents that
participate with the selling security holders in sales of the Common Stock may
be deemed to be "underwriters" within the meaning of the Securities Act in
connection with these sales. In this event, any commissions received by these
broker-dealers or agents and any profit on the resale of the Common Stock
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
The selling security holders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Common
Stock against certain liabilities, including liabilities arising under the
Securities Act.
NASD Notice to Members 88-101 states that in the event a selling
shareholder intends to sell any of the shares registered for resale in this
Prospectus through a member of the NASD participating in a distribution of our
securities, such member is responsible for insuring that a timely filing is
first made with the Corporate Finance Department of the NASD and disclosing to
the NASD the following:
o it intends to take possession of the registered securities or
to facilitate the transfer of such certificates;
o the complete details of how the selling shareholders shares
are and will be held, including location of the particular
accounts;
o whether the member firm or any direct or indirect affiliates
thereof have entered into, will facilitate or otherwise
participate in any type of payment transaction with the
selling shareholders, including details regarding any such
transactions; and
o in the event any of the securities offered by the selling
shareholders are sold, transferred, assigned or hypothecated
by any selling shareholder in a transaction that directly or
indirectly involves a member firm of the NASD or any
affiliates thereof, that prior to or at the time of said
transaction the member firm will timely file all relevant
documents with respect to such transaction(s) with the
Corporate Finance Department of the NASD for review.
The selling security holders are subject to applicable provisions of the
Securities Exchange Act of 1934 (the "Exchange Act") and the SEC's rules and
regulations, including Regulation M, which provisions may limit the timing of
purchases and sales of the securities by the selling security holders.
We have advised the selling shareholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling shareholders and their affiliates.
In addition, we will make copies of this Prospectus available to the selling
shareholders for the purpose of satisfying the Prospectus delivery requirements
of the Securities Act. The selling security holders may agree to indemnify any
25
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Stock against certain liabilities, including liabilities arising
under the Securities Act.
In order to comply with certain states' securities laws, if applicable,
the Common Stock may be sold in those jurisdictions only through registered or
licensed brokers or dealers. In certain states the securities may not be sold
unless they have been registered or qualified for sale in such state, or unless
an exemption from registration or qualification is available and is obtained.
We have agreed to indemnify each selling stockholder whose shares we are
registering from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement.
LEGAL PROCEEDINGS
The Company is not currently involved in any litigation.
26
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth information as of July 3, 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.
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
27
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.
Certain Matters Involving Promoters
Immediately prior to our merger with Coastal in April 2005, 47.3% of the
Company's then outstanding shares of Common Stock were held by Mr. David Loev.
Mr. Loev is an attorney residing in the State of Texas who performed legal
services for the Company prior to its merger with Coastal. At no time was Mr.
Loev an officer or a director of the Company.
In November 2005, the SEC filed a civil lawsuit in the Houston federal
district court against certain parties unrelated to the Company and sued Mr.
Loev for allegedly violating certain registration provisions of the federal
securities laws (SEC Litigation Release No. 19476; November 29, 2005). Mr. Loev
settled the lawsuit with the SEC by consenting to the entry of an order
permanently enjoining him from violating the securities registration provisions,
ordering him to disgorge $25,785.50, plus interest, and imposing a $25,000 civil
penalty. The order also prohibits Mr. Loev from issuing any legal opinions that
the securities of any issuer are exempt from the securities registration
provisions of the federal securities laws pursuant to Rule 504 of Regulation D
and from accepting securities of any issuer whose securities are quoted on the
Pink Sheets in consideration for legal or consulting services rendered.
As previously stated, since April of 2005, Mr. Loev has had no dealings
with the Company.
28
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of July 3, 2007, we had 32,260,238 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 666,665 (3) 2.1 %
(Chairman and Chief Executive Officer)
Alan Gaines 7,624,250 (4) 22.4 %
(Vice Chairman and Director)
Richard Cohen 475,000 (5) 1.5 %
(Chief Financial Officer)
Richard d'Abo 1,186,000 (6) 3.6 %
(Director)
Barrie Damson 7,624,250 (7) 22.4 %
37 Franklin Street
Westport, CT 06880
Superius Securities Group Inc. Profit 1,673,637 (8) 5.1 %
Sharing Plan
94 Grand Avenue
Englewood, NJ 07631
Lakewood Group LLC 3,000,000 (9) 8.5 %
242 4th Street
Lakewood, NJ 08701
All Officers & Directors as a Group (4 9,951,915 (3)(4)(5)(6) 28.8 %
persons)
- ----------
(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 June 26, 2007. Each beneficial owner's
percentage is determined by assuming that options and warrants that are held by
such person (but not any other person), and which are exercisable within 60 days
from June 26, 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.
29
(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.
(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.
(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.
(8) Includes 500,000 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.
30
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 July 3, 2007,
there are a total of 32,260,238 shares of Common Stock issued and outstanding
and no shares of preferred stock that are issued and outstanding.
In addition to the foregoing, as of July 3, 2007 there are (i) 7,545,000
shares of Common Stock issuable pursuant to outstanding stock options, (ii)
4,750,000 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.
Common Stock
Holders of outstanding shares of Common Stock are entitled to one vote for
each share of stock in his or her name on the records of the Company 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.
Preferred Stock
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. The Company may
issue preferred stock to effect a business combination, to raise capital or for
other reasons. In addition, preferred stock could be utilized as a method of
discouraging, delaying or preventing a change in control of the Company.
Restrictions on Ownership - Nevada law
The Nevada statutory law applicable to private corporations such as the
Company contains provisions that impose certain restrictions on the ability of
stockholders owning a specific percentage or more of shares of a Nevada
corporation's voting stock to engage in a combination transaction with that
corporation, and on the ability to certain persons or entities to acquire a
controlling interest in a Nevada corporation. Because the Company's Articles of
Incorporation and Bylaws do not prohibit the application of these provisions,
these laws may have the effect of inhibiting the acquisition of shares of Common
Stock or any combination transaction with the Company.
31
INTERESTS OF NAMED EXPERTS AND COUNSEL
Included in this registration statement are the reports of Malone &
Bailey, PC, independent registered public accountants, located in Houston,
Texas, with respect to its audits of (i) our balance sheet 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 and (ii) the
Statements of Combined Revenues and Direct Operating Expenses of the Oil and Gas
Properties purchased by us from Statex Petroleum I, L.P. and Charles W. Gleason,
L.P. for the years ended December 31, 2006 and 2005, respectively. We have
relied upon such report, given upon the authority of such firm as an expert in
accounting and auditing.
Our counsel, Eaton & Van Winkle LLP, located in New York, New York, passed
upon the validity of the issuance of the shares of Common Stock that are being
offered pursuant this prospectus.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT
Our Articles of Incorporation and by-laws provide that we will indemnify
to the fullest extent permitted by the Nevada General Corporation Law any person
made or threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person or such person's testator or intestate is or was a director,
officer, employee or agent of our Company or serves or served at our request as
a director, officer or employee of another corporation or entity.
We may enter into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in our articles of incorporation
and by-laws. These agreements, among other things, would indemnify our directors
and officers for certain expenses (including advancing expenses for attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by us or in our right, arising
out of such person's services as a director or officer of our Company, any
subsidiary of ours or any other company or enterprise to which the person
provides services at our request.
We maintain a Directors, Officers and Company Liability Policy.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
32
CERTAIN RELATIONSHIPS AND TRANSACTIONS AND
CORPORATE GOVERNANCE
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.
During our fiscal year 2006, we granted stock options to certain of our
affiliates as described elsewhere in this prospectus under "Executive
Compensation - Option Grants in Last Fiscal Year".
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 director independence standards of The Nasdaq Stock
Market, on which market our Common Stock is traded. 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.
33
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. Under the
Plan and Agreement of Merger, Coastal was merged with and into our company in
exchange for 17,206,000 shares of our Common Stock issued to the former Coastal
stockholders. In addition, all stock options and other rights to purchase shares
of common stock of Coastal were converted into options or rights to purchase an
equal number of shares of our Common Stock. As of the effective date of the
merger, options to acquire up to 500,000 shares of Coastal common stock were
converted into options to acquire 500,000 shares of our Common Stock.
Under the merger agreement, we assumed all of the obligations and
liabilities of Coastal, including Coastal's obligations to repay outstanding
indebtedness under its $350,000 original principal amount of 10% convertible
promissory notes. These notes were convertible into shares of our Common Stock
at a rate of $0.25 per share and matured on April 6, 2006. Each holder of these
notes was entitled to receive an additional number of shares equal to 20% of the
face amount of holder's note. Effective April 6, 2006, the holders of such notes
converted such notes into an aggregate of 1,820,000 shares of our Common Stock.
In addition, on the effective date of the merger, Coastal delivered the sum of
$125,000 to the Company to discharge amounts owed by us for prior legal services
rendered to us and for expenses incurred by us in connection with the merger
transaction.
As a result of the merger, 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 SEC on March 19, 2007; and
o our purchase on April 12, 2007 of the Statex Assets, including
those wells and properties located on approximately 4600 acres
in north Texas (the "Stephens County Acquisition"), as more
particularly described below under the heading "- Northern
Texas Oil, Gas and Mineral Rights - Stephens County
Acquisition" and elsewhere in our Current Report on Form 8-K
previously filed with the SEC on April 18, 2007.
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.
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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 1, 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".
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.
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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.
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
36
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 in January 2006 to [Rex Parties] 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
On April 12, 2007, we acquired effective as of February 1, 2007 certain
oil and gas 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. Under the purchase and sale agreement dated December 20, 2006 with Statex
Petroleum I, L.P. and Charles W Gleeson LP, we paid approximately $28,600,000
(including interest from January 15, 2007 until date of closing) for 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 Stephens County Regular 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.
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.
In addition to Thomas Kaetzer, our Chairman and Chief Executive Officer,
and Richard Cohen, our Chief Financial Officer, we currently have nine
full-time employees and one part-time employee.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS 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 Prospectus.
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. See "Cautionary Note Regarding
Forward-Looking Statements" at page 13 of this Prospectus.
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.
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 and Rule 12b-2
promulgated under 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").
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
38
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 April 2007 Credit Facility, as discussed
elsewhere in this prospectus under "- Liquidity and Source of Capital - April
2007 Credit Facility", we believe that we now have adequate funds available
under our revolving line of credit to focus on exploratory and production
activities at each of our southern Indiana recently acquired north Texas
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
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 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 it is planned to expand the waterflood to the western
leases.
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
39
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 Area of Mutual Interest, or 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) during 2007 in the
163,000 acre AMIs. 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 are also planned to be tested during 2007.
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 and two 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.
40
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 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 the April 2007 Credit
Facility 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,
of which approximately $45 million remains available to be drawn down by us at
June 26, 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 discussed elsewhere in this
prospectus under "- Liquidity and Source of Capital - March 2007 Bridge
Financing".
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. At May 15, 2007, we had received approximate net proceeds of
$500,000 attributable to production from these wells. Included elsewhere in this
prospectus under the heading "Financial Statements" 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 the Statements of Combined Revenues and Direct Operating Expenses
relating to the Stephens County Acquisition as of and for the period ended
December 31, 2006, contained elsewhere in this prospectus under the heading
"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.
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
41
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.
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 April 2007 Credit Facility,
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.
Private Placement of Equity and Debt
Previously, we have financed current expenses and our business operations
chiefly through private placements of equity and debt securities issued by our
Company, as follows:
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. 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. These shares, together with
[582,380] additional shares that would be issuable if interest accruing under
notes, in the aggregate principal amount of $1,875,000, was converted, are among
the shares of our Common Stock being registered under the registration statement
to which this prospectus is a part.
Each note initially matured on May 15, 2007 and accrued interest at the
rate of 10% per annum. On May 31, 2007 we entered into Extension Agreements with
the holders of the notes extending the maturity date until the earlier of (i)
November 15, 2007 or the date of consummation by us of a merger, combination or
42
sale of substantially all of our Company's assets or the purchase by a single
entity or person or group of affiliated entities or persons of more than fifty
(50%) percent of the voting stock of our Company. In consideration for the note
holders' agreement to extend the maturity date, we agreed to (i) increase the
interest payable on the outstanding principal under the notes from 10% to 12%,
effective as of May 31, 2007, and (ii) issue to the note holders an aggregate of
380,000 shares of our Common Stock.
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. These shares are among the shares of our Common
Stock being registered under the registration statement to which this prospectus
is a part.
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.
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) our lease payments of approximately $2,600 per month for
use of our corporate headquarters, (ii) our hedging arrangement entered into
under the Swap Agreement, as discussed elsewhere in this prospectus , which
hedging arrangement is to be settled on a monthly basis, commencing June 1, 2007
and (iii) 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.
43
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.
44
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.
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. Prior to our redemption, 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.
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 640 bopd and 100 mcfpd, resulting in 510
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.
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).
Additional disclosure of the oil and gas estimated and proven reserves is
included in the notes to the financial statements and the pro forma financial
information, giving effect as of January 1, 2005 to our acquisition of the
Stephens County assets, contained elsewhere in this prospectus under "Financial
Statements - (b) Financial Statements of Business Acquired - Notes to Financial
Statements, Note 5" and "Financial Statements - (c) Pro Forma Financial
Information of Baseline Oil & Gas Corp. - Pro Forma Supplemental Oil and Gas
Disclosures."
45
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER 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 July 3, 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 4,750,000 shares of Common Stock,
excluding interest.
Holders of Securities.
As of May 15, 2007, there were approximately 188 holders of record of our
Common Stock.
Our Common Stock is covered by a SEC rule that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors, which are generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and transaction prior
to the sale. Consequently, the rule may affect the ability of broker-dealers to
sell our securities and also may affect the ability of purchasers of our Common
Stock to sell their shares in the secondary market. It may also cause fewer
broker-dealers to be willing to make a market in our Common Stock, and it may
affect the level of news coverage we receive.
46
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.
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;
47
o Options granted December 20, 2005 to third parties in connection with
potential acquisition transaction, which options expire five 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.
48
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 $7,500. In connection with our employment
of Mr. Kaetzer in December 2006, we agreed to pay him a salary and other
compensation pursuant to his employment agreement with us, as described in more
detail below in the Summary Compensation Table and elsewhere in this prospectus
under "- Employment Contracts."
The following table shows the compensation of our executive officers for
the fiscal years ended December 31, 2006 and December 31, 2005:
Summary Compensation Table
Long-Term Compensation
----------------------------
Annual Awards
Compensation
--------------------------------------------------------
Name and Securities Underlying All Other
Principal Position Year Salary ($) Options (#) Compensation
- -----------------------------------------------------------------------------------------------------------------
Barrie Damson (Chief Executive 2006 $0 None n/a
Officer) (1)
Thomas Kaetzer (President and Chief 2006 $15,833 (2) 2,000,000 shares of Common n/a
Operating Officer) (2) Stock
Richard Cohen 2006 $90,000 None n/a
(Chief Financial Officer) (3)
2005 $7,500 (3) 175,000 shares of Common n/a
Stock
- ----------
(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:
49
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 2006 1,000,000 (1) 50% $0.50 12/20/2011
(President and Chief 2006 500,000 (1) 25% $0.60 12/20/2011
Operating Officer) 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.
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
Name Underlying Options Granted at 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 in
December 2006, Mr. Gaines and Mr. Damson each agreed to the cancellation of
options to acquire 1,000,000 shares of our Common Stock.
50
Employment Contracts.
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.
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.
51
FINANCIAL STATEMENTS
Index
Page No.
(a) Annual Financial Statements of Baseline Oil & Gas Corp.
Report of Independent Registered Public Accounting Firm ........................ F-1
Balance Sheet at December 31, 2006 ............................................. F-2
Statement of Expenses for years ended December 31, 2006 and 2005 and
for the period from June 29, 2004 (Inception) through December 31, 2006 ........ F-3
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 .... F-4
Statement of Changes in Stockholders' Equity (Deficit) for the period from
June 29, 2004 (Inception) through December 31, 2006 ........................... F-5
Notes to Financial Statements .................................................. F-6
(b) Quarterly Financial Statements of Baseline Oil & Gas Corp.
Unaudited Balance Sheet at March 31, 2007 and December 31, 2006 ................ F-18
Unaudited Statement of Expenses for three months ended March 31, 2006 and
2005 and for the period from June 29, 2004 (Inception) through December 31,
2006 ........................................................................... F-19
Unaudited Statement of Cash Flows for three months ended March 31, 2006 and
and 2005 and for the period from June 29, 2004 (Inception) through December 31,
2006 ........................................................................... F-20
Notes to Financial Statements .................................................. F-21
(c) Financial Statements of Businesses Acquired.
Report of Independent Registered Public Accounting Firm ........................ F-25
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. F-26
Notes to Financial Statements .................................................. F-27
(d) Pro Forma Financial Information of Baseline Oil & Gas Corp.
Introductory Comments - Unaudited Pro Forma Condensed Financial
Statements ..................................................................... F-32
Unaudited Pro Forma Condensed Statement of Operations for the
Year Ended December 31, 2006 ................................................... F-33
Unaudited Pro Forma Condensed Statement of Operations for the
Year Ended December 31, 2005 ................................................... F-34
Unaudited Pro Forma Condensed Balance Sheet as of December 31, 2006 ........... F-35
Notes to Unaudited Pro Forma Condensed Financial Statements .................... F-36
Pro Forma Supplemental Oil and Gas Disclosures ................................. F-37
52
(a) Annual Financial Statements of Baseline Oil & Gas Corp.
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
F-1
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.
F-2
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.
F-3
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.
F-4
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
ount -- -- 1,939,401 -- 1,939,401
Debt
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.
F-5
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
F-6
found a sufficient quantity of reserves to justify its completion as a producing
well if the required capital expenditure is made and ii) drilling of the
additional exploratory wells is under way or firmly planned for the near future.
If drilling in the area is not under way or firmly planned, or if the well has
not found a commercially producible quantity of reserves, the exploratory well
is assumed to be impaired, and its costs are charged to expense.
In the absence of a determination as to whether the reserves that have been
found can be classified as proved, the costs of drilling such an exploratory
well is not carried as an asset for more than one year following completion of
drilling. If, after that year has passed, a determination that proved reserves
exist cannot be made, the well is assumed to be impaired, and its costs are
charged to expense. Its costs can, however, continue to be capitalized if a
sufficient quantity of reserves are discovered in the well to justify its
completion as a producing well and sufficient progress is made in assessing the
reserves and the well's economic and operating feasibility.
The impairment of unamortized capital costs is measured at a lease level and is
reduced to fair value if it is determined that the sum of expected future net
cash flows is less than the net book value. The Company determines if impairment
has occurred through either adverse changes or as a result of the annual review
of all fields.
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
F-7
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.
- --------------------------------------------------------------------------------
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.
F-8
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.
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.
F-9
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.
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.
F-10
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.
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
F-11
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.
F-12
On November 16, 2006 Wayne Brannan exercised an option to purchase 250,000
shares at $0.05 share.
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, Messrs. 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
========== ==========
F-13
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.
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
F-14
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.
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
F-15
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.
F-16
(b) Quarterly Financial Statements of Baseline Oil & Gas Corp.
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.
F-17
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.
F-18
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
March 31, Inception Through
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.
F-19
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.
F-20
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 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.
After redeeming its membership interest in New Albany on March 16, 2007,
Baseline now owns the following assets:
F-21
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 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
F-22
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.
F-23
(c) Financial Statements of Businesses Acquired.
Report of Independent Registered Public Accounting Firm
To the Shareholders of Baseline Oil & Gas Corp.
Houston, TX
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
F-24
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.
F-25
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. At the end of the economic life of the Properties,
F-26
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.
F-27
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
========== ========== ==========
F-28
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
============= =============
F-29
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
============ ============
F-30
(d) Pro Forma Financial Information.
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.
F-31
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 derivitive 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.
F-32
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) 18,547,279
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.
F-33
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.
F-34
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.
F-35
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.
F-36
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
======================================
F-37
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
================================================
F-38
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
================================================
F-39
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Our Articles of Incorporation and by-laws provide that we will indemnify
to the fullest extent permitted by the Nevada General Corporation Law any person
made or threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person or such person's testator or intestate is or was a director,
officer, employee or agent of our Company or serves or served at our request as
a director, officer or employee of another corporation or entity.
We may enter into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in our articles of incorporation
and by-laws. These agreements, among other things, would indemnify our directors
and officers for certain expenses (including advancing expenses for attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by us or in our right, arising
out of such person's services as a director or officer of our Company, any
subsidiary of ours or any other company or enterprise to which the person
provides services at our request.
We maintain a Directors, Officers and Company Liability Policy.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Item 25. Other Expenses of Issuance and Distribution
Our expenses in connection with the issuance and distribution of the
securities being registered, other than the underwriting discount, are estimated
as follows:
SEC Registration Fee $ 4,473
Legal Fees and Expenses 15,000
Accountants' Fees and Expenses 10,000
Miscellaneous Expenses 10,000
-------
Total $39,473
Item 26. Recent Sales of Unregistered Securities
As of July 3, 2007, we have 32,260,238 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 19,569,090 shares of
Common Stock.
All issuances of equity securities in the last 3 years described below
were issued pursuant to exemptions from registration provided by Section 4(2) of
the Securities Act and Regulation D promulgated thereunder.
II-1
Issuances Related to Costal 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 Related to 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.
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.
Issuances Following the Coastal Merger.
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.
Issuances in connection with our November 2005 Placement.
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
II-2
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. The
November Shares, November Conversion Shares (including those which may be issued
through May 15, 2007 as interest payments) and Warrant Shares are among the
securities included for registration in this registrations statement on Form
SB-2 initially filed with the Commission on June 13, 2006, and declared
effective on October 20, 2006. As of July 3, 2007, we had issued to certain
holders of November Notes electing to receive interest in the form of shares of
Common Stock an aggregate of 562,500 shares of our Common Stock in lieu of cash
for interest having accrued over the six quarterly periods, ending May 15, 2007,
since the date of issuance.
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.
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, 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. Our registration statement on
Form SB-2 was declared effective by the Commission on October 20, 2006.
II-3
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 April 2007 Credit Facility, 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.
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.
General Grants to Consultants, Employees, Officers and Directors
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.
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
II-4
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.
Item 27. Exhibits
Exhibit Nos. Descriptions
3.1 Registrant's Amended and Restated Articles of Incorporation
(incorporated herein by reference to Exhibit 3.1 to
registrant's Form 8-K report, filed January 19, 2006).
3.2 By-Laws of the Registrant (incorporated herein by reference to
Exhibit 3.2 of Registrant's registration statement on Form
SB-2, filed June 25, 2004).
4.1 Form of 10% Convertible Promissory Note, issued by the
Registrant in November 2005 (incorporated herein by reference
to Exhibit 99.1 of Registrant's Form 8-K report, filed
November 16, 2005).
4.1.1 Form of Extension Agreement, dated as of May 31, 2007, among
the Company, and each of the holders of the November 2005
Notes (incorporated herein by reference to Exhibit 99.1 of
Registrant's Form 8-K report, filed June 6, 2007).
4.2 Form of Warrant to Purchase Shares of Common Stock, issued by
the Registrant to the placement agent in November 2005
(incorporated herein by reference to Exhibit 99.2 of
Registrant's Form 8-K report, filed November 16, 2005).
4.3 Form of Warrant to Purchase Shares of Common Stock, issued by
the Registrant to the placement agents in February 2006
(incorporated herein by reference to Exhibit 4.3 of
Registrant's Form 10-KSB annual report, filed March 31, 2006).
5.1 Opinion of Eaton & Van Winkle LLP (incorporated herein by
reference to the Registrant's Registration Statement on Form
SB-2 filed on June 13, 2006).
10.5 Form of Registration Rights Agreement for February Private
Placement (incorporated by reference to Exhibit 10.5 of the
Registrant's Amendment No. 1 to this Registration Statement on
Form SB-2 filed on August 1, 2006).
II-5
23.1 Consent of Malone & Bailey, LLP *
23.2 Consent of Eaton & Van Winkle LLP (included in Exhibit 5.1)
- ----------
Numbers with (*) are filed herewith.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration Statement;
and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) For the purpose of determining any liability under the
Securities Act, treat each such post-effective amendment as a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the end
of the offering.
(4) For determining liability of the undersigned small business
issuer under the Securities Act to any purchaser in the initial distribution of
the securities, the undersigned small business issuer undertakes that in a
primary offering of securities of the undersigned small business issuer pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the undersigned
small business issuer will be a seller to the purchaser and will be considered
to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned small business issuer relating to the offering required to be filed
pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned small business issuer or used or
referred to by the undersigned small business issuer;
II-6
(iii) The proportion of any other free writing prospectus
relating to the offering containing material information about the undersigned
small business issuer or its securities provided by or on behalf of the
undersigned small business issuer; and
(iv) Any other communication that is an offer in the offering
made by the undersigned small business issuer to the purchase.
(5) For the purpose of determining liability under the Securities
Act to any purchaser:
Each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is a part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Houston, State of Texas on July 5, 2007.
BASELINE OIL & GAS CORP.
By: /s/ Thomas Kaetzer
--------------------------------
Name: Thomas Kaetzer
Title: Chief Executive Officer
(principal executive officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints Thomas Kaetzer his
true and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign any or all amendments to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Securities Act of 1933, as amended, this
post-effective registration statement has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature Capacities Date
- --------- ---------- ----
/s/ Thomas Kaetzer Chairman and Chief Executive July 5, 2007
- ------------------ Officer (principal executive officer)
Thomas Kaetzer
/s/ Alan Gaines Vice-Chairman July 5, 2007
- ------------------
Alan Gaines
/s/ Richard Cohen Chief Financial Officer July 5, 2007
- ------------------ (principal financial and accounting
Richard Cohen officer)
/s/ Richard D'Abo Director July 5, 2007
- ------------------
Richard D'Abo
II-8
BASELINE OIL & GAS CORP.
INDEX OF EXHIBITS FILED WITH REGISTRATION STATEMENT
Exhibit Nos. Descriptions
23.1 Consent of Malone & Bailey, LLP