U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

AMENDMENT NO. 1

TO

FORM 10-QSB

 

(Mark One)

 

For the quarterly period ended December 31, 2006

 

OR

 

 

For the transition period from _____ to ______

 

Commission file number 000-50929

 

 

 

 

 

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No o

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12 b-2 of the Exchange Act).

 

Yes o No x

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of November 5, 2007, the registrant had issued and outstanding 57,171,982 shares of common stock.

 

Transitional Small Business Disclosure Format (check one);        Yes o No x

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EXPLANATORY NOTE

 

We are filing this Amendment No.1 (“Amendment No.1”) to our Form 10-QSB for the quarter ended December 31, 2006, to restate our consolidated statements of operations and cash flows for the quarter and six months ended December 31, 2006. This Amendment No. 1 to the Original Filing amends our original recordation of warrant and derivative liability and the related method of amortization of debt discount, as well as various expense and reclassifications affecting net income per share.  The effects of the restatement are presented in Item 2 Management’s Discussion and Analysis of this Amendment No.1 and in Note 2, Notes to the Financial Statements, December 31, 2006.

 

For the convenience of the reader, this Amendment No.1 sets forth our Original 10-QSB in its entirety, as amended by, and to reflect, the Amendment No.1.  No attempt has been made in this Amendment No.1 to update other disclosures presented in our Original 10-QSB, except as required to reflect the effects of the restatement. This Amendment No.1 does not reflect events occurring after the filing of our Original 10-QSB, or modify or update those disclosures, including the exhibits to the Original 10-QSB affected by subsequent events except as applicable in our financial statement footnotes subsequent event disclosures. The following sections of our Original 10-QSB have been amended to reflect this Amendment No.1:

 

 

This Amendment No.1 has been signed as of a current date and all certifications of our Chief Executive Officer and Chief Financial Officer are given as of a current date. Accordingly, this Amendment No.1 should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the Original 10-QSB for the fiscal year ended June 30, 2007, including any amendments to those filings.

 

 

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Ignis Petroleum Group, Inc. and Subsidiary

Consolidated Balance Sheet (Restated)

December 31, 2006

(Unaudited)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

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Ignis Petroleum Group, Inc. and Subsidiary

Consolidated Statement of Operations for the

Three and Six Months Ended December 31, 2006 (Restated) and 2005

(Unaudited)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

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Ignis Petroleum Group, Inc. and Subsidiary

Consolidated Statement of Cash Flows for the

Six Months Ended December 31, 2006 (Restated) and 2005

Unaudited

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

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IGNIS PETROLEUM GROUP, INC. AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

The interim consolidated financial statements of Ignis Petroleum Group, Inc. are unaudited and in the opinion of management contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year or for previously reported periods due in part to the volatility in prices for crude oil and natural gas, the timing of acquisitions, interruption in production and the success of drilling activity. You should read these consolidated interim financial statements in conjunction with the audited consolidated financial statements and notes thereto included in Ignis Petroleum Group’s Form 10-KSB dated June 30, 2006.

 

 

We identified an error in recording depletion. We recorded a reduction of $63,246 and an increase of $39,838 in depletion expense under the units of production method for the six month and three month periods ended December 31 2006 respectively, which has been corrected in this restatement.

 

We identified an error in exploration expense. The North Wright Field should have been written off to expense at June 30, 2006. We corrected this error in our Amendment No.2 to our Annual Report on Form 10-KSB, resulting in the decrease in exploration expense of $199,082 and $0.00 for the six and three month periods ended December 31, 2006.

 

The original presentation included amortization of debt discount in general and administrative expense. We reclassified amortization expense of $89,140 to interest expense for the six and three month periods.

 

We identified errors in our accounting for the warrant liability for warrants issued to Cornell Capital Partners, LP. The warrant liability error relates to adjusting the warrant liability for changes in fair market value on a quarterly basis.  We historically recorded the fair market value of the warrant liability at inception with no subsequent adjustments for changes in the market value.  As a result, we did not record the gain/loss on change in the warrant liability as of December 31, 2006.

 

The warrant liability error resulted in an overstatement of warrant liability and related loss of $2,695,667 and $2,135,282 for the six and three-month periods ended December 31, 2006 respectively. These corrections had no effect on our revenue, total assets, cash flow or liquidity for any period. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the registration statement no later than May 3, 2006, or if the registration statement is not declared effective by September 5, 2006 we are considered

 

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in default. As of December 31, 2006 the registration statement had not been declared effective, therefore we are considered in default and accordingly we reclassified the warrant liability from long term to short term liabilities.

 

We identified an error in our accounting for the derivative liability issued to Cornell Capital Partners LP.  Under the Secured Convertible Debenture, Section 3(b)(i) limits the number of shares issuable to Cornell Capital Partners, LP upon conversion to 4.99% of the outstanding stock at time of conversion. Under section 39(a)(ii) of the same agreement, we are required to pay cash in lieu of shares for the portion greater than 4.99%.  The amount of cash is determined by the number of shares issuable upon conversion and the current market price of our stock.  Since the number of shares issuable is calculated using 94% of the market price, the cash conversion results in approximately a 6% premium paid on conversion.  As a result, the value of the derivative liability related to the conversion in excess of 4.99% will be based on the conversion premium at the end of the reporting period, the Cash Premium Method rather than using the Black-Scholes model.  We corrected the derivative liability for the period ended December 31, 2006 resulting in a decrease in the liability of $3,042,400 and $674,120 for the six and three months ended December 31, 2006 respectively. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the registration statement no later than May 3, 2006, or if the registration statement is not declared effective by September 5, 2006 we are considered in default. As of September 5, 2006 the registration statement had not been declared effective, therefore we are considered in default and accordingly we reclassified the derivative liability from long term to short term liabilities.

 

We also identified an error in accounting for the amortization of the debt discount related to the $5,000,000 convertible debenture issued to Cornell Capital Partners, LP.  We calculated the amortization of the debt discount using an amortization method that is not in accordance with generally accepted accounting principles.  We corrected the calculation using the effective interest method, which results in near zero amortization in the first year and exponentially increasing in the later years because the debt balance (net of discount) is zero at inception. We corrected the method of amortization in this restatement resulting in a decrease to interest expense and increase to the debt discount of $1,266,331 and $642,942 for the six and three-month periods ended December 31, 2006. As of December 31, 2006 the registration statement had not been declared effective, therefore we are considered in default and accordingly we reclassified the debt and debt discount from long term to short term liabilities.

 

The effects of these changes on the consolidated balance sheet as of December 31, 2006, and the statements of operations for the six and three-month periods ended December 31, 2006 are summarized as follows:

 

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The financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

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Should the Company be unable to achieve profitable operations or raise additional capital to bring on new projects, it may not be able to continue operations. These factors raise substantial doubt concerning the ability of the Company to continue as a going concern. The accompanying financial statements do not purport to reflect or provide for the consequences of discontinuing operations. In particular, such financial statements do not purport to show: (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to liabilities, the amount that may be allowed for claims and contingencies, or the status and priority thereof; (c) as to shareholder accounts, the effect of any changes that may be made in the capitalization of the Company; and (d) as to operations, the effect of any changes that may be made in its business.

 

If current market conditions and production levels of our existing oil and natural gas continues we have sufficient funds to conduct our operations for a limited amount of time. We will need external funding to continue our planned operations for the next 12 months. Additional financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to secure additional capital, we will be forced to either slow or cease operations.

 

We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not been a sufficient source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. We may not be successful in obtaining additional funding.

 

We will still need additional investments in order to continue operations to achieve cash flow break-even. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail or cease our operations.

 

 

In connection with the second amended and restated securities purchase agreement, we also entered into a second amended and restated registration rights agreement providing for the filing, within five days of April 28, 2006, of a registration statement with the Securities and Exchange Commission registering the common stock issuable upon conversion of the secured convertible debentures and warrants. We are obligated to use our best efforts to cause the registration statement to be declared effective no later than 130 days after filing and to insure that

 

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the registration statement remains in effect until the earlier of (i) all of the shares of common stock issuable upon conversion of the secured convertible debentures have been sold or (ii) January 5, 2008. In the event of a default of our obligations under the registration rights agreement, which includes, among other things, our failure, to file the registration statement no later than May 3, 2006, or the failure of our registration statement to be declared effective by September 5, 2006, we are required pay to Cornell Capital, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the secured convertible debentures. We have accrued a liability of $400,000 at December 31, 2006 in connection with this provision.

 

 

Our financial statements reflect the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. Our asset retirement obligation primarily represents the estimated present value of the amount we will incur to plug, abandon and remediate our producing properties at the end of their productive lives, in accordance with applicable state laws. We determine our asset retirement obligation by calculating the present value of estimated cash flows related to the liability. We elected not to recognize asset retirement obligation during prior periods as the amount was immaterial and did not materially affect our obligations or misstate income. At December 31, 2006, we recorded a liability for asset retirement obligation of $38,049, of which all is considered long term. We capitalized $32,014 and recorded an accretion expense of $6,035.

 

 

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period. Any stock options and conversion of debt were not considered for the calculation.

 

The weighted average shares used in the basic loss per common share computations for the three months ended December 31, 2006 and 2005 were 50,490,557 and 48,025,029 shares, respectively. For the six months ended December 31, 2006 and 2005, the weighted average shares used in basic loss per common share computations were 50,286,091 and 45,957,328 shares respectively.

 

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Diluted net income (loss) per common share is computed in the same manner, but also considers the effect of the convertible debentures and warrants if their effect is dilutive. For the three and six month periods ended December 31, 2006 dilutive earnings per share were $0.02 and $0.05 respectively. For the three and six month periods ended December 31, 2006, the convertible debentures increased basic common share to 52,999,958 and 52,826,414 respectively.

 

 

Litigation

 

We are not aware of any pending or threatened litigation or legal proceedings.

 

Other

 

To date, our expenditures to comply with environmental or safety regulations have not been significant and are not expected to be significant in the future. However, new regulations, enforcement policies, claims for damages or other events could result in significant future costs.

 

 

On February 7, 2007, we entered into an agreement with Petrofinanz GmbH pursuant to which Petrofinanz will (i) convert all of the debt represented by the Amended and Restated Loan Agreement dated August 28, 2006, between us, as the borrower, and Petrofinanz as the lender in the original principal amount of $600,000, plus accrued interest of $24,907 into 3,021,794 shares of our common stock at a conversion price of $0.2068 per share, such price representing a 6% discount to the closing bid price of our common stock on February 6, 2007; and (ii) purchase an additional $600,000 of our common stock at a price to be determined, such price representing a 6% discount to closing bid price of our common stock in three tranches of $200,000 each on the following dates: February 9, 2007, March 9, 2007, and April 9, 2007. As of February 12, 2007 we received the first tranch payment of $200,000.

 

Item 2. Management’s Discussion and Analysis or Plan of Operation.

 

Forward-Looking Statements

 

We are including the following cautionary statement in this Form 10-QSB for any forward-looking statements made by, or on behalf of, us. Certain statements contained herein and other materials we file with the Securities and Exchange Commission are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements give our current expectations, plans, objectives, assumptions or forecasts of future events. All statements other than statements of current or historical fact contained in this report, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In some cases,

 

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you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plans,” “potential,” “projects,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” and similar expressions. These statements are based on our current plans and are subject to risks and uncertainties, and as such our actual future activities and results of operations may be materially different from those set forth in the forward-looking statements. Any or all of the forward-looking statements in this periodic report may turn out to be inaccurate and as such, you should not place undue reliance on these forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

 

Factors that could cause actual results to differ materially from those in forward-looking statements include: the change of business focus; continued availability of capital and financing; general economic, market or business conditions; acquisition opportunities or lack of opportunities; changes in laws or regulations; risk factors listed from time to time in our reports filed with the Securities and Exchange Commission; and other factors.

 

These forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this periodic report.

 

Plan of Operations

 

Overall Strategy

 

We are a growing independent oil and gas company engaged in the acquisition and development of mature fields with established oil and gas reserves. We believe significant opportunities exist primarily because the major energy companies continue to focus their attention and resources toward the discovery and development of large fields. Moreover the major companies have higher internal overhead costs that prevent them from fully developing production from existing, mature fields. And, the recent economics of the oil and gas market continues to hold high pricing. These conditions provide ample opportunities for smaller independent companies to purchase and exploit mature U.S. fields. We expect that there will be competition for such properties.

 

We will continue to target potential acquisition candidates in a disciplined manner. By adhering to our disciplined approach, we expect to prevent overpaying for acquisition and development opportunities.

 

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Our competitive advantage is our highly talented team of professionals with executive, exploration, engineering and financial experience. We intend to employ personnel with specialized geological, geophysical and other technical expertise to carry out the most crucial value-added functions. We seek to attract and retain a high-quality workforce by offering an entrepreneurial team-oriented environment, equity ownership and performance-based compensation programs.

 

Our strategy is to identify and acquire prospects with attractive return potential and significant in-field development and expansion opportunities. We hope to accomplish this through a disciplined approach and a rigorous process of screening and evaluating projects. We seek to apply the most advanced technologies and methods with staff, consultants, and operating partners having proven track records. Our strategy emphasizes the following core elements:

 

 

Focused Geography

 

We intend to focus on specific geographic areas primarily along the onshore United States Gulf Coast. We believe that substantial undiscovered reserves remain in this region. Because of significant existing 3-D seismic data, numerous industry participants are currently engaged in the reprocessing and review of this data to identify prospective acreage. In addition, many of the major and large independent oil companies are focusing less on such areas as they are engaged in seeking “elephant” fields in the offshore and international areas. At present we own several prospects and we intend to initially focus our resources primarily to develop those opportunities. In the future, we intend to generate prospects both internally and in partnership with others to take advantage of area-specific expertise gained by exploration specialists over the past few decades.

 

We believe that a conservative financial structure is crucial to consistent, positive financial results. This structure benefits during cyclical swings in the industry and enables us to move quickly to take advantage of acquisition and drilling opportunities. In order to maximize our financial flexibility while improving overall stockholder returns, we plan to maintain a conservative debt-to-capital ratio. We seek to fund most of our ongoing capital expenditures from issuances of equity, access to capital markets, cash flow from operations, and reserving our debt capacity for potential investment opportunities that will profitably add to our program. Part of a sound financial structure is constant attention to costs, both operating and overhead. We will work to control our operating and overhead costs, and institute a formal, disciplined capital budgeting process. We will, wherever practicable, use partnerships to leverage our resources and enhance our ability to meet objectives.

 

On September 27, 2006, through our wholly-owned subsidiary, Ignis Barnett Shale, LLC, we entered into a purchase and sale agreement with W.B. Osborn Oil & Gas Operations., Ltd.

 

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and St. Jo Pipeline, Limited to acquire 45% of W.B. Osborn Oil & Gas Operations and St. Jo Pipeline’s interest in the acreage, oil and natural gas producing properties, and natural gas gathering and treating system located in the St. Jo Ridge Field in the North Texas Fort Worth Basin. To fund Ignis Barnett Shale’s acquisition of the properties as contemplated by the Purchase Agreement, on November 15, 2006, we entered into an Amended and Restated Limited Liability Company Agreement of Ignis Barnett Shale with affiliates of Silver Point Capital, L.P. Under the terms of the LLC Agreement, we agreed to manage the day-to-day operations of Ignis Barnett Shale and the Silver Point affiliates agreed to fund 100% of the purchase price of the transaction and 100% of future acreage acquisitions and development costs of Ignis Barnett Shale to the extent approved by Silver Point. Ignis Barnett Shale’s budget and generally all material decisions affecting Ignis Barnett Shale are subject to the approval of Silver Point. Distributions from Ignis Barnett Shale will be made first to Silver Point until Silver Point has received a return of its aggregate capital contributions and a specified return on such contributions. Thereafter, we can earn up to 50% of the cash distributions after Ignis Barnett Shale meets performance criteria specified in the LLC Agreement.

 

The effective date of the above transaction was June 1, 2006. At June 1, 2006, there were 14 producing wells. As of February 5, 2007, 21 wells are on production, one well is drilling, and one well is awaiting completion. For the quarter ended December 31, 2006, net production to the Ignis Barnett Shale, LLC averaged 92 bopd and 722 mcfpd of gas. Cumulative gross production through September 2006 from Osborn’s Barnett wells has been in excess of 460,000 barrels and 1.7 bcf of gas. Ignis Barnett Shale, LLC also derives revenue from joint ownership in a 26-mile gas gathering and treating system that transmits a processes third- party gas in the area. Our goal is to continue to expand this system to service not only our wells, but additional third parties, as well. Three of our wells have been horizontally drilled, and only one of those is on production. Our plan calls for the drilling of 3 vertical and 8 horizontal wells in 2007.

 

We will earn our share of equity upon Silver Point realizing a specified return under the terms of the Purchase and Sale Agreement. We have the opportunity to earn up to 50% equity in the partnership. Until such time as we begin to earn our equity share we are not allowed to consolidate the results of these operations into our own in accordance with EITF Abstracts, Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. For the quarter ended December 31 2006, we have not earned our share of equity and therefore we have not recorded any financial transactions relating to this venture.

 

Liquidity and Capital Resources

 

We intend to finance acquisitions of oil and gas properties and drilling programs with combination of issuances of equity, access to capital markets, and cash flow from operations. We cannot guarantee that any additional equity financing will be available in sufficient amounts or on acceptable terms when needed If such financing is not available in sufficient amounts or on acceptable terms, our results of operations and financial condition bay be adversely affected. In addition, equity financing may result in dilution of existing stockholders and my involve securities that have rights, preferences, or privileges that are senior to our common stock.

 

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For the year ended June 30, 2006, our auditors, in Note 2 of the Financial Statements from the Form 10-KSB/A, have noted that there is substantial doubt about our ability to continue as a going concern. Our existence is dependent upon management funding operations and raising sufficient capital. At this point in time it is impossible to state an amount of profitable operations and/or additional funding which we believe would remove the going concern opinion.

 

Financing Activities

 

On January 19, 2006, Cornell Capital Partners LP executed a Notice of Conversion in accordance with and pursuant to their Securities Purchase Agreement. They elected to convert convertible debentures into shares of our common stock, for $50,000 of the principal amount of debentures dated January 5, 2006. The number of shares issued was 422,654 at a conversion price of $.1183.

 

On February 7, 2007, we entered into an agreement with Petrofinanz GmbH pursuant to which Petrofinanz will (i) convert all of the debt represented by the Amended and Restated Loan Agreement dated August 28, 2006, between us, as the borrower, and Petrofinanz as the lender in the original principal amount of $600,000, plus accrued interest of $24,907 into 3,021,794 shares of our common stock at a conversion price of $0.2068 per share, such price representing a 6% discount to the closing bid price of our common stock on February 6, 2007; and (ii) purchase an additional $600,000 of our common stock at a price to be determined, such price representing a 6% discount to closing bid price of our common stock in three tranches of $200,000 each on the following dates: February 9, 2007, March 9, 2007, and April 9, 2007. As of February 12, 2007 we received the first tranch payment of $200,000.

 

Operating Activities

 

For the six months ended December 31, 2006 and December 31, 2005 net cash used in operating activities were $430,521 and $966,189 respectively. We are seeking to improve cash flow from future acquisitions, sale of equity and the reimbursement of expenses from our wholly-owned subsidiary, Ignis Barnett Shale, LLC.

 

Results of Operations

 

For the six months ended December 31, 2005 and for the quarter ended December 31, 2005, the company was in a start-up stage and therefore we are not comparing the periods in the table below. First oil and gas production was October 2005. We reported oil and gas sales for the quarter ended December 31, 2005 of $223,933. For the three months ended December 31, 2005 total operating expense was $1,115,384 of which general and administrative expense was $1,086,484 and depletion was $28,900. For the six months ended December 31, 2005 total operating expense was $2,166,242 of which general and administrative expense was $2,137,342 and depletion was $28,000. For the six months ended December 31, 2005 general and administrative expense primarily consisted of investor relations cost of $62,888, legal expense of $114,566, advertising expense of $148,600, stock issued to advisors of $617,000 and stock issued as salary to employees of $851,000.

 

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Operating Revenues

 

The table below summarizes our operating revenues through December 31, 2006.

 

 

The current quarter operating revenues of $234,909 decreased $236,305 compared to prior quarter as a result of decreased production primarily from the Acom A-6 property and lower condensate and gas pricing of approximately $10.00 per barrel of oil and $1.80 per mcf. The decrease in production in this period is representative of expected production. Prior period production increase resulted from paraffin build up that was cleaned out along with sand fill clean out. We expect the Acom A-6 production level to remain flat at approximately 200 Bbls per day of gross oil and 400 Mcf per day of gross natural gas with some moderate decline with time. We own a 25% working interest in the property.

 

Operating expenses

 

For the current quarter, operating expenses were $1,080,514, which were approximately $198,783 higher compared to the prior quarter ended September 30, 2006. Depreciation, depletion, and amortization decreased from the prior quarter ended September 30, 2006 by $128,106 resulting primarily from depletion taken on the Acom A-6 property in the first quarter ended September 30, 2006. This was offset by an increase in exploration costs of $229,330 for the quarter ended December 31, 2006.

 

We recognized an impairment of $229,110 for the quarter ended December 31, 2006 for the Sherburne Field Development prospect, located in Pointe Coupee Parish Louisiana. We tested two zones to date that were not economic and plan to test a third zone during the next twelve months. If the third zone does not meet our economic expectations we will abandon the property.

 

Asset Retirement Obligation accretion expense of $6,035 was recognized during this period. The cumulative effect amount was $4,137 and the current period was $1,898. We will continue to evaluate properties and record asset retirement obligation in accordance with FASB 143, Accounting for Retirement Obligations, and the related accretion expense.

 

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We received $91,353 for reimbursement of capital expenditures resulting from the return of investment of the Crimson Bayou prospect. The joint venture parties elected not to drill this prospect and subsequently refunded monies invested.

 

General and administrative expense consists of support of our operating activities, along with investor relation costs. During the current quarter and six month period they were approximately $582,318 and $1,065,333, respectively. General and administrative expense increased approximately 21% or $122,071 compared to the prior quarter ended September 30, 2006 resulting primarily from recognition of prepaid advertising to expense of $150,000. Stock issued to employees as salary increased $120,000 in this period offset by lower stock issued to advisors of $66,537 and lower legal fees of $40,368. General and administrative expense for the three months ended December 31, 2006 compared to 2005 decreased $504,166 and decreased $1,072,009 for the six months ended December 31, 2006 compared to 2005. The decrease in general and administrative expense for the six months ended December 31, 2006 compared to six months ended December 31, 2005 is primarily due to a decrease in stock issued to advisors and employees for salary in the amount of $1,227,575. Due to the start-up stage of the Company during the six months ended December 31, 2005 more stock was issued as the Company hired employees and advisors to run the business.

 

Off Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements as of December 31, 2006 or as of the date of this report.

 

Item 3. Controls and Procedures.

 

Our management, with the participation of our then chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2006. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions’ rules and forms. Disclosures controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that a company files or

 

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submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer as appropriate to allow timely decisions regarding required disclosure.

 

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were not effective as of December 31, 2006.

 

Our management has identified a material weakness in our internal control over financial reporting, as defined in the standards by the Public Company Accounting Oversight Board. The area of material weakness identified in our internal control over financial reporting is the lack of an adequate complement of staff to address technical accounting issues as well as a lack of sufficient personnel to maintain proper segregation of duties. Provided we obtain additional funding we may be able to hire additional qualified staff to address this weakness.

 

Except for the material weakness described above, there have been no significant changes in our internal controls or in the other factors since the date of the Chief Executive Officer’s and Chief Financial Officer’s evaluation that could significantly affect these internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

PART II – OTHER INFORMATION

 

Item1. Legal Proceedings.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On November 30, 2006, we issued 500,000 shares of common stock to Michael P. Piazza for services to us as an officer of this Company. No underwriters were used and the shares were issued in reliance upon the exemptions contained in Rule 506 and/or Section 4(2) of the Securities Act.

 

On November 30, 2006, we issued 90,000 shares of common stock to our advisors for services to us as advisors. No underwriters were used and the shares were issued in reliance upon the exemptions contained in Rule 506 and/or Section 4(2) of the Securities Act.

On December 28, 2006, we issued 29,687 shares of common stock to our advisors for services to us as advisors. No underwriters were used and the shares were issued in reliance upon the exemptions contained in Rule 506 and/or Section 4(2) of the Securities Act.

 

Item 3. Defaults Upon Senior Securities.

 

 

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Item 4. Submission of Matters to a Vote of Security Holders.

 

 

Item 5. Other Information.

 

 

Item 6. Exhibits.

 

The following are exhibits to this report:

 

 

______________

*Filed herewith

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

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