UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended: MARCH 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number: 000-51152
PETROHUNTER ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 98-0431245
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1875 LAWRENCE STREET, SUITE 1400, DENVER, COLORADO 80203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (303) 572-8900
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
222,928,734 SHARES OF COMMON STOCK, $.001 PAR VALUE, AS OF
MAY 15, 2007
EXPLANATORY NOTE
We are filing this Amendment No. 1 to Form 10-Q for the quarterly period ended
March 31, 2007, as originally filed with the SEC on May 21, 2007, to restate our
financial statements and corresponding financial information for the quarterly
period ended March 31, 2007.
We are restating the financial statements and corresponding financial
information to correctly reflect the timing of the abandonment of the South
Bronco prospect in the Piceance Basin of Colorado. The Form 10-Q for the
quarterly period ended March 31, 2007 had previously reported the abandonment
and resulting impairment expense had occurred in the three-month period ended
March 31, 2007. The abandonment actually occurred in the three-month period
ended December 31, 2006. This restatement gives effect to the timing change of
the abandonment and the recognition of the impairment expense from the quarterly
period ended March 31, 2007 to the quarterly period ended December 31, 2006.
A more complete discussion of this restatement is set forth in Note 1 to the
consolidated financial statements included in Part I, Item 1 of this Amendment
No. 1. Changes also have been made to Part I, Item 2 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations in this Amendment
No. 1, as a result of the restatement.
This Amendment No. 1 continues to speak as of the date of the original Form 10-Q
for the quarterly period ended March 31, 2007 and we have not updated or amended
the disclosures contained herein to reflect events that have occurred since the
filing of the Form 10-Q, or modified or updated those disclosures in any way
other than as described in the preceding paragraphs. Accordingly, this Amendment
No. 1 should be read in conjunction with our filings made with the SEC
subsequent to the filing of the original Form 10-Q on May 21, 2007.
2
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31,
2007 SEPTEMBER 30,
(UNAUDITED) 2006
----------------- -----------------
Current Assets
Cash and cash equivalents $ 1,702,427 $ 10,631,776
Oil and gas receivables 2,133,757 -
Oil and gas receivables - related party 73,616 35,656
Other receivables 19,718 22,290
Due from related parties - 921,344
Prepaid expenses and other assets 7,383 30,960
----------------- -----------------
TOTAL CURRENT ASSETS 3,936,901 11,642,026
----------------- -----------------
PROPERTY AND EQUIPMENT, AT COST
Oil and gas properties under full cost, net 164,873,003 45,972,784
Deposit on pending oil and gas property acquisition 2,243,777 -
Furniture and equipment, net 746,560 550,213
----------------- -----------------
167,863,340 46,522,997
----------------- -----------------
OTHER ASSETS
Due from joint interest owner (NOTE 5) 10,618,987 -
Restricted cash 1,101,793 1,076,793
Deferred financing costs 162,016 -
----------------- -----------------
TOTAL ASSETS $ 183,683,037 $ 59,241,816
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 21,337,684 $ 9,644,236
Note payable - related party - current portion 2,925,000 -
Accrued interest payable 350,379 124,474
Accrued interest payable - related party 178,814 -
Due to shareholder and related parties 889,284 197,785
Contracts payable - oil and gas properties 2,600,000 -
Convertible notes payable - in default 350,000 -
Convertible notes payable 50,000 400,000
----------------- -----------------
TOTAL CURRENT LIABILITIES 28,681,161 10,366,495
----------------- -----------------
NON CURRENT OBLIGATIONS
Notes payable - related party 10,125,000 -
Notes payable - net 10,687,121 -
Asset retirement obligation 326,103 522,054
----------------- -----------------
21,138,224 522,054
----------------- -----------------
TOTAL LIABILITIES 49,819,385 10,888,549
----------------- -----------------
COMMON STOCK SUBSCRIBED 3,067,500 -
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (NOTES 4, 5, 8, 9, 10 and 13)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value
Authorized - 1,000,000 shares, issued - none - -
Common stock, $.001 par value
Authorized - 500,000,000 shares
Issued and outstanding - 222,928,734 and 219,928,734 shares 222,929 219,929
Capital in excess of par value 81,623,051 70,944,172
Common stock issuable 81,732,450 -
Deficit accumulated during the development stage (32,782,278) (22,810,834)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 130,796,152 48,353,267
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 183,683,037 $ 59,241,816
================= =================
The accompanying notes are an integral part of the consolidated
financial statements.
3
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31 MARCH 31
2007 2006
(UNAUDITED) (UNAUDITED)
------------------ ------------------
REVENUES
Oil and gas revenues $ 3,359,598 $ -
------------------ ------------------
COSTS AND EXPENSES
Lease operating expenses 644,828 -
General and administrative 4,327,573 1,157,998
Property development - related - 820,000
Consulting fees - related party 75,000 -
Depreciation, depletion, amortization and accretion 553,170 -
------------------ ------------------
TOTAL OPERATING EXPENSES 5,600,571 1,977,998
------------------ ------------------
OTHER INCOME (EXPENSE)
Interest income 6,330
Interest expense (1,881,994) (499,225)
------------------ ------------------
TOTAL (EXPENSE) (1,875,664) (499,225)
------------------ ------------------
------------------ ------------------
NET LOSS $ (4,116,637) $ (2,477,223)
================== ==================
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (0.02) $ (0.02)
================== ==================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 222,562,067 103,271,111
================== ==================
CUMULATIVE FROM
INCEPTION
SIX SIX (JUNE 20, 2005)
MONTHS ENDED MONTHS ENDED TO
MARCH 31 MARCH 31 MARCH 31
2007 2006 2007
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------ ------------------ ------------------
REVENUES
Oil and gas revenues $ 3,808,474 $ - $ 3,844,130
------------------ ------------------ ------------------
COSTS AND EXPENSES
Lease operating expenses 806,628 - 810,300
General and administrative 7,998,571 1,869,252 22,872,163
Property development - related 1,815,000 1,520,000 7,205,000
Consulting fees - related party 75,000 - 75,000
Depreciation, depletion, amortization and accretion 1,190,097 - 1,263,234
------------------ ------------------ ------------------
TOTAL OPERATING EXPENSES 11,885,296 3,389,252 32,225,697
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE)
Interest income 14,389 - 17,022
Interest expense (1,909,012) (686,660) (4,417,733)
------------------ ------------------ ------------------
TOTAL (EXPENSE) (1,894,623) (686,660) (4,400,711)
------------------ ------------------ ------------------
------------------ ------------------ ------------------
NET LOSS $ (9,971,445) $ (4,075,912) $ (32,782,278)
================== ================== ==================
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (0.05) $ (0.04)
================== ==================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 221,245,401 101,635,556
================== ==================
The accompanying notes are an integral part of the consolidated
financial statements.
4
PETROHUNTER ENERGY CORPORATION
(A Development Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FROM
INCEPTION
SIX SIX (JUNE 20, 2005)
MONTHS ENDED MONTHS ENDED TO
MARCH 31, MARCH 31, MARCH 31,
2007 2006 2007
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------ ----------------- ------------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (9,971,445) $ (4,075,912) $ (32,782,279)
Adjustments to reconcile net loss to
net cash (used) in operating activities
Stock for expenditures advanced - - 100,000
Stock based compensation 3,616,724 411,356 13,628,768
Depreciation, depletion, amortization,
impairment and accretion 1,190,097 - 1,263,234
Stock issued and issuable for financing costs 1,440,918 95,000 2,863,619
Amortization of discount on notes payable and deferred
financing costs 148,122 4,822 148,122
Changes in assets and liabilities
Accounts receivable (2,095,530) (19,814) (2,153,476)
Due from related party 921,344 (1,510,428) -
Prepaids and other 23,578 7,699 14,627
Accounts payable and accrued expenses (855,451) (12,595) 524,336
Due to shareholder and related parties 617,883 568,105 815,668
------------------ ----------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (4,963,760) (4,531,767) (15,577,381)
------------------ ----------------- ------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to oil and gas properties (5,556,386) (7,847,782) (38,337,727)
Due from joint interest owner (10,618,987) (10,618,987)
Deposit on oil and gas property acquisition (2,243,777) - (2,243,777)
Property and equipment (94,641) (3,774) (647,852)
Restricted cash (525,000) (30,000) (1,601,793)
------------------ ----------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (19,038,791) (7,881,556) (53,450,136)
------------------ ----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock - 35,442,500
Proceeds from common stock subscribed 3,067,500 - 3,067,500
Proceeds from the sale of notes payable 12,500,000 - 12,500,000
Payment of notes payable - related party (450,000) - (450,000)
Proceeds from the exercise of warrants - - 1,000,000
Cash received upon recapitalization and merger - - 20,949
Proceeds from issuance of convertible notes - 11,150,752 20,831,667
Offering and financing costs (44,298) (4,753) (1,682,672)
------------------ ----------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,073,202 11,145,999 70,729,944
------------------ ----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,929,349) (1,267,324) 1,702,427
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,631,776 1,250,242 -
------------------ ----------------- ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,702,427 $ (17,082) $ 1,702,427
================== ================= ==================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ - $ 1,028,353
================== ================= ==================
Cash paid for income taxes $ - $ - $ -
================== ================= ==================
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Stock issued for expenditures advanced $ - $ - $ 100,000
================== ================= ==================
Contracts for oil and gas properties $ - $ - $ 11,773,960
================== ================= ==================
Common stock issued for debt conversion $ - $ - $ 22,031,667
================== ================= ==================
Common stock issued for commissions on offerings $ 200,000 $ - $ 3,100,201
================== ================= ==================
Common stock issued for property and finders fee on property $ 4,127,770 $ 1,700,000 $ 6,327,770
================== ================= ==================
Debt issued for property, related party $ 13,500,000 $ - $ 13,500,000
================== ================= ==================
Interest capitalized to oil and gas properties $ 394,803 $ - $ 394,803
================== ================= ==================
Convertible debt issued for property $ - $ - $ 1,200,000
================== ================= ==================
Common stock issuable for property and finders fee on property $ 81,275,200 $ - $ 81,275,200
================== ================= ==================
Common stock issuable $ 457,250 $ - $ 457,250
================== ================= ==================
The accompanying notes are an integral part of the
consolidated financial statements.
5
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 1 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
In January 2007, the Company determined not to proceed with further
evaluation or exploration of its South Bronco project in the Piceance
Basin of Colorado. This abandonment and the resulting impairment
expense of $550,790 were originally reflected in the three-month period
ended March 31, 2007. The Company subsequently determined the
abandonment and impairment expense should have been recorded in the
quarterly period ended December 31, 2006. On June 13, 2007, the Company
filed an Amended Form 10-Q for the quarterly period ended December 31,
2006 to reflect this timing change. This restatement for the quarterly
period ended March 31, 2007 reflects the timing change for the period
then ended.
The following table sets forth the net effect of the restatement on the
Consolidated Statement of Operations for the three months ended March
31, 2007, and identifies individual line items impacted by the
restatement. There is no effect on the Consolidated Statement of
Operations for the six months ended March 31, 2007 or for the period
from inception, June 20, 2005, through March 31, 2007, or on the
Company's Consolidated Balance Sheet or Consolidated Statements of Cash
Flows as of and for the six month period ended March 31, 2007.
AS REPORTED ADJUSTMENTS RESTATED
CONSOLIDATED STATEMENT OF OPERATIONS - THREE
MONTHS ENDED MARCH 31, 2007
Depreciation, depletion, amortization and accretion $ 1,103,960 $ (550,790) $ 553,170
============================================================
Total operating expenses 6,151,361 (550,790) 5,600,571
============================================================
NET LOSS $ (4,667,427) $ 550,790 $ (4,116,637)
============================================================
NOTE 2 - ORGANIZATION AND BASIS OF PRESENTATION
PetroHunter Energy Corporation, formerly known as Digital Ecosystems
Corp., ("Digital") was incorporated on February 21, 2002 under the laws
of the State of Nevada. On February 10, 2006, Digital entered into a
Share Exchange Agreement (the "Agreement") with GSL Energy Corporation
("GSL") and certain shareholders of GSL pursuant to which Digital
acquired more than 85% of the issued and outstanding shares of common
stock of GSL, in exchange for shares of Digital's common stock. On May
12, 2006, the parties to the Agreement completed the share exchange,
and Digital changed its business to the business of GSL. Subsequent to
the closing of the Agreement, Digital acquired all the remaining
outstanding stock of GSL, and effective August 14, 2006, Digital
changed its name from Digital Ecosystems Corp. to PetroHunter Energy
Corporation ("PetroHunter").
6
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 2 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
GSL was incorporated under the laws of the State of Maryland on June
20, 2005 for the purpose of acquiring, exploring and developing oil and
gas properties. GSL is considered a development stage company as
defined by Statement of Financial Accounting Standards ("SFAS") No. 7,
and its principal activities since inception have been raising capital
through the sale of common stock and convertible notes and the
acquisition of oil and gas properties in the Western United States and
Australia. In October 2006, GSL changed its name to PetroHunter
Operating Company. On November 8, 2005, GSL formed Paleotechnology,
Inc. ("Paleo") as a wholly owned subsidiary for the purpose of
exploring and developing new products and processes using by-products
of petroleum extraction environments. On September 11, 2006,
PetroHunter formed PetroHunter Heavy Oil Ltd. ("Heavy Oil"), as a
wholly owned subsidiary for the purpose of holding and developing the
Company's heavy oil assets. Effective September 30, 2006, PetroHunter
acquired 50% of the outstanding common shares of Sweetpea Corporation
Pty Ltd ("Sweetpea"), an Australian corporation; and effective January
1, 2007 acquired the remaining 50%. Sweetpea is the record owner of
four exploration permits issued by the Northern Territory of Australia.
On October 20, 2006, PetroHunter formed PetroHunter Energy NT Ltd., now
known as PetroHunter Australia Ltd. ("PetroHunter Australia"), as a
wholly owned subsidiary, for the purpose of holding and developing its
assets in Australia. Collectively, PetroHunter and its subsidiaries are
referred to herein as the "Company".
As a result of the Agreement, GSL became a wholly owned subsidiary of
PetroHunter. Since this transaction resulted in the former shareholders
of GSL acquiring control of PetroHunter, for financial reporting
purposes the business combination was accounted for as an additional
capitalization of PetroHunter (a reverse acquisition with GSL as the
accounting acquirer).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements included herein were prepared from
the records of the Company in accordance with generally accepted
accounting principles in the United States applicable to interim
financial statements and reflect all adjustments which are, in the
opinion of management, necessary to provide a fair statement of the
results of operations and financial position for the interim periods.
Such financial statements conform to the presentation reflected in the
Company's Form 10-KSB filed with the Securities and Exchange Commission
for the year ended September 30, 2006. The current interim period
reported herein should be read in conjunction with the Company's Form
10-KSB for the year ended September 30, 2006. The results of operations
for the three and six months ended March 31, 2007 are not necessarily
indicative of the results that may be expected for the full fiscal year
ending September 30, 2007.
7
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a going concern, which
contemplates the realization of assets and extinguishment of
liabilities in the normal course of business. As shown in the
accompanying balance sheet the Company has incurred a cumulative net
loss of $32,782,278 for the period from inception (June 20, 2005) to
March 31, 2007, has a working capital deficit of $24,744,260 at March
31, 2007 and has significant capital expenditure commitments. As of
March 31, 2007, the Company has received oil and gas revenue from its
initial wells, and will require significant additional funding to
sustain its operations and satisfy its contractual obligations for its
planned oil and gas exploration and development operations. These
factors, among others, may indicate that the Company may be unable to
continue in existence. The Company's financial statements do not
include any adjustments related to the realization of the carrying
value of assets or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue in
existence. The Company's ability to establish itself as a going concern
is dependent upon its ability to obtain additional financing, in order
to fund its planned operations and ultimately, to achieve profitable
operations. Management believes that they can be successful in
obtaining equity and/or debt financing which will enable the Company to
continue in existence and establish itself as a going concern. The
Company has sold approximately $72.5 million of notes, convertible
notes and common stock through March 31, 2007. Subsequent to March 31,
2007 the Company has received an additional $2,500,000 under a
mezzanine financing arrangement, and $1,500,000 from a private investor
pursuant to a loan commitment. (See Notes 9 and 13.) Management
believes that the Company will be successful in raising additional
funding to have sufficient capital to meet its obligations for its
planned operations.
DEVELOPMENT STAGE
The Company is considered a development stage company as defined by
Statement of Financial Accounting Standards ("SFAS") No. 7, and its
principal activities since inception have been raising capital through
the sale of common stock and convertible notes and the acquisition of
oil and gas properties in the Western United States and Australia. The
Company has commenced initial test production from its first wells in
the Piceance Basin of Colorado; however, management does not consider
that the Company has commenced principal operations as of March 31,
2007.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include PetroHunter
for the three and six months ended March 31, 2007. For the three and
six months ended March 31, 2006, the consolidated financial statements
are those of GSL. All significant intercompany transactions have been
eliminated upon consolidation.
8
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OIL AND GAS PROPERTIES
The Company utilizes the full cost method of accounting for oil and gas
activities. Under this method, subject to a limitation based on
estimated value, all costs associated with property acquisition,
exploration and development, including costs of unsuccessful
exploration, are capitalized within a cost center on a country basis.
No gain or loss is recognized upon the sale or abandonment of
undeveloped or producing oil and gas properties unless the sale
represents a significant portion of oil and gas properties and the gain
significantly alters the relationship between capitalized costs and
proved oil and gas reserves of the cost center. Depreciation, depletion
and amortization of oil and gas properties is computed on the units of
production method based on proved reserves. Amortizable costs include
estimates of future development costs of proved undeveloped reserves.
Capitalized costs of oil and gas properties may not exceed an amount
equal to the present value, discounted at 10%, of the estimated future
net cash flows from proved oil and gas reserves plus the cost, or
estimated fair market value, if lower, of unproved properties. Should
capitalized costs exceed this ceiling, an impairment is recognized. The
present value of estimated future net cash flows is computed by
applying year end prices of oil and natural gas to estimated future
production of proved oil and gas reserves as of year end, less
estimated future expenditures to be incurred in developing and
producing the proved reserves and assuming continuation of existing
economic conditions. As of March 31, 2007, the Company has no proved
reserves, has received revenue from testing and production on its
initial wells, and all oil and gas property costs are considered to be
unevaluated and are recorded at the lower of cost or estimated fair
market value.
ASSET RETIREMENT OBLIGATION
The Company applies SFAS 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement
requires companies to record the present value of obligations
associated with the retirement of tangible long-lived assets in the
period in which it is incurred. The liability is capitalized as part of
the related long-lived asset's carrying amount. Over time, accretion of
the liability is recognized as an operating expense and the capitalized
cost is depreciated over the expected useful life of the related asset.
Asset retirement obligations ("ARO") relate primarily to the plugging,
dismantlement, removal, site reclamation and similar activities of its
oil and gas properties.
REVENUE RECOGNITION
The Company recognizes oil and gas revenues from its interests in
producing wells as oil and gas is produced and sold from these wells.
The Company may have an interest with other producers in certain
properties, in which case the Company uses the sales method to account
for gas imbalances. Under this method, revenue is recorded on the basis
of gas actually sold by the Company. In addition, the Company records
revenue for its share of gas sold by other owners that cannot be
volumetrically balanced in the future due to insufficient remaining
reserves. The Company also reduces revenue for other owners' gas sold
by the Company that cannot be volumetrically balanced in the future due
to insufficient remaining reserves. The Company's remaining over- and
under-produced gas balancing positions will be considered in the
Company's proved reserves. The Company has no gas balancing
arrangements in place at March 31, 2007. Oil and gas sold is not
significantly different from the Company's product entitlement.
9
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT
The Company applies SFAS 144, "Accounting for the Impairment and
Disposal of Long-Lived Assets," which requires that long-lived assets
to be held and used be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Oil and gas properties accounted for using the
full cost method of accounting, the method utilized by the Company, are
excluded from this requirement, but will continue to be subject to the
ceiling test limitations. The Company's unproved properties are
evaluated periodically for the possibility of potential impairment.
During the three months ended December 31, 2006, management of the
Company determined not to proceed with further evaluation or
exploration of its South Bronco project in the Piceance Basin of
Colorado and charged to operations an impairment expense of $550,790.
There was no impairment expense recognized for the three-month period
ended March 31, 2007.
INCOME TAXES
The Company has adopted the provisions of SFAS 109, "Accounting for
Income Taxes." SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
Temporary differences between the time of reporting certain items for
financial and tax reporting purposes consist primarily of exploration
and development costs on oil and gas properties, and stock based
compensation of options granted.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company's financial statements are based on a number of significant
estimates, including oil and gas reserve quantities, which are the
basis for the calculation of depreciation, depletion and impairment of
oil and gas properties, and timing and costs associated with its
retirement obligations.
The oil and gas industry is subject, by its nature, to environmental
hazards and clean-up costs. At this time, management knows of no
substantial costs from environmental accidents or events for which the
Company may be currently liable. In addition, the Company's oil and gas
business makes it vulnerable to changes in wellhead prices of crude oil
and natural gas. Such prices have been volatile in the past and can be
expected to be volatile in the future. By definition, proved reserves
are based on current oil and gas prices and estimated reserves. Price
declines reduce the estimated quantity of proved reserves and increase
annual amortization expense (which is based on proved reserves).
10
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER COMMON SHARE
Basic (loss) per share is based on the weighted average number of
common shares outstanding during the period. Diluted (loss) per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. Convertible equity instruments such as stock options and
convertible debentures are excluded from the computation of diluted
loss per share, as the effect of the assumed exercises would be
anti-dilutive. The dilutive weighted average number of common shares
outstanding excluded potential common shares from stock options and
warrants of approximately 48,701,500 for the period ended March 31,
2007.
SHARE BASED COMPENSATION
The Company had followed Accounting Principles Board ("APB") Opinion
No. 25,"Accounting for Stock Issued to Employees," and related
interpretations, through September 30, 2005 which resulted in the
accounting for grants of awards to employees at their intrinsic value
in the consolidated financial statements. Additionally, the Company has
recognized compensation expense in the financial statements for awards
granted to non-employees, which must be re-measured each period under
the mark-to-market, as required under EITF 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling, Goods or Services." The
Company previously adopted the provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting
for Stock-Based Compensation --Transition and Disclosure," through
disclosure only.
Effective October 1, 2005, the Company adopted SFAS123(R), "Accounting
for Stock-Based Compensation," using the modified prospective method,
which results in the provisions of SFAS 123(R) being applied to the
consolidated financial statements on a going-forward basis. Prior
periods have not been restated. SFAS 123(R) requires companies to
recognize share-based payments to employees as compensation expense on
a fair value method. Under the fair value recognition provisions of
SFAS 123(R), stock-based compensation cost is measured at the grant
date based on the fair value of the award and is recognized as expense
over the service period, which generally represents the vesting period.
The expense recognized over the service period is required to include
an estimate of the awards that will be forfeited. Previously, no such
forfeitures have occurred. The Company is assuming no forfeitures going
forward based on the Company's historical forfeiture experience. The
fair value of stock options is calculated using the Black-Scholes
option-pricing model.
11
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHARE BASED COMPENSATION (Continued)
As of March 31, 2007, options to purchase an aggregate of 33,295,000
shares of the Company's common stock were outstanding, of which
10,759,000 are exercisable. These options were granted to the Company's
officers, directors and consultants in August of 2005 and 2006, and
February 2007, generally vesting 20% at grant date and 20% per year on
the anniversary of the grant date for the next four years. Each option
has an exercise price equal to the fair market value per share of the
Company's common stock at the date of grant and each option expires and
terminates, if not exercised sooner, five years from the grant date.
Stock-based compensation expense of $2,055,591 and $3,616,724 before
tax, was charged to operations as compensation expense for the three
and six months ended March 31, 2007.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers as cash
equivalents all highly liquid investments with a maturity of three
months or less at the time of purchase. Restricted cash at March 31,
2007 consists of certificates of deposit underlying letters of credit
for exploration permits, state and local plugging and abandonment bonds
and guarantees to vendors.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash. The Company maintains
cash accounts at one financial institution. The Company periodically
evaluates the credit worthiness of financial institutions, and
maintains cash accounts only in large high quality financial
institutions, thereby minimizing exposure for deposits in excess of
federally insured amounts. On occasion, the Company may have cash in
banks in excess of federally insured amounts. The Company believes that
credit risk associated with cash is remote.
FAIR VALUE
The carrying amount reported in the balance sheet for cash,
receivables, prepaids, accounts payable and accrued liabilities
approximates fair value because of the immediate or short-term maturity
of these financial instruments.
Based upon the borrowing rates currently available to the Company for
loans with similar terms and average maturities, the fair value of
convertible notes approximates their carrying value.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
12
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 4 - AGREEMENT WITH MAB RESOURCES LLC
Effective January 1, 2007, the Company and MAB Resources LLC ("MAB")
entered into an Acquisition and Consulting Agreement (the "MAB
Consulting Agreement"), as amended, which replaced in its entirety the
Management and Development Agreement (the "Development Agreement")
entered into July 1, 2005, and materially revised the relationship
between MAB and the Company. MAB is a Delaware limited liability
company and the largest shareholder of the Company. MAB is in the
business of oil and gas exploration and development. Under the terms of
the Consulting Agreement:
o The Company's working interest in all its oil and gas properties
doubled (from 50% undivided interest in the properties to 100%);
o The Company's prior obligation to carry MAB for its 50% portion of
the first $700 million in capital costs was eliminated;
o The Company's aggregate monthly payments to MAB related to the
existing properties were reduced from $600,000 to (i) $25,000 for
consulting, plus (ii) $225,000 for payments under a $13.5 million
promissory note as partial consideration for MAB's assignment of
its previous undivided 50% working interest in the properties;
o MAB's 3% overriding royalty was increased to 5% (the "Override"),
but the Override does not apply to the Company's Piceance II
properties, and does not apply to the extent that the Override
would cause the Company's net revenue interest under an oil and
gas lease to be less than 75%;
o MAB will receive 7% of the issued and outstanding shares of
PetroHunter Australia, as of the date that the Company receives
PetroHunter Australia shares in consideration for the Company's
assignment of its rights and obligations in the Northern Territory
(Australia) permits to PetroHunter Australia.
The MAB Consulting Agreement also provides for the issuance of
50,000,000 shares of the Company's common stock to MAB. MAB has the
right and opportunity to receive up to an additional 50,000,000 shares,
to be issued over a five-year period in specified numbers of shares
that are tied to the Company's performance in booking reserves. The MAB
Consulting Agreement, including the monthly payments to MAB, terminates
after five years, except MAB's overriding royalty continues for the
life of the properties.
The Company has accounted for the acquisition component of the MAB
Consulting Agreement in accordance with the purchase accounting
provisions of SFAS 141 "Business Combinations." Accordingly, the
Company has capitalized as oil and gas properties the $13,500,000
promissory note and the $81,000,000 fair market value of the 50,000,000
shares issued to MAB, based on the trading price of the Company's
common stock on the trading date immediately preceding the effective
date of the transaction. The $25,000 per month consulting fees are
charged to operations as incurred.
Commencing July 1, 2005 and continuing through December 31, 2006, the
Company and MAB operated pursuant to the Development Agreement, and a
series of individual property agreements (collectively, the "EDAs").
The Development Agreement sets forth: (a) MAB's obligation to assign to
the Company a minimum 50% undivided interest in any and all oil and gas
assets which MAB acquires from third parties in the future; and (b)
MAB's and the Company's long-term relationship regarding the ownership
and operation of all jointly-owned properties. Each of the Properties
acquired was covered by a property-specific EDA that is consistent with
the terms of the Development Agreement.
13
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 5 - OIL AND GAS PROPERTIES
Commencing effective July 1, 2005 and continuing through December 31,
2006, the Company entered into a Management and Development Agreement
(the "Development Agreement") and a series of property-specific
Exploration and Development Agreements (collectively, the "EDAs")
pursuant to the Development Agreement with MAB. Effective January 1,
2007, the Development Agreement and the EDA's were replaced in their
entirety by the Consulting Agreement with MAB as discussed in Note 4
above.
The following description of the Company's oil and gas property
acquisitions for the period from October 1, 2006 to December 31, 2006
is pursuant to the original Development Agreement and related EDA's.
All references to the Company's obligations to pay "project development
costs" pertaining to the following properties means the specified
amount of capital expenditures (for each such property), which were
credited against the Company's obligation to carry MAB for MAB's 50%
portion of such expenditures.
On November 28, 2006, MAB entered into an agreement with Maralex
Resources, Inc. and Adelante Oil & Gas, LLC (collectively, "Maralex")
for the acquisition and development of the Jack's Pocket Prospect in
Garfield County, Colorado (the "Maralex Agreement"). Under the terms of
the Maralex Agreement, an initial payment of $100,000 was made upon
execution and the balance of $2.9 million cash and issuance of
2,428,100 shares of the Company's common stock was due on January 15,
2007. The Company has recorded the $2.9 million obligation as a
contract payable and the fair market value of the shares to be issued
of $4,127,770, based on the closing price of the Company's common stock
as of the date of the Maralex Agreement. Effective January 12, 2007,
the Maralex Agreement was amended to extend the payment terms of the
cash due through March 15, 2007, and increase the number of shares to
be issued by 571,900, to a total of 3,000,000 shares. On January 16,
2007, the Company issued 3,000,000 shares to the sellers and recorded
as interest expense, transaction finance costs of $983,668 representing
the market value of the 571,900 incremental shares. On January 17,
2007, the Company made a payment of $500,000 on the amount due.
Effective March 26, 2007, the Maralex Agreement was further amended to
increase the amount of cash due under the Agreement by $200,000 and to
amend the payment terms to $325,000 due on April 20, 2007 and
$2,275,000 due on April 30, 2007. The incremental $200,000 has been
recorded as interest expense in the three months ended March 31, 2007.
The Company is currently negotiating to further extend the terms. In
the event the Company is not able to reach an agreement to extend the
terms, the Company might become subject to a penalty or damages related
to its failure to timely meet its obligations.
On November 14, 2006, the Company and Lakes Oil N.L. entered into an
agreement (the "Lakes Agreement") under which they will jointly develop
Lakes Oil's onshore petroleum prospects (focusing on unconventional gas
resources) in the Gippsland and Otway basins in Victoria, Australia.
The arrangement is subject to various conditions precedent, including
completion of satisfactory due diligence, and the satisfactory
processing of certain retention lease applications. Under the Lakes
Agreement, the Company or its subsidiary company Sweetpea will
initially farm into 33-1/3% of Lakes Oil's permits by spending $7
million in Lakes Oil's permits. In addition, the Company will subscribe
for $3 million in new shares in Lakes Oil at 1.5 cents (Australian).
The Company will also have the right to increase its position in Lakes
Oil's permits with two further 16-2/3% farm-in tranches of $10 million
each, exercisable within 12 months and 24 months, respectively, from
the date of the first closing under the Agreement (the "Closing").
Under the Lakes Agreement, the Company has the right to participate in
the same proportion in any permits which are non-contiguous to existing
permits acquired by Lakes within two years from the Closing, and any
contiguous permits acquired by Lakes moving forward, and the Company
has a first right of refusal in other permits acquired by Lakes within
five years from the Closing. The Company is to assume Lakes Oil's
position as operator of the permits.
14
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 5 - OIL AND GAS PROPERTIES (CONTINUED)
On December 29, 2006, the Company entered into an agreement ("PSA")
with Galaxy Energy Corporation ("Galaxy") and its wholly owned
subsidiary, Dolphin Energy Corporation ("Dolphin"), a related party,
for the Company to purchase, through its wholly owned subsidiary,
PetroHunter Operating Company, all of Galaxy's and Dolphin's oil and
gas interests in the Powder River Basin of Wyoming and Montana. The
controlling owner of PetroHunter's largest single shareholder (MAB
Resources LLC) is Marc A. Bruner. Mr. Bruner is a 14.3% beneficial
shareholder of Galaxy and the father of the President and Chief
Executive Officer of Galaxy. Dolphin owns an average 86% working
interest in 197 oil and gas wells in the Powder River Basin. Twenty-two
wells are currently selling gas at an average rate of 850,000 cubic
feet a day. The remaining wells are in various stages of dewatering,
shut-in waiting on pipeline, or waiting to be completed.
The PSA provides for the Company to pay $45 million to acquire all of
Galaxy's and Dolphin's oil and gas interests in Sheridan, Johnson,
Converse and Campbell Counties in Wyoming, and in Big Horn, Custer,
Powder River and Rosebud Counties in Montana. The purchase price will
be $20 million in cash and $25 million in shares of the Company's
common stock. Closing of the transaction will be subject to approval by
Galaxy's senior lenders, approval in its discretion of all matters by
the Company's Board of Directors, including the Company receiving
financing on terms acceptable to it, and various other terms and
conditions. Closing of the transaction, which was originally scheduled
to occur by February 28, 2007, has been extended until May 31, 2007.
Either party may terminate the agreement if the closing has not
occurred by May 31, 2007. The Company has paid to Galaxy a $2 million
earnest money payment due under the terms of the agreement and has
advanced an additional $243,777 towards operating costs of the assets
to be acquired. In the event the sale is not consummated, the amounts
advanced to Galaxy will be converted to unsecured notes payable by
Galaxy to the Company.
On March 21, 2007, the Company entered into a Partial Assignment of
Contract and Guarantee (the "Assignment") with MAB. Pursuant to this
Assignment, the Company assigned MAB its right to purchase an undivided
45% interest in oil and gas interests in the Powder River Basin of
Wyoming and Montana, which right PetroHunter obtained in the PSA with
Galaxy. As consideration for the Assignment, MAB assumed the Company's
obligation under the PSA to pay Galaxy $25 million in PetroHunter
common stock. MAB also agreed to indemnify the Company against costs
relating to or arising out of the termination or breach of the PSA by
Galaxy or Dolphin, and MAB agreed to guarantee the payment of principal
and interest due to the Company in the event the PSA does not close.
The Company's exploration projects continue to be evaluated, and
management believes that the carrying costs of these projects are
recoverable. Should the Company be unsuccessful in its exploration
activities, the carrying cost of these prospects will be charged to
operations. The Company charged to operations all property development
costs incurred to MAB under the related EDA's. None of the Company's
projects had production as of the date of acquisition and, as of March
31, 2007, the Company had received revenues from initial testing and
production on certain of its projects.
15
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 6 - DUE FROM JOINT INTEREST OWNER
The Company has been in negotiations with an unrelated third party oil
and gas operator (the "Third Party") to exchange leasehold interests in
certain oil and gas leases in the Piceance Basin of Colorado held by
the Company for interests in certain oil and gas leases held by the
Third Party in the Piceance Basin. During the six months ended March
31, 2007, the Company had drilled, as operator, seven wells on oil and
gas leases which are subject to the above-described negotiations. The
Company's record title interest in the leases on which the seven wells
were drilled is currently 15.4%. As of March 31, 2007 the Company has
recorded only its share of costs in the seven wells, based upon its
15.4% record title interest, as Oil and Gas Properties, and has
recorded the 84.6% of costs incurred on behalf of the Third Party, as
Due From Joint Interest Owner. At March 31, 2007, this amount totaled
$10,618,987. In the event the negotiations are successfully
consummated, the Company's interest in those leases will increase to
100% and the balance Due From Joint Interest Owner will be reclassified
to Oil and Gas Properties. In the event the negotiations are not
successfully consummated, the Third Party will be obligated to
reimburse the Company for all costs incurred for the Third Party's
84.6% working interest. Management believes the transaction will be
successfully consummated in the third quarter of fiscal 2007, and that
the amounts classified as Due from Joint Interest Owner at March 31,
2007 will subsequently be reclassified to Oil and Gas Properties.
NOTE 7 - ASSET RETIREMENT OBLIGATION
SFAS 143, "Accounting for Asset Retirement Obligations," addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. This statement requires companies to record the
present value of obligations associated with the retirement of tangible
long-lived assets in the period in which it is incurred. The liability
is capitalized as part of the related long-lived asset's carrying
amount. Over time, accretion of the liability is recognized as an
operating expense and the capitalized cost is depreciated over the
expected useful life of the related asset. The Company's asset
retirement obligations relate primarily to the plugging, dismantlement,
removal, site reclamation and similar activities of its oil and gas
properties.
The following table summarizes activity related to the accounting for
asset retirement obligations for the six months ended March 31, 2007
and 2006:
2007 2006
-----------------------------
Asset retirement obligations, beginning of period $ 522,054 $ -
Liabilities incurred 15,755 -
Revisions to estimates (213,825)
Liabilities settled - -
Accretion expense 2,119 -
------------- -------------
Asset retirement obligations, end of period $ 326,103 $ -
============= =============
16
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 8 - CONVERTIBLE NOTES
Prior to the merger with GSL on May 12, 2006, Digital entered into five
separate loan agreements, aggregating $400,000, due one year from
issuance, commencing October 11, 2006. The loans bear interest at 12%
per annum, are unsecured, and are convertible at the option of the
lender, at any time during the term of the loan or upon maturity, at a
price per share equal to the closing price of the Company's common
shares on the OTC.BB market on the day preceding notice from the lender
of its intent to convert the loan. As of March 31, 2007, the Company
was in default on payment of an aggregate $350,000 of notes that
matured.
In December 2006, PetroHunter Australia, commenced the sale, pursuant
to a private placement, of up to $50,000,000 of convertible notes. As
of January 8, 2007, the Company had received proceeds of $1,530,000
from the offering. In February 2007, the Company terminated the
offering, agreeing to refund $30,000 to four investors, and converting
$1,500,000 from one investor as the initial funding under a Credit and
Security Agreement entered into January 9, 2007. (See Note 10.)
NOTE 9 - NOTE PAYABLE - RELATED PARTY
Effective January 1, 2007, in conjunction with the MAB Consulting
Agreement, the Company issued a $13.5 million promissory note (the "MAB
Note") as partial consideration for MAB's assignment of its undivided
50% working interest in the oil and gas properties (Note 4). The MAB
Note bears interest at a rate equal to LIBOR and requires monthly
principal payments of $225,000 plus interest commencing January 31,
2007. As of March 31, 2007, the outstanding balance of the MAB Note was
$13,050,000 of which $2,925,000 was currently due.
NOTE 10 - NOTES PAYABLE
On January 9, 2007, the Company entered into a Credit and Security
Agreement (the "Financing") with Global Project Finance AG, a Swiss
company, for mezzanine financing in the amount of $15 million. The
Financing provides for an interest rate of 6.75% over prime, and is
secured by a first perfected lien on the Company's assets, limited to
the specific portion of the assets to which the loan proceeds are
applied by the Company. The Company has applied most of the proceeds of
this loan to its drilling and development operations in the Piceance
Basin, Colorado. The terms of the Financing also provide for the
issuance of 1,000,000 warrants of the Company's shares upon execution
of the Financing, and an additional 200,000 warrants, for each $1
million draw down of the credit facility up to $15 million. The
warrants will be exercisable for five years after the date of the
Financing. The exercise price of the warrants will be equal to 120% of
the weighted average price of the Company's stock for the 30 days
immediately prior to each warrant issuance date. The fair value of the
warrants was estimated as of each respective issue date under the
Black-Scholes pricing model, with the following assumptions: common
stock based on market price of at issue date, zero dividends, expected
volatility of 69.6%% to 71.4%, risk free interest rate of 4.75% and
expected life of 2.5 years. The fair value of the debenture warrants of
$1,953,719 was recorded as a discount to the note and is being
amortized over the life of the note. During the three months ended
March 31, 2007, amortization of discount in the amount of $140,841 was
included in interest expense.
Global Project Finance AG and its controlling shareholder were
shareholders of the Company prior to the Financing. The initial draw
down of $1,500,000 was converted from the PetroHunter Australia
convertible note offering (see Note 8). As of March 31, 2007, the
Company has drawn down $12,500,000 on the credit facility.
17
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 11 - STOCKHOLDERS' EQUITY
COMMON STOCK
In conjunction with the acquisition of properties under the Maralex
Agreement (see Note 5) the Company issued 3,000,000 shares of its
common stock as partial consideration for the acquisition.
COMMON STOCK SUBSCRIBED
On November 6, 2006, the Company commenced the sale of a maximum
$125,000,000 pursuant to a private placement of units at $1.50 per
unit. Each unit consisted of one share of the Company's common stock
and one-half common stock purchase warrant. A whole common stock
purchase warrant entitled the purchaser to acquire one share of the
Company's common stock at an exercise price of $1.88 per share through
December 31, 2007. In February 2007, the Board of Directors determined
that the composition of the units being offered would be restructured,
and those investors who had subscribed in the offering would be offered
the opportunity to rescind their subscriptions or to participate on the
same terms as ultimately defined for the restructured offering. As of
March 31, 2007, the Company has received subscriptions for $3,067,500
for the sale of units pursuant to the private placement, of which
$2,250,000 was from a related party, and has recorded the proceeds and
outstanding subscriptions from the offering as "Common Stock
Subscribed".
COMMON STOCK ISSUABLE
The Company has agreed to issue its common stock for certain
transactions as described below. As of March 31, 2007, the shares have
not been issued and the value of the shares, calculated based upon the
trading price of the stock on the commitment date, is included in
"Common Stock Issuable" as of that date:
o 50,000,000 shares in connection with the MAB Consulting
Agreement (see Note 3) as partial consideration for the
acquisition, valued at $81,000,000;
o 424,528 shares related to the cash investment of $300,000
from an unrelated third party, valued at $450,000;
o 256,000 shares to a unrelated consultant as partial
consideration for finders fees and consulting services
related to the Maralex Agreement (see Note 4), valued at
$382,450; and
o 121,250 shares to an unrelated individual, for
commissions on the sale of the Company's convertible debt
offering in 2006, valued at $200,000. This amount
represents the settlement of a previous dispute regarding
the amount of commission on the debt offering.
Accordingly, the $200,000 has been recorded as finance
costs and charged to operations as interest expense in
the three months ended March 31, 2007.
STOCK OPTION PLAN
The Company adopted the 2005 Stock Option Plan (the "Plan"), as
amended. Under the Plan, stock options may be granted at an exercise
price not less than the fair market value of the Company's common stock
at the date of grant. Options may be granted to key employees and other
persons who contribute to the success of the Company. The Company has
reserved 40,000,000 shares of common stock for the plan. At March 31,
2007, options to purchase 6,705,000 shares were available to be granted
pursuant to the stock option plan.
18
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 11 - STOCKHOLDERS' EQUITY (CONTINUED)
In February 2007, the Company granted 500,000 options to each of two
directors. The options were granted at an exercise price of $1.38 per
share and vest 50% at grant and 50% one year from grant. There were no
options cancelled, forfeited or exercised during the period ended March
31, 2007. The fair value of options granted during the period,
calculated using the Black Scholes option pricing model and under the
following assumptions: expected option term, 2.75 years; risk free
interest rate, 4.75%; dividend yield, -0- and expected volatility,
70.35%, resulted in a fair value of $0.66 per share.
WARRANTS
The following stock purchase warrants were outstanding at March 31,
2007:
NUMBER OF SHARES EXERCISE PRICE EXPIRY DATE
34,442,500 (1) $1.00 2011
3,500,000 (2) $1.30-$2.10 2012
(1) During 2006, the Company issued 35,442,500 stock purchase warrants
in conjunction with the unit sale of common stock. The warrants are
exercisable for a period of five years from date of issuance at an
exercise price of $1.00 per share.
(2) Pursuant to the Credit and Security Agreement entered into on
January 9, 2007 (Note 10) the Company issued 1,000,000 stock purchase
warrants upon execution of the Credit Agreement, and an additional
2,500,000 warrants for draws on the facility. The warrants are
exercisable for five years from the date of draw. The exercise price of
the warrants is 120% of the weighted average price of the Company's
stock for the 30 days immediately prior to each warrant issuance date.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2007, pursuant to the MAB
Agreement and the $13.5 million promissory note issued thereunder (see
Note 4), the Company incurred interest expense of $179,719 and made
principal payments of $450,000. As of March 31, 2007, the Company owed
MAB principal and accrued interest of $13,229,719 under the terms of
the promissory note.
During the six months ended March 31, 2007, the Company incurred
$75,000 of consulting fees pursuant to the MAB Agreement and $1,815,000
in property development costs to MAB under the Development Agreement
between MAB and the Company. At March 31, 2007, in addition to the
amount due under the promissory note as discussed above, MAB was owed
$779,331 by the Company.
On March 21, 2007, the Company entered into a Partial Assignment of
Contract and Guarantee (the "Assignment") with MAB. Pursuant to this
Assignment, the Company assigned MAB its right to purchase an undivided
45% interest in oil and gas interests in the Powder River Basin of
Wyoming and Montana, which right the Company obtained in the PSA with
Galaxy (see Note 5). As consideration for the Assignment, MAB assumed
the Company's obligation under the PSA to pay Galaxy $25 million in
PetroHunter common stock. MAB also agreed to indemnify the Company
against costs relating to or arising out of the termination or breach
of the PSA by Galaxy or Dolphin, and MAB agreed to guarantee the
payment of principal and interest due to the Company in the event the
PSA does not close.
19
PETROHUNTER ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED)
At March 31, 2007, the Company is owed $73,619 from MAB for oil and gas
revenues for its share of initial production earned through December
31, 2006 pursuant to the Development and EDA agreements with MAB.
In June 2006, the Company entered into an Office Sharing Agreement with
Falcon Oil & Gas Ltd. ("Falcon") for office space in Denver, Colorado,
of which Falcon is the lessee. Under the terms of the agreement, Falcon
and the Company share, on an equivalent employee cost basis, all costs
related to the office space, including rent, office operating costs,
furniture and equipment and any other expenses related to the
operations of the corporate offices. The 75% owner of the largest
single shareholder of the Company is also the Chief Executive Officer
and a Director of Falcon. At March 31, 2007, Falcon owed the Company
$109,952 for Falcon's share of costs incurred pursuant to the
agreement.
During the six months ended March 31, 2006, the Company incurred
consulting fees related to services provided by its officers in the
aggregate amount of $420,531; and incurred $1,520,000 in property
development costs to MAB under the Development Agreement between MAB
and the Company.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
Oil and gas producing activities are subject to extensive environmental
laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the environmental effects of
the disposal or release of petroleum or chemical substances at various
sites. Environmental expenditures are expensed or capitalized depending
on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that have no future
economic benefit are expensed. Liabilities for expenditures of a
noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
CONTINGENCIES
The Company may from time to time be involved in various claims,
lawsuits, and disputes with third parties, actions involving
allegations of discrimination, or breach of contract incidental to the
operations of its business. The Company is not currently involved in
any such incidental litigation which it believes could have a
materially adverse effect on its financial condition or results of
operations.
NOTE - 14 - SUBSEQUENT EVENTS
In April 2007, the Company received additional advances of $2.5 million
under the terms of the Credit and Security Agreement (see Note 10); and
additional advances from the same lender of $1.5 million pursuant to
another loan agreement presently being negotiated.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our Consolidated
Financial Statements and related notes appearing elsewhere in this Form 10-Q.
PetroHunter Energy Corporation ("PetroHunter"), formerly Digital
Ecosystems Corp. ("Digital"), through the operations of its wholly owned
subsidiary, PetroHunter Operating Company, is a global oil and gas exploration
and production company with primary assets consisting of a working interest in
oil and gas leases and related interests in various oil and natural gas
prospects, including approximately 220,000 net acres in Colorado, Utah and
Montana and approximately seven million net acres in the Northern Territory of
Australia. The properties are managed and operated in three groups: Heavy Oil,
Piceance Basin, and Australia.
PetroHunter Operating Company (formerly GSL Energy Corporation) was
formed in June 2005 as a Maryland corporation, and on May 12, 2006 completed a
stock exchange by which its stockholders received more than 85% of Digital's
outstanding stock (the "Stock Exchange"). The business of PetroHunter Operating
Company became the business of Digital. Subsequent to May 2006, Digital acquired
all the remaining outstanding stock of PetroHunter Operating Company, and
effective August 14, 2006, Digital changed its name from Digital Ecosystems
Corp. to PetroHunter Energy Corporation and changed its domicile to Maryland.
Digital was incorporated on February 21, 2002 under the laws of the State of
Nevada.
In October 2006, GSL Energy Corporation ("GSL") changed its name to
PetroHunter Operating Company. On November 8, 2005, GSL formed Paleotechnology,
Inc. ("Paleo") as a wholly-owned subsidiary for the purpose of exploring and
developing new products and processes using by-products of petroleum extraction
environments. On September 11, 2006, PetroHunter formed PetroHunter Heavy Oil
Ltd. as a wholly-owned subsidiary for the purpose of holding and developing its
heavy oil assets. Effective September 30, 2006, PetroHunter acquired 50% of the
outstanding common shares of Sweetpea Corporation Pty Ltd ("Sweetpea"), an
Australian corporation; and effective January 1, 2007 acquired the remaining
50%. Sweetpea is the record owner of four exploration permits issued by the
Northern Territory of Australia. On October 20, 2006, PetroHunter formed
PetroHunter Energy NT Ltd., now known as PetroHunter Australia Ltd.
("PetroHunter Australia") for the purpose of holding and developing its assets
in Australia. Collectively, PetroHunter and its subsidiaries are referred to
herein as the "Company," "we," "us" or "our".
As a result of the Stock Exchange, GSL, now known as PetroHunter
Operating Company, became a wholly owned subsidiary of our Company. Since this
transaction resulted in the former shareholders of GSL acquiring control of our
Company, for financial reporting purposes the business combination was accounted
for as an additional capitalization of the Company (a reverse acquisition with
GSL as the accounting acquirer). In accounting for this transaction:
i. GSL was deemed to be the purchaser and parent company for
financial reporting purposes. Accordingly, its net assets were
included in the consolidated balance sheet at their historical
book value; and
ii. Control of the net assets and business of the Company was
acquired effective May 12, 2006 for no consideration.
21
PetroHunter Operating Company is considered a development stage company
as defined by Statement of Financial Accounting Standards ("SFAS") No. 7, and
its principal activities since inception have been raising capital through the
sale of common stock and convertible notes and the acquisition of oil and gas
properties in the Western United States and Australia.
MAB RESOURCES LLC
Effective January 1, 2007, we entered into an entered into an
Acquisition and Consulting Agreement (the "Consulting Agreement"), as amended,
with MAB Resources LLC ("MAB"), which replaced in its entirety the Management
and Development Agreement (the "Development Agreement") entered into July 1,
2005, and materially revised our relationship with MAB. MAB is a Delaware
limited liability company and our largest shareholder. MAB is in the business of
oil and gas exploration and development. Under the terms of the Consulting
Agreement:
o Our working interest in all our oil and gas properties doubled
(from 50% undivided interest in the properties to 100%);
o Our prior obligation to carry MAB for its 50% portion of the
first $700 million in capital costs was eliminated;
o Our aggregate monthly payments to MAB related to the existing
properties were reduced from $600,000 to (i) $25,000 for
consulting, plus (ii) $225,000 for payments under a $13.5
million promissory note as partial consideration for MAB's
assignment of its previous undivided 50% working interest in
the properties;
o MAB's 3% overriding royalty was increased to 5% (the
"Override"), but the Override does not apply to our Piceance
II properties, and does not apply to the extent that the
Override would cause our net revenue interest under an oil and
gas lease to be less than 75%;
o MAB will receive 7% of the issued and outstanding shares of
PetroHunter Australia, as of the date that we receive
PetroHunter Australia shares in consideration for our
assignment of our rights and obligations in the Northern
Territory (Australia) permits to PetroHunter Australia.
The new agreement also provides for the issuance of 50 million shares
of our common stock to MAB. MAB has the right and opportunity to receive up to
an additional 50 million shares, to be issued over a five-year period in
specified numbers of shares that are tied to our performance in booking
reserves. The entire Consulting Agreement, including the monthly payments to
MAB, terminates after five years, except MAB's overriding royalty continues for
the life of the properties.
The transfer of MAB's working interest for our shares (including the
carried interest), the revised override and MAB foregoing monthly capital cost
advances, were analyzed by an independent economic evaluator, who, in a report
dated April 10, 2007, concluded the transaction was fair to our existing
shareholders.
Commencing July 1, 2005 and continuing through December 31, 2006, we
and MAB operated pursuant to the Development Agreement, and a series of
individual property agreements (collectively, the "EDAs"). The Development
Agreement set forth: (a) MAB's obligation to assign to us a minimum 50%
undivided interest in any and all oil and gas assets which MAB acquired from
third parties in the future; and (b) our long-term relationship with MAB
regarding the ownership and operation of all jointly-owned properties. Each of
the Properties acquired was covered by a property-specific EDA that was
consistent with the terms of the Development Agreement.
22
PROPOSED ACQUISITION OF POWDER RIVER BASIN PROPERTIES
On December 29, 2006, we entered into a Purchase and Sale Agreement
(the "PSA") with Galaxy Energy Corporation ("Galaxy") and its wholly owned
subsidiary, Dolphin Energy Corporation ("Dolphin"). Pursuant to the PSA, we
agreed to purchase all of Galaxy's and Dolphin's oil and gas interests in the
Powder River Basin of Wyoming and Montana (the "Powder River Basin Assets").
Marc A. Bruner, who is the controlling owner of our largest
shareholder, also is a 14.3% beneficial shareholder of Galaxy. Marc A. Bruner is
the father of Marc E. Bruner, the President, Chief Executive Officer and
director of Galaxy. Marc E. Bruner is the stepson of Carmen J. Lotito, the Chief
Financial Officer and a director of the Company.
The purchase price for Powder River Basin Assets is $45 million, with
$20 million to be paid in cash and $25 million to be paid in shares of our
common stock.
Closing of the transaction is subject to approval by Galaxy's secured
noteholders, approval of all matters in its discretion by our Board of
Directors, including the Company obtaining outside financing on terms acceptable
to its Board of Directors, and various other terms and conditions. Either party
may terminate the agreement if closing has not occurred by May 31, 2007.
In January 2007, we paid to Galaxy a $2 million earnest money payment
due under the terms of the agreement. In the event the closing does not occur
for any reason other than a material breach by us, the deposit shall convert
into a promissory note (the "Note"), payable to us, and shall be an unsecured
subordinated debt of both Galaxy and Dolphin, which is payable only after
repayment of Galaxy's and Dolphin's senior indebtedness.
We became the contract operator of the Powder River Basin Assets
beginning January 1, 2007. At closing, the operating expenses incurred by us as
the contract operator will be credited toward the purchase price, or if closing
does not occur, will be added to the principal amount of the Note.
On March 21, 2007, we entered into a Partial Assignment of Contract and
Guarantee (the "Assignment") with MAB. Pursuant to this Assignment, we assigned
MAB our right to purchase an undivided 45% interest in oil and gas interests in
the Powder River Basin Assets, which right we obtained in the PSA with Galaxy.
As consideration for the Assignment, MAB assumed our obligation under the PSA to
pay Galaxy $25 million in PetroHunter common stock. MAB also agreed to indemnify
us against costs relating to or arising out of the termination or breach of the
PSA by Galaxy or Dolphin, and MAB agreed to guarantee the payment of principal
and interest due to us in the event the PSA does not close.
23
PRODUCTION AND PRICES
The following table sets forth information regarding net production of
oil and natural gas, and certain price and cost information for quarters ended
March 31, 2007, December 31, 2006 and the fiscal year ended September 30, 2006.
We did not have any production during the comparable periods of the prior year.
------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER FOR THE QUARTER FOR THE FISCAL YEAR
ENDED MARCH 31, ENDED DECEMBER ENDED
2007 31, 2006 SEPTEMBER 30, 2006
------------------------------------------------------------------------------------------------------------------
PRODUCTION DATA:
------------------------------------------------------------------------------------------------------------------
Natural gas (Mcf) 495,764 142,229 5,822
------------------------------------------------------------------------------------------------------------------
Oil (Bbls) 3,485 584 -0-
------------------------------------------------------------------------------------------------------------------
AVERAGE PRICES:
------------------------------------------------------------------------------------------------------------------
Natural gas (per Mcf) $5.59 $5.17 $6.12
------------------------------------------------------------------------------------------------------------------
Oil (per Bbl) $54.13 $58.29 --
------------------------------------------------------------------------------------------------------------------
PRODUCTIVE WELLS
The following table summarizes information at March 31, 2007, relating
to the productive wells in which we owned a working interest as of that date.
Productive wells consist of producing wells and wells capable of production.
Gross wells are the total number of producing wells in which we have an
interest, and net wells are the sum of our fractional working interests owned in
gross wells.
--------------------------------------------------------------------------------------------------------------------------------
GROSS NET
--------------------------------------------------------------------------------------------------------------------------------
LOCATION OIL GAS TOTAL OIL GAS TOTAL
--------------------------------------------------------------------------------------------------------------------------------
Colorado -- 22 22 -- 7.2 7.2
--------------------------------------------------------------------------------------------------------------------------------
Utah -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------------------
Montana 2 -- 2 2.0 -- 2.0
--------------------------------------------------------------------------------------------------------------------------------
Australia -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------------------
TOTAL 2 22 24 2.0 7.2 9.2
--------------------------------------------------------------------------------------------------------------------------------
ACREAGE POSITIONS
As of March 31, 2007, we owned interests in the following developed and
undeveloped acreage positions. Undeveloped acreage refers to acreage that has
not been placed in producing units.
----------------------------------------------------------------------------------------------------------------------
DEVELOPED UNDEVELOPED
----------------------------------------------------------------------------------------------------------------------
LOCATION GROSS ACRES NET ACRES GROSS ACRES NET ACRES
----------------------------------------------------------------------------------------------------------------------
Colorado 480.0 102.2 25,759.0 19,736.8
----------------------------------------------------------------------------------------------------------------------
Utah 0 0 173,738.0 173,738.0
----------------------------------------------------------------------------------------------------------------------
Montana 80.0 80.0 93,515.0 72,734.0
----------------------------------------------------------------------------------------------------------------------
Australia 0 0 7,000,000.0 7,000,000.0
----------------------------------------------------------------------------------------------------------------------
TOTAL 560.0 182.2 7,293,012.0 7,266,208.8
----------------------------------------------------------------------------------------------------------------------
24
SUMMARY OF DEVELOPMENT AND EXPLORATION PROJECTS AND PLAN OF OPERATIONS
The following is an update of our production and exploration areas and
significant projects. While actively pursuing specific production and
exploration activities in each of the following areas, we continually review
additional acquisition opportunities in our core areas that meet our exploration
criteria.
HEAVY OIL PROPERTIES
GREAT SALT LAKE, UTAH. We have 173,738 net mineral acres under lease
(covered by approximately 78 leases) on two principal properties, the West Rozel
Field and Gunnison Wedge prospect in the Great Salt lake of Utah. Careful review
of our drilling plan has resulted in planning to drill six vertical wells in the
West Rozel Field. The six wells have been sited according to geology and the
Utah State drilling regulations. Permits are being prepared for the six wells.
Site visit was conducted to meet with the land owner for access to the lake from
Little Valley Harbor.
PetroHunter is negotiating an extension to the current acquisition
agreement due to delays caused by the previous negotiations between the Utah
government and interested parties. These negotiations are complete and this
allows for our permitting to be undertaken.
FIDDLER CREEK, MONTANA. We have completed major geologic studies on the
23,795 net acres on four anticlines on the northern portion of the Big Horn
Basin, which extends from north central Wyoming into southern Montana. These
properties encompass significant portions of Roscoe Dome, Dean Dome, Fiddler
Creek and MacKay Domes, which we believe have significant estimated in place oil
reserves. These structures are large asymmetric anticlines with proven
production from several Cretaceous horizons; i.e., the Upper Greybull Sandstone,
the Lower Greybull Sandstone and the Pryor Sandstone. The geology studies have
identified locations that appear to have the most potential. The current program
is in Fiddler Creek for one re-completion, one vertical well and one horizontal
well; Roscoe Dome has two re-completions and one horizontal well; Dean Dome is
one re-completion and two vertical wells. As the program proceeds refinements
will be made based on results.
PROMISED LAND, MONTANA. We have acquired 49,120 net acres in a resource
play evaluating heavy oil reservoirs in Jurassic Swift Formation and lower
Cretaceous Bow Island and Sunburst Sandstone reservoirs in north central
Montana. The Swift reservoirs were deposited in a shallow marine to estuarine
depositional setting. The Swift sandstones are commonly oil saturated in the
area, and most well tests report oil shows in the Swift. The reservoirs are up
to 60 feet thick and composed of high quality sandstone, averaging about 20
percent porosity and permeabilities range up to one Darcy. The oil gravities
range from 10o to 22o API with viscosities of 1500 centipoise to greater than
50,000 centipoise at 125oF. Additional conventional petroleum potential is
possible in Devonian Duperow and Nisku formations, and in the Mississippian
Madison Formation. We are now evaluating a seismic program to better define
locations for an initial drilling program.
We do not have any drilling commitments with respect to this property.
PLAN OF OPERATIONS. We anticipate that, over the next twelve months, we
will incur the following costs related to our heavy oil prospects in Montana and
Utah:
o $5,000,000 to $7,000.000 to add land in Montana in areas
where we have already completed acquisitions;
25
o $7,000,000 to $14,000,000 in connection with the Fiddler
Creek project, to include drilling, completion and production
facilities; and
o $15,000,000 to $21,000,000 in connection with the Great Salt
Lake project, to include project design, project equipment
procurement, site infrastructure development and initial
drilling.
PICEANCE BASIN, COLORADO PROPERTIES
BUCKSKIN MESA PROJECT. A 26-square mile 3D seismic survey has been
licensed, re-processed, and interpreted to focus initial drilling in areas of
thickest pay and enhanced fracturing. We have acquired approximately 20,000 net
acres of leasehold in Rio Blanco County, Colorado. We have applied for and
received six approved drilling permits to test targets in the Cretaceous Mesa
Verde Group. We have drilled and cased our first well at Buckskin mesa, the
Anderson 6-16, with a total depth of 10,785 feet. Log analysis indicates a gross
pay interval in excess of 3,500 feet, with a net pay of 600 feet. Gas shows
during drilling averaged 3,000 units with peaks as high as 20,000 units. We have
drilled and cased the Anderson 13-19 to a total depth of 10,835 feet. This well
also had gas shows during drilling. Log analysis of the second well indicates
net pay of 572 feet. The third well, Lake 16-21, was cased on April 9, 2007 and
has net sandstone pay of 590 feet.
PICEANCE II PROJECT. As of March 31, 2007, we had interests in 19
producing wells, 18 wells waiting on completion, and 1 well is being drilled.
Production is from frac-stimulated perforations in stacked sands of the
fluvial Williams Fork formation.
On November 28, 2006, we executed a purchase and sale agreement with
Maralex Resources, inc. and Adelante oil & Gas, LLC (collectively "Maralex") for
the acquisition and development of 2,000 net acres in the Jack's Pocket Prospect
in Garfield County, Colorado. Under the terms of the agreement, an initial
payment of $100,000 was made upon execution and the balance of $2.9 million cash
and issuance of 2,428,100 shares of our common stock was due on January 15,
2007. Effective January 12, 2007, the agreement was amended to extend the
payment terms of the cash due through March 15, 2007, and increase the shares to
be issued to 3 million. These shares have been issued as of January 31, 2007.
Effective March 26, 2007, the agreement was further amended to extend the
payment terms. We are obligated to drill four wells on these leases during 2007.
The Company has been in negotiations with an unrelated third party oil
and gas operator (the "Third Party") to exchange leasehold interests in certain
oil and gas leases in the Piceance Basin of Colorado held by the Company for
interests in certain oil and gas leases held by the Third Party in the Piceance
Basin. During the six months ended March 31, 2007, the Company had drilled, as
operator, seven wells on oil and gas leases which are subject to the above
described negotiations. The Company's record title interest in the leases on
which the seven wells were drilled is currently 15.4%. As of March 31, 2007 the
Company has recorded only its share of costs in the seven wells, based upon its
15.4% record title interest, as oil and gas properties, and has recorded the
84.6% of costs incurred on behalf of the Third Party, as Due From Joint Interest
Owner. At March 31, 2007 this amount totaled $10,618,987. In the event the
negotiations are successfully consummated the Company's interest in those leases
will increase to 100% and the balance Due From Joint Interest Owner will be
reclassified to Oil and Gas Properties. In the event the negotiations are not
successfully consummated, the Third Party will be obligated to reimburse the
Company for all costs incurred for the Third Party's 84.6% working interest.
Management believes the transaction will be successfully consummated in the
third quarter of fiscal 2007, and that the amounts
26
classified as Due from Joint Interest Owner at March 31, 2007 will subsequently
be reclassified to Oil and Gas Properties.
PLAN OF OPERATIONS. We expect that the development of our Colorado
properties will include: (i) continued drilling of wells in the southern portion
of the Piceance Basin, where we expect to complete at lease 12 wells for
additional gas production, and design and construction of a two-mile low
pressure gathering system to connect these wells to market.
Associated with the development of our Colorado properties, we
anticipate that, over the next twelve to twenty-four months, we will incur costs
of $8,000,000 to $32,000,000 to add leasehold in the Piceance II and Buckskin
mesa project areas.
AUSTRALIAN PROPERTIES
BEETALOO BASIN. Plans are to begin drilling in the Beetaloo Basin
around July 1, 2007. To date, seven drilling locations have been identified
based on extensive geological and geophysical analysis. These locations have
been cleared through the Northern Land Council, responsible for protecting
Native Lands, and permits have been submitted to the Department of Primary
Industries, Fisheries and Mines located in Darwin, Northern Territory. Final
drilling approval is expected in May. These locations have been staked and will
be formally surveyed, also in May. Preparing drilling pads and access lines will
commence the last week of May.
Sweetpea has signed a Letter of Intent with Century Resources to
provide a drilling rig for the drilling operations. The rig is currently
scheduled to begin mobilizing to the Beetaloo Basin on June 15, 2007. In
preparation for the drilling program, a drilling yard has been constructed in
the permit area. Casing and other necessary materials are being ordered and will
arrive before the first of June.
From July through November of 2006, 686 kilometers of new 2D seismic
data were acquired throughout the Beetaloo Basin. Additionally, 1000 kilometers
of previously acquired 2D seismic data were reprocessed. Along, with the other
existing 1500 kilometers of 2D seismic data that have not been reprocessed,
geologic structure maps have been generated for the basin. Ongoing work is
proceeding to delineate drilling locations beyond the initial seven locations.
The exploration drilling program for 2007 will test several play
concepts within the basin. Hydrocarbon potential exists in shallow, conventional
structures (in the form of oil), and in deeper unconventional reservoirs,
including fractured shales and basin centered gas accumulations. The
unconventional plays may be gas and/or oil. All of the exploration wells are
planned to reach a total depth in the Bessie Creek Sandstone formation. The
deepest penetration is expected to be 3000 meters.
Sweetpea currently controls 7 million contiguous acres in the Beetaloo
Basin. Applications for another 1.5 million acres have been submitted to the
Territory's Ministry. Sweetpea owns the existing four permits.
GIPPSLAND AND OTWAY BASINS. On November 14, 2006, we entered into an
agreement with Lakes Oil N.L. ("Lakes Oil"), under which we will jointly develop
Lakes Oil's onshore petroleum prospects (focusing on unconventional gas
resources) in the Gippsland and Otway basins in Victoria, Australia. Under an
amendment to the original agreement, completion of the agreement is scheduled
for June 30, 2007 with PetroHunter, or our subsidiary company, Sweetpea, farming
into 33-1/3 of Lakes Oil's permits by spending $7 million on exploration
efforts. In addition, we will subscribe for $3 million in new shares in Lakes
Oil at 1.5 cents (Australian). We also have the right to increase our position
in Lakes Oil's
27
permits with two further 16-2/3% farm-in tranches of $10 million each,
exercisable within 12 months and 24 months, respectively.
Under the agreement, Sweetpea will be the operator of the permits, but
has signed a sub operator agreement with Lakes Oil to take advantage of their
infrastructure in Victoria.
NORTHWEST SHELF AREA. Effective February 19, 2007, the Commonwealth
of Australia granted to Sweetpea an exploration permit in the shallow, offshore
waters of Western Australia. The permit, WA-393-P, has a six-year term and
encompasses almost 20,000 acres.
PLAN OF OPERATIONS. In Australia we plan to explore and develop
portions of the 7,000,000 acres of the project area in the Northern Territory of
Australia (Beetaloo Basin). During 2007, we plan to drill a minimum of eight
wells in the exploration permit blocks. We anticipate that, over the next twelve
months, we will incur $45,000,000 to $60,000,000 in costs related to drilling,
well completion and a potential delineation seismic program.
Under the agreement with Lakes Oil, we or our subsidiary company,
Sweetpea, will initially farm into 33-1/3% of Lakes Oil's permits by spending $7
million in Lakes Oil's permits. In addition, we will subscribe for $3 million in
new shares in Lakes Oil at 1.5 cents (Australian).
CURRENT FINANCING ACTIVITIES
To fund the planned operations described above and our fixed
commitments for operating leases, delay rentals, property development fees and
consulting fees and note payments to MAB totaling approximately $2,700,000 for
the fiscal year ended September 30, 2007, we are engaging in financing
activities. On November 6, 2006, we commenced an offering of up to $125,000,000
pursuant to a private placement of units at $1.50 per unit. Each unit consisted
of one share of our common stock and one-half common stock purchase warrant. A
whole common stock purchase warrant entitled the purchaser to acquire one share
of our common stock at an exercise price of $1.88 per share through December 31,
2007. As of March 31, 2007, we had received $3,067,500 from the sale of units
pursuant to the private placement. In February 2007, our board of directors
determined that the composition of the units being offered would be
restructured, and those investors who had subscribed in the offering would be
offered the opportunity to rescind their subscriptions or to participate on the
same terms as ultimately defined for the restructured offering.
In December 2006, PetroHunter Australia commenced the sale, pursuant to
a private placement, of up to $50,000,000 of convertible notes. As of January 8,
2007, the Company had received proceeds of $1,530,000 from the offering. In
February 2007, PetroHunter Australia terminated the offering, agreeing to refund
$30,000 to four investors, and converting $1,500,000 from one investor as the
initial funding under a Credit and Security Agreement entered into January 9,
2007, as described below.
On January 9, 2007, we entered into a Credit and Security Agreement
(the "Financing") with Global Project Finance AG, a Swiss company, for mezzanine
financing in the amount of $15 million. The Financing provides for an interest
rate of 6.75% over prime, and is secured by a first perfected lien on the
Company's assets, limited to the specific portion of the assets to which the
loan proceeds are applied by the Company. We have applied most of the proceeds
of this loan to its drilling and development operations in the Piceance Basin,
Colorado. The terms of the Financing also provide for the issuance of warrants
to purchase 1,000,000 of our common shares upon execution of the Financing, and
an additional 200,000 warrants, for each $1 million draw down of the credit
facility up to $15 million. The warrants will be exercisable for five years
after the date of the Financing. The exercise price of the warrants will be
equal
28
to 120% of the weighted average price of our stock for the 30 days immediately
prior to each warrant issuance date. Global Project Finance AG and its
controlling shareholder were shareholders of the Company prior to the Credit
Agreement. As April 30, 2007, we had drawn down all $15,000,000 on the credit
facility.
Subsequent to March 31, 2007, we received an additional $1.5 million
advance from Global Project Finance AG, in anticipation of a borrowing facility
currently being negotiated. The terms of the borrowing facility have not been
finalized as of the date of this report, but are expected to be similar to the
terms of the Financing.
LIQUIDITY AND CAPITAL RESOURCES
We had not commenced principal operations or earned significant revenue
as of March 31, 2007, and are considered a development stage company. During the
period from inception to March 31, 2007, we incurred a cumulative net loss of
$32,782,278 and at that date have a working capital deficit of $24,744,260. In
order to fund our planned exploration and development of oil and gas properties,
we will require significant additional funding. We have sold approximately $72.5
million of notes, convertible notes and common stock from inception through
March 31, 2007, and our management believes that we will be successful in
raising additional funding to have sufficient capital to meet our obligations
for our planned operations for at least the next twelve months.
The Company at March 31, 2007 is vastly different from its existence at
March 31, 2006. At March 31, 2006, we had been operating for approximately nine
months, had no employees, and had acquired an interest in two properties, West
Rozel and Buckskin Mesa, aggregating approximately 12,400 net mineral acres.
During the 2006 fiscal year and the first six months of the current fiscal year,
we added 16 employees, moved to offices in Denver, Colorado, and acquired an
interest in properties aggregating approximately 7,207,000 acres.
We funded the acquisition of these properties and the increased level
of activity primarily through the sale of debt and equity securities for cash.
We also issued 8,800,000 shares, valued at $0.50 per share, as partial
consideration for the acquisition of oil and properties and as consideration for
a finder's fee on an oil and gas prospect. At March 31, 2007, we had a working
capital deficit of $24,744,260 and cash of $1,702,427. In addition, we will need
to raise additional funds for our planned operations and acquisitions.
Prior to the acquisition of PetroHunter Operating Company in May 2006,
we entered into five separate loan agreements, aggregating $400,000, due one
year from issuance, commencing October 11, 2006. The loans bear interest at 12%
per annum, are unsecured, and are convertible, at the option of the lender at
any time during the term of the loan or upon maturity, at a price per share
equal to the closing price of our common stock on the OTC Bulletin Board on the
day preceding notice from the lender of its intent to convert the loan. As of
March 31, 2007, we were in default on payment of an aggregate of $350,000 of
notes.
CASH USED IN OPERATING ACTIVITIES. Primarily as a result of our net
loss of $9,971,445, we used cash of $4,963,760 for six months ended March 31,
2007. See "Results of Operations" below for the discussion of our operating
expenses. The principal adjustments to reconcile the net loss to net cash used
in operating activities were stock based compensation of $3,616,724, as a result
of stock options issued to employees and consultants; depreciation, depletion,
amortization, impairment and accretion of $1,190,097; and common stock issued
for financing costs of $1,440,918. In comparison, we used $4,531,767 of cash in
operations for the six months ended March 31, 2006.
29
CASH USED IN INVESTING ACTIVITIES. We used cash of $19,038,791 in
investing activities during the six months ended March 31, 2007, primarily for
our additions to our oil and gas properties of $5,556,386, costs incurred on
behalf of joint interest owners of $10,618,987, and deposits on oil and gas
property acquisitions of $2,243,777. Depending on the outcome of current
negotiations with third party joint interest owners, the amount expended on
behalf of the joint interest owner will either be reclassified to additions to
oil and gas properties, or will be collected in the form of cash payments from
the joint interest owner. We also used $525,000 for restricted cash, which are
certificates of deposit underlying letters of credit for exploration permits,
state and local bonds and guarantees to vendors. During the six months ended
March 31, 2006, we used $7,847,782 for additions to oil and gas properties.
We currently anticipate our capital budget will be approximately
between $165 and $260 million for the period ending December 31, 2007, which we
plan to use for a diverse portfolio of development and exploration wells in our
core areas of operation. If we are unable to obtain capital through the sale of
our securities or a credit facility or otherwise, our ability to execute our
development plans could be greatly limited. We may consider selling down a
portion of our interests in some of our exploration and development projects to
industry partners to generate additional funds to finance our 2007 capital
budget.
CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by financing
activities in the six months ended March 31, 2007 consisted of proceeds from
promissory notes sold under a Credit and Security Agreement of $12,500,000 and
proceeds from the sale of units in our private placement shares for gross
proceeds of $3,067,500. Total cash provided by financing activities was
$15,073,202, resulting in cash of $1,702,427 at March 31, 2007.
It is anticipated that the continuation and future development of our
business will require additional, substantial, capital expenditures. We believe
cash flow from our existing producing wells and wells soon to be connected will
provide sufficient funds to meet our ongoing administration and operating
expenditures; however, our capital expenditure budget for the period ending
December 31, 2007 will depend on our success in selling additional prospects for
cash, the level of industry participation in our exploration projects, the
availability of debt or equity financing, and the results of our activities. We
anticipate spending approximately between $165 and $260 million on exploration
and development activities during the period ending December 31, 2007. To limit
capital expenditures, we may form industry alliances and exchange an appropriate
portion of our interest for cash and/or a carried interest in our exploration
projects. We may need to raise additional funds to cover capital expenditures.
These funds may come from cash flow, equity or debt financings, a credit
facility, or sales of interests in our properties, although there is no
assurance additional funding will be available or that it will be available on
satisfactory terms.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
OIL AND GAS REVENUES. We generated our first revenues during the last
quarter of our fiscal year ending September 30, 2006 from initial testing and
production of natural gas wells in the Piceance Basin of Colorado. Revenues
increased significantly for the quarter ended March 31, 2007 as the 12 wells,
which had commenced production in late 2006, produced for the entire three-month
period and 8 additional wells recorded initial production during the period. We
sold 495,764 mcf of natural gas and 3,485 barrels of oil, generating $3,359,598
($5.59/mcf and $54.13/bbl) of production revenues for the three months ended
March 31, 2007, as compared to none for the three months ended March 31, 2006.
We recorded lease operating expenses of $644,828 ($1.25/mcfe) and depreciation,
depletion and amortization (DD&A) expense of $508,953 ($0.98/mcfe) for the 2007
period.
30
GENERAL AND ADMINISTRATIVE. Due to the substantially increased level of
activity during the three months ended March 31, 2007 as compared to the three
months ended March 31, 2006, general and administrative expenses increased by
$3,169,575 or 274%.
For the quarters ended March 31, 2007 and 2006, we recorded general and
administrative costs of $4,327,573 and $1,157,998, respectively, as summarized
below:
-------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------------
Consulting fees $ 367,539 $ 222,688
-------------------------------------------------------------------------------
Insurance 76,613 3,040
-------------------------------------------------------------------------------
Investor relations 151,464 273,555
-------------------------------------------------------------------------------
Legal 431,680 278,675
-------------------------------------------------------------------------------
Salaries 597,954 -
-------------------------------------------------------------------------------
Stock based compensation 2,055,591 300,678
-------------------------------------------------------------------------------
Travel and entertainment 313,160 59,151
-------------------------------------------------------------------------------
Director fees 22,500 -
-------------------------------------------------------------------------------
Office lease and expenses 155,649 12,708
-------------------------------------------------------------------------------
Audit and accounting 114,601 5,912
-------------------------------------------------------------------------------
Other expenses 40,822 1,591
-------------------------------------------------------------------------------
$ 4,327,573 $ 1,157,998
-------------------------------------------------------------------------------
o Consulting fees increased in 2007 due the significant growth of the
business after successful completion of fund raising activities and the
increased use of consultants for fundraising activities, shareholder
relations, and corporate activities.
o Insurance increased due to medical insurance benefits provided for
employees, cost of insurance to cover office furnishings and equipment,
and directors and officers insurance.
o Investor relations decreased in 2007 compared to 2006 when we were in
the process of becoming a public company through the Stock Exchange in
May 2006.
o Legal expenses increased in 2007 due to growth of the business,
particularly with regard to new financings, the renegotiation of the
MAB Acquisition and Consulting Agreement, and the costs of public
company reporting and compliance.
o Increased salary expense in 2007 reflects the fact we had no employees
at March 31, 2006 compared to 16 employees as of March 31, 2007.
o Increased stock based compensation expense in 2007 reflects
significantly more options granted and vested as of March 31, 2007 as
compared to March 31, 2006.
o Increased travel and entertainment expenses reflect the growth of the
business, the level of operational activity both domestically and in
Australia, and the increases in staff.
o Increased director fees reflect compensation paid to three outside
directors in 2007 versus none in 2006.
o Increased office expenses reflects costs of our existing offices in
Denver and Salt Lake City in 2007.
In 2006, the Company had no office facilities.
o Increased accounting and audit fees reflect the growth of the business,
complexity of the transactions entered into and the resultant audit and
review requirements subsequent to becoming a public reporting entity
effective May 2006.
31
PROPERTY DEVELOPMENT - RELATED. During the three months ended March 31,
2006, we incurred $820,000 in property development costs to MAB, as compared to
$0 in 2007. This reduction follows the execution of the new Acquisition and
Consulting Agreement with MAB, which was effective January 1, 2007, under which
we no longer incur property development costs to MAB.
DEPRECIATION, DEPLETION, AMORTIZATION, IMPAIRMENT AND ACCRETION
EXPENSE. We recorded depreciation on furniture and fixtures of $43,555,
depletion of oil and gas properties of $508,953, and accretion of asset
retirement obligation (ARO) of $662 during the three months ended March 31,
2007. For the corresponding period of 2006 we incurred no such expenses, due to
the early stage of our business and having no revenue from oil and gas
operations.
OPERATING EXPENSES. Total operating expenses for 2007 were $5,600,571,
as compared to $1,977,998 in 2006.
INTEREST EXPENSE. We incurred interest and financing expenses of
$1,881,994 for 2007, as compared to $499,225 for 2006. The increase in 2007
relates primarily to financing costs paid in common stock to extend the payment
terms of pending acquisitions of oil and gas properties of $1,133,668 in 2007
compared to none in 2006.
NET LOSS. As a result of the expenses described above, we incurred a
loss of $4,116,637 for 2007 as compared to $2,477,223 for 2006, increasing the
loss accumulated since inception to $32,782,278.
SIX MONTHS ENDED MARCH 31, 2007 COMPARED TO SIX MONTHS ENDED MARCH 31, 2006
OIL AND GAS REVENUES. During the six months ended March 31, 2007 we
sold 637,993 mcf of natural gas and 4,069 barrels of oil, generating $3,808,474
($5.62/mcf and $54.29/bbl) of production, as compared to none for the six months
ended March 31, 2006. We recorded lease operating expenses of $806,628
($1.22/mcfe) and DD&A of $58,721 ($0.84/mcfe) for the 2007 period.
GENERAL AND ADMINISTRATIVE. Due to the substantially increased level of
activity during the six months ended March 31, 2007 as compared to the six
months ended March 31, 2006, general and administrative expenses increased by
$6,129,319 or 328%.
For the six months ended March 31, 2007 and 2006, we recorded general
and administrative costs of $7,998,571 and $1,869,252, respectively, as
summarized below:
-----------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------------
Consulting fees $ 603,313 $ 505,579
-----------------------------------------------------------------------------
Insurance 145,737 11,367
-----------------------------------------------------------------------------
Investor relations 431,911 307,420
-----------------------------------------------------------------------------
Legal 620,812 349,826
-----------------------------------------------------------------------------
Salaries 1,152,096 -
-----------------------------------------------------------------------------
Stock based compensation 3,616,724 506,356
-----------------------------------------------------------------------------
Travel and entertainment 779,253 120,510
-----------------------------------------------------------------------------
Director fees 33,000 -
-----------------------------------------------------------------------------
Office lease and expenses 327,731 28,196
-----------------------------------------------------------------------------
Audit and accounting 177,221 35,912
-----------------------------------------------------------------------------
Other expenses 110,773 4,086
-----------------------------------------------------------------------------
$ 7,998,571 $ 1,869,252
-----------------------------------------------------------------------------
32
o Consulting fees increased in 2007 due the significant growth of the
business and the increased use of consultants for fundraising
activities and shareholder relations.
o Insurance increased due to medical insurance benefits provided for
employees and cost of insurance to cover office furnishings and
equipment, and directors and offices insurance coverage.
o Investor relations increased in 2007 compared to 2006, particularly in
the first fiscal quarter of 2007 during which time we employed several
investor relations consultants to present our business plans to
potential investors as part of fundraising efforts.
o Legal expenses increased in 2007 due to growth of the business,
particularly with regard to new financings, the renegotiation of the
MAB Acquisition and Consulting Agreement, and the incremental costs of
public company reporting and compliance.
o Increased salary expense in 2007 reflects the fact we had no employees
at March 31, 2006 compared to 16 employees as of March 31, 2007.
o Increased stock based compensation expense in 2007 reflects
significantly more options granted and vested as of March 31, 2007 as
compared to March 31, 2006.
o Increased travel and entertainment expenses reflect the growth of the
business, the level of operational activity both domestically and in
Australia, and the increases in professional staff. Additional travel
of staff was required during the fundraising activities discussed
above.
o Increase in director fees reflects compensation paid to three outside
directors in 2007 versus none in 2006.
o Increased office expenses reflect costs of our existing offices in
Denver and Salt Lake City in 2007 In 2006, the Company had no office
facilities
o Increased accounting and audit fees reflect the growth of the business,
complexity of the transactions entered into and the resultant audit
review requirements.
PROPERTY DEVELOPMENT - RELATED. During the six months ended March 31,
2007, we incurred $1,815,000 in property development costs to MAB, as compared
to $1,520,000 in 2006. The increase reflects costs associated with additional
properties acquired in the second half of fiscal 2006. All 2007 costs were
incurred in the first three months of fiscal 2007. Effective January 1, 2007, we
executed a new Acquisition and Consulting Agreement with MAB under which we no
longer incur property development costs to MAB.
DEPRECIATION, DEPLETION, AMORTIZATION, IMPAIRMENT AND ACCRETION
EXPENSE. We recorded depreciation on furniture and fixtures of $80,097,
depletion of oil and gas properties of $558,405, impairment expenses of
$550,790, and accretion of ARO of $805 during the six months ended March 31,
2007. For the corresponding period of 2006 we incurred no such expenses, due to
the early stage of our business.
OPERATING EXPENSES. Total operating expenses for 2007 were
$11,885,296, as compared to $3,389,252 in 2006.
INTEREST EXPENSE. We incurred interest and financing expenses of
$1,909,012 for 2007, as compared to $686,660 for 2006. The increase relates
primarily to financing costs paid in common stock to extend the payment terms of
pending acquisitions of oil and gas properties of $1,133,668 in 2007 compared to
none in 2006.
GOING CONCERN
We have incurred a cumulative net loss $32,782,278 for the period from
inception to March 31, 2007 and at March 31, 2007 have a working capital deficit
of $24,744,260. We require significant
33
additional funding to sustain our operations and satisfy our contractual
obligations for our planned oil and gas exploration and development operations.
Our ability to establish the Company as a going concern is dependent upon our
ability to obtain additional financing, in order to fund our planned operations
and ultimately, to achieve profitable operations.
OFF-BALANCE SHEET ARRANGEMENTS
From time to time, we enter into off-balance sheet arrangements and
transactions that can give rise to off-balance sheet obligations. As of March
31, 2007, the off-balance sheet arrangements and transactions that we have
entered into include operating lease agreements. We do not believe that these
arrangements are reasonably likely to materially affect our liquidity or
availability of, or requirements for, capital resources.
SCHEDULE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our obligations and commitments to make
future payments under our notes payable, operating leases, employment contracts
and consulting agreement for the periods specified as of March 31, 2007.
------------------------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS (1) TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
Convertible Notes Payable
Principal $ 400,000 $ 400,000 $ - $ - $ -
Interest 48,000 48,000 - - -
Notes Payable Principal & Interest
Related Party (2) 14,919,778 3,738,110 6,220,660 4,961,008 -
Other 17,063,082 2,174,383 14,888,699 - -
------------------------------------------------------------------------------------------------------------------------------------
Office, Equipment Leases & Other 830,388 185,907 389,129 255,352 -
------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 33,261,248 $ 6,546,400 $ 21,498,488 $ 5,216,360 $ -
------------------------------------------------------------------------------------------------------------------------------------
--------------------
(1) We have excluded asset retirement obligations because we are not able
to precisely predict the timing for these amounts.
(2) Interest payments were calculated using actual interest rates charged
through March 31, 2007 and 5.44% thereafter.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our Financial
Statements.
OIL AND GAS PROPERTIES. We utilize the full cost method of accounting
for oil and gas activities. Under this method, subject to a limitation based on
estimated value, all costs associated with property acquisition, exploration and
development, including costs of unsuccessful exploration, are capitalized within
a cost center. No gain or loss is recognized upon the sale or abandonment of
undeveloped or producing oil and gas properties unless the sale represents a
significant portion of oil and gas properties and the gain significantly alters
the relationship between capitalized costs and proved oil and gas reserves
34
of the cost center. Depreciation, depletion and amortization of oil and gas
properties are computed on the units of production method based on proved
reserves. Amortizable costs include estimates of future development costs of
proved undeveloped reserves.
Capitalized costs of oil and gas properties may not exceed an amount
equal to the present value, discounted at 10%, of the estimated future net cash
flows from proved oil and gas reserves plus the cost, or estimated fair market
value, if lower, of unproved properties. Should capitalized costs exceed this
ceiling, an impairment is recognized. The present value of estimated future net
cash flows is computed by applying year end prices of oil and natural gas to
estimated future production of proved oil and gas reserves as of year end, less
estimated future expenditures to be incurred in developing and producing the
proved reserves and assuming continuation of existing economic conditions. As of
March 31, 2007, we have no proved reserves, have received revenue from testing
and production on our initial wells, and all oil and gas property costs are
considered to be unevaluated and are recorded at the lower of cost or estimated
fair market value.
ASSET RETIREMENT OBLIGATION. We apply SFAS 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement requires companies to record
the present value of obligations associated with the retirement of tangible
long-lived assets in the period in which it is incurred. The liability is
capitalized as part of the related long-lived asset's carrying amount. Over
time, accretion of the liability is recognized as an operating expense and the
capitalized cost is depreciated over the expected useful life of the related
asset. Asset retirement obligations ("ARO") relate primarily to the plugging,
dismantlement, removal, site reclamation and similar activities of its oil and
gas properties. At March 31, 2007, we had recorded an ARO of $326,103 for our
initial wells under progress.
SHARE BASED COMPENSATION. On October 1, 2005, we adopted SFAS 123(R),
"Accounting for Stock-Based Compensation," using the modified prospective
method, which results in the provisions of SFAS 123(R) being applied to the
consolidated financial statements on a going-forward basis. Prior periods have
not been restated. SFAS 123(R) requires companies to recognize share-based
payments to employees as compensation expense on a fair value method. Under the
fair value recognition provisions of SFAS 123(R), stock-based compensation cost
is measured at the grant date based on the fair value of the award and is
recognized as expense over the service period, which generally represents the
vesting period. The expense recognized over the service period is required to
include an estimate of the awards that will be forfeited. Previously, no such
forfeitures have occurred. We are assuming no forfeitures going forward based on
our historical forfeiture experience. The fair value of stock options is
calculated using the Black-Scholes option-pricing model.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN
48"). The interpretation clarifies the accounting for uncertainty in income
taxes recognized in a company's financial statements in accordance with SFAS
109, "Accounting for Income Taxes." Specifically, the pronouncement prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. The
interpretation will be effective for the fiscal year beginning October 1, 2007
for the Company. The adoption of FIN 48 is not expected to have a material
impact on our consolidated financial position, results of operations and cash
flows.
35
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements."
This Statement defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosure related to the use of fair value
measures in financial statements. The Statement is to be effective for the
Company's financial statements issued in 2009; however, earlier application is
encouraged. We are currently evaluating the timing of adoption and the impact
that adoption might have on our financial position or results of operations.
In September 2006, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 108 ("SAB 108"). Due to diversity in
practice among registrants, SAB 108 expresses SEC staff views regarding the
process by which misstatements in financial statements are evaluated for
purposes of determining whether financial statement restatement is necessary.
SAB 108 was effective for the Company on October 1, 2006. The adoption of SAB
108 had no impact on our financial position or results from operations.
In December 2006, the FASB issued FASB Staff Position ("FSP") EITF
00-19-2, "Accounting for Registration Payment Arrangements." This FSP specifies
that the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with FASB Statement No. 5, "Accounting for
Contingencies." This FSP is effective immediately for registration payment
arrangements and the financial instruments subject to those arrangements that
are entered into or modified subsequent to December 21, 2006. For registration
payment arrangements and financial instruments subject to those arrangements
that were entered into prior to December 21, 2006, the guidance in the FSP will
be effective for the fiscal year beginning October 1, 2007 for the Company. The
adoption of this FSP is not expected to have a material impact on our financial
position or results from operations.
On February 15, 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities." This Statement
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for our
financial statements issued in 2009. We are currently evaluating the impact that
the adoption of SFAS No. 159 might have on our financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk relates to changes in the pricing applicable to
the sales of gas production in the Piceance Basin in Colorado. This risk will
become more significant to us as our production increases in this area. Although
we are not using derivatives at this time to mitigate the risk of adverse
changes in commodity prices, we may consider using them in the future.
36
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our management
carried out an evaluation, under the supervision and with the participation of
our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
lack adequate staff and procedures in order to be effective. Subsequent to the
end of the period covered by this report we have implemented procedures to
remediate this control deficiency by completing the implementation of an
accounting system designed for oil and gas producing companies and will be
hiring additional staff.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
In connection with the evaluation of our internal controls during our
last fiscal quarter, our principal executive officer and principal financial
officer have determined that there have been no changes to our internal controls
over financial reporting that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.
37
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors disclosed in our Form
10-KSB for the fiscal year ended September 30, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2007, a wholly-owned subsidiary of the
registrant, PetroHunter Australia Ltd., sold convertible notes in the aggregate
amount of $25,000 to three accredited investors pursuant to the exemption from
registration contained in Rule 506 of Regulation D.
The registrant sold 986,667 units, each unit consisting of one share of common
stock and one-half common stock purchase warrant, to four accredited investors
pursuant to the exemption from registration contained in Rule 506 of Regulation
D. No underwriters were used.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
--------------------------------------------------------------------------------
REGULATION
S-K
NUMBER EXHIBIT
--------------------------------------------------------------------------------
2.1 Stock Exchange Agreement dated February 10, 2006 by and among
Digital Ecosystems Corp., GSL Energy Corporation, MABio Materials
Corporation and MAB Resources LLC (incorporated by reference to
Exhibit 10.8 to the Company's quarterly report on Form 10-QSB for
the quarter ended December 31, 2005, filed February 16, 2006)
--------------------------------------------------------------------------------
2.2 Amendment No. 1 to Stock Exchange Agreement dated March 31, 2006
(incorporated by reference from Exhibit 10.1 to the Company's
current report on Form 8-K dated March 31, 2006, filed April 7,
2006)
--------------------------------------------------------------------------------
38
--------------------------------------------------------------------------------
REGULATION
S-K
NUMBER EXHIBIT
--------------------------------------------------------------------------------
2.3 Amendment No. 5 to Stock Exchange Agreement dated May 12, 2006
(incorporated by reference from Exhibit 10.1 to the Company's
current report on Form 8-K dated May 12, 2006, filed May 15,
2006)
--------------------------------------------------------------------------------
2.4 Purchase and Sale Agreement dated December 29, 2006 between
Dolphin Energy Corporation and Galaxy Energy Corporation and
PetroHunter Operating Company and PetroHunter Energy Corporation
(incorporated by reference to Exhibit 2.1 to the Company's
current report on Form 8-K dated December 29, 2006, filed January
4, 2007)
--------------------------------------------------------------------------------
2.5 Second Amendment to Purchase and Sale Agreement dated February
28, 2007 (incorporated by reference to Exhibit 2.2 to the
Company's amended current report on Form 8-K dated December 29,
2006, filed March 2, 2007)
--------------------------------------------------------------------------------
2.6 Partial Assignment of Contract and Guarantee between PetroHunter
Energy Corporation, PetroHunter Operating Company and MAB
Resources LLC, dated March 21, 2007 (incorporated by reference to
Exhibit 2.1 to the Company's current report on Form 8-K dated
March 21, 2007, filed March 22, 2007)
--------------------------------------------------------------------------------
2.7 Third Amendment to Purchase and Sale Agreement dated March 30,
2007 (incorporated by reference to Exhibit 2.3 to the Company's
amended current report on Form 8-K dated December 29, 2006, filed
April 2, 2007)
--------------------------------------------------------------------------------
2.8 Fourth Amendment to Purchase and Sale Agreement dated April 30,
2007 (incorporated by reference to Exhibit 2.4 to the Company's
amended current report on Form 8-K dated December 29, 2006, filed
May 1, 2007)
--------------------------------------------------------------------------------
3.1 Articles of Incorporation (incorporated by reference to Exhibit A
to the Information Statement filed July 17, 2006)
--------------------------------------------------------------------------------
3.2 Bylaws (incorporated by reference to Exhibit B to the Information
Statement filed July 17, 2006)
--------------------------------------------------------------------------------
10.1 Business Consultant Agreement dated October 1, 2005 (incorporated
by reference to Exhibit 10.1 to the Company's current report on
Form 8-K dated October 1, 2005, filed October 28, 2005)
--------------------------------------------------------------------------------
10.2 Marketing Management Contract dated October 15, 2005
(incorporated by reference to Exhibit 10.1 to the Company's
current report on Form 8-K dated October 1, 2005, filed October
28, 2005)
--------------------------------------------------------------------------------
10.3 Loan Agreement with Carnavon Trust Reg. Dated for reference
October 11, 2005 (incorporated by reference to Exhibit 10.3 to
the Company's quarterly report on Form 10-QSB for the quarter
ended September 30, 2005, filed November 21, 2005)
--------------------------------------------------------------------------------
10.4 Loan Agreement with Carnavon Trust Reg. Dated for reference
December 5, 2005 (incorporated by reference to Exhibit 10.6 to
the Company's quarterly report on Form 10-QSB for the quarter
ended December 31, 2005, filed February 16, 2006)
--------------------------------------------------------------------------------
39
--------------------------------------------------------------------------------
REGULATION
S-K
NUMBER EXHIBIT
--------------------------------------------------------------------------------
10.5 Loan Agreement with Carnavon Trust Reg. Dated for reference
February 2, 2006 (incorporated by reference to Exhibit 10.7 to
the Company's quarterly report on Form 10-QSB for the quarter
ended December 31, 2005, filed February 16, 2006)
--------------------------------------------------------------------------------
10.6 2005 Stock Option Plan (incorporated by reference from Exhibit
4.1 to the Company's annual report Form 10-KSB for the fiscal
year ending March 31, 2006, filed on July 14, 2006)
--------------------------------------------------------------------------------
10.7 Management and Development Agreement Between MAB Resources LLC
and GSL Energy Corporation (Amended and Restated) Effective
July 1, 2005 (incorporated by reference from Exhibit 10.4 to the
Company's annual report Form 10-KSB for the fiscal year ending
March 31, 2006, filed on July 14, 2006)
--------------------------------------------------------------------------------
10.8 Acquisition and Consulting Agreement between MAB Resources LLC
and PetroHunter Energy Corporation Effective January 1, 2007
(incorporated by reference to Exhibit 10.1 to the Company's
amended current report on Form 8-K dated January 9, 2007, filed
May 4, 2007)
--------------------------------------------------------------------------------
10.9 Credit and Security Agreement dated as of January 9, 2007 between
PetroHunter Energy Corporation and PetroHunter Operating Company
and Global Project Finance AG (incorporated by reference to
Exhibit 10.2 to the Company's current report on Form 8-K dated
January 9, 2007, filed January 11, 2007)
--------------------------------------------------------------------------------
31.1 Rule 13a-14(a) Certification of Thomas Ahlbrandt
--------------------------------------------------------------------------------
31.2 Rule 13a-14(a) Certification of Carmen J. Lotito
--------------------------------------------------------------------------------
32.1 Certification of Thomas Ahlbrandt Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act Of 2002
--------------------------------------------------------------------------------
32.2 Certification of Carmen J. Lotito Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act Of 2002
--------------------------------------------------------------------------------
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PETROHUNTER ENERGY CORPORATION
(REGISTRANT)
Date: June 12, 2007 By: /s/ CARMEN J. LOTITO
--------------------------------------
Carmen J. Lotito
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
41