UNITEDSTATES

SECURITIESAND EXCHANGE COMMISSION

Washington,D.C. 20549

 

FORM10-QSB

 

[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OFTHE SECURITIES EXCHANGE ACT OF 1934

 

[] TRANSITION REPORT PURSUANT TO SECTION 13 OR

15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

 

Forthe quarterly period ended: September 30, 2003

 

Commissionfile number 000-30009

 

PETROLOIL AND GAS, INC.

(Exactname of registrant as specified in its charter)

 

| **Nevada  **
**88-0453323**
(State      or other jurisdiction of   
(I.R.S.      Employer
incorporation      or organization)   
Identification      Number)

**2300      Patrick Lane, Suite 26**
**Las      Vegas, Nevada  **
**89119**
(Address      of Principal Executive Offices)   
(Zip      Code)** 

(702)454-3394**
(Registrant'stelephone number, including area code)

 

Indicateby check mark whether the registrant (1) filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the last 12months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

Yes  X     No ____

 

Thenumber of shares of Common Stock, $0.001 par value, outstanding on October 29,2003, was 16,651,866 shares, held by approximately 78 shareholders.

 

TransitionalSmall Business Disclosure Format (check one):

 

Yes            No   X    
 

 

ITEM 1.FINANCIAL STATEMENTS

 
**PetrolOil and Gas, Inc.

(ADevelopment Stage Company)

CondensedBalance Sheet

 **
September      30, 2003
December      31, 2002
(unaudited)
Assets
Current      assets:
       Cash
$            1,039,285
$               161,836
Equipment
30,143
--
       Accumulated depreciation
(627)
--
29,516
--
Oil      and gas properties using full cost accounting:
       Properties not subject to amortization
890,466
282,956
$            1,959,267
$               444,792
Liabilities      and shareholders' equity
Current      liabilities:
       Notes payable-current
$              414,166
$                         --
       Accounts payable
267,931
109,969
       Due to officer
47,500
25,000
          Total current liabilities
729,597
134,969
Long-term      debt
24,009
--
Contingencies      and commitments
Shareholders'      equity:
       Preferred stock, $.001 par, authorized 10,000,000 shares; no shares issued
--
--
       Common stock, $.001 par, authorized 100,000,000 shares; 14,896,993 and      13,151,993 issued and outstanding at September 30, 2003 and December 31,      2002

 

14,897
 

13,152
       Stock for services not issued 100,000 and 215,000 shares at September 30,      2003 and December 31, 2002

 

100
 

107,500
       Unamortized cost of stock issued for services
(1,000)
--
       Stock paid for not issued 1,089,823 shares at September 30, 2003
1,090
--
       Additional paid in capital
2,850,383
898,870
       Deficit accumulated under the development stage
(1,659,809)
(709,699)
          Total shareholders' equity
1,205,661
309,823
$            1,959,267
$               444,792** 

Seenotes to condensed financial statements.

 **
2
**PetrolOil and Gas, Inc.

(ADevelopment Stage Company)

CondensedStatement of Operations

Unaudited

 **
Nine      Months Ended September 30,
Three      Months Ended September 30,
March      3, 2000 (inception) to September 30,
2003
2002
2003
2002
2003
Revenue:
$                      --
$                      --
$                     --
$                     --
$                      --
Professional      and consulting fees
712,928
60,610
544,715
60,610
1,352,436
Wages
105,417
--
37,917
--
148,155
Travel
53,192
7,337
30,069
7,337
63,672
Miscellaneous      expense
78,573
1,603
39,559
1,581
95,546
Net      loss
$         (950,110)
$           (69,550)
$         (652,260)
$           (69,528)
$       (1,659,809)
Basic      and diluted earnings per share
$               (0.06)
$               (0.01)
$               (0.04)
$               (0.01)
$                (0.19)
Weighted      shares outstanding
13,569,363
7,363,565
13,569,363
7,363,565
8,260,541** 

Seenotes to condensed financial statements.

 **
3
**PetrolOil and Gas, Inc.

(ADevelopment Stage Company)

CondensedStatement of Cash Flows

Unaudited

 **
Nine      Months Ended

September      30,
March      3, 2000

(inception)      to

September      30,
2003
2002
2003
Operating      activities:
       Net loss
$          (950,110)
$           (69,550)
$        (1,659,809)
Adjustments      to reconcile net income to net cash used in operating activities-
  Depreciation
627
--
627
       Stock and options issued for services
483,000
--
969,870
       Change in assets and liabilities-
       Accounts payable
157,962
113,972
178,551
       Due to officer
22,500
1,000
47,500
       Cash used in operating activities
(286,021)
45,422
(463,261)
Investing      activities:
       Equipment purchase
(30,142)
--
(30,142)
       Additions to oil & gas property not subject to amortization
(607,510)
(44,625)
(750,505)
       Cash used in investing activities
(637,652)
(44,625)
(780,647)
Financing      activities:
       Stock issued for debt paid by shareholder of Company stock
--
22
6,475
       Stock paid for but not issued
1,025,448
47,286
1,025,448
       Notes payable
438,175
--
438,174
       Stock sold
337,500
--
813,096
       Cash provided from financing activities
1,801,123
47,308
2,283,193
       Increase in cash
877,449
48,105
1,039,285
       Beginning cash
161,836
--
--
       Ending cash
$          1,039,285
$               48,105
$          1,039,285
Supplemental      cash flow information:
       Interest paid
$                       --
$                      --
$                       --
       Income taxes paid
--
--
--
Non      cash financing activities:
       Stock issued for assets acquired
$                       --
$                      --
$               50,580
Addition      to oil & gas property not subject to amortization and accounts payable      assumed in asset purchase
 

--
 

--
 

89,381
       Stock contributed to paid in capital
--
--
5,826
       Unamortized cost of stock issued for services
1,000
1,000
       Stock for services not issued
100,000
--
100,000
       Stock, warrants and options issued for services
393,000
--
799,870** 

Seenotes to condensed financial statements.

 **
4
**PetrolOil and Gas, Inc.

NotesTo Condensed Financial Statements**
 
**Note1 -Basis of Presentation**
 

Theunaudited condensed financial statements have been prepared in accordance withUnited States generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-QSB and reflect all adjustmentswhich, in the opinion of management, are necessary for a fair presentation. Allsuch adjustments are of a normal recurring nature. The results of operations forthe interim period are not necessarily indicative of the results to be expectedfor a full year. Certain amounts in the prior year statements have beenreclassified to conform to the current year presentations. The statements shouldbe read in conjunction with the financial statements and footnotes theretoincluded in the company's Form 10-KSB for the year ended December 31, 2002.

 
**Note2 -Going Concern**
 

Theaccompanying condensed financial statements have been prepared using thegenerally accepted accounting principles applicable to a going concern, whichcontemplates the realization of assets and liquidation of liabilities in thenormal course of business. The ability of the Company to continue as a goingconcern is dependent upon the ability in its endeavors to seek additionalsources of capital, and in attaining future profitable operations. Management iscurrently initiating their business plan and in the process of raisingadditional capital. The accompanying financial statements do not include anyadjustments that might be necessary should the company be unable to continue asa going concern.

 
**Note3 -Stock Transactions**
 

TheCompany sold 450,000 shares of common stock during the first and second quarterat a price of $.75 per share net of any costs associated with the sale. In thethird quarter the Company sold 1,089,823 shares of stock at a price of $1.00 pershare. The shares were registered on Form SB-2 with the SEC and were a part ofthe Company's Initial Direct Public Offering. The costs associated with thesale of these shares totaled $60,000 for professional fees and $4,375 for othercosts. These costs were netted against the additional paid in capital associatedwith the sale of the stock. These shares were not issued as of September 30,2003 and an amount of $1,090 is recorded in the equity section as stock paid fornot issued.

 

Pursuantto a consulting agreement with William Stoeckinger, the Company owed Mr.Stoeckinger 20,000 shares for each month during the period for a total for theyear of 180,000 shares. The value assigned to the consulting fee was $1.00 pershare for the months of July-September and $.75 per share for the monthsJanuary-June for a total expense for the nine month period ended September 30,2003 of $150,000. 100,000 shares were not issued at September 30, 2003 and $100is recorded in the equity section as shares for services not issued.

 

TheCompany on April 18, 2003 issued 1,000,000 shares of its common stock toCornerstone Bank as collateral for a note payable to the bank. The Company onJuly 7, 2003 paid off the note and the shares have been cancelled. The par valueof the shares of $1,000 was recorded as common stock with an offsetting amountrecorded as a reduction of equity under the account unamortized cost of stockissued for services.

 

5
**PetrolOil & Gas, Inc.

NotesTo Condensed Financial Statements**
 

TheCompany on July 2, 2003, entered into a Secured Promissory Note Agreement withCPA Directed Investments, whereby CPA loaned the Company $400,000. The interestrate on the loan is 10% per annum. Proceeds from the loan were used to repay TheCornerstone line of credit and for general working capital. As collateral forthe loan the Company issued CPA 1,000,000 shares of its $0.001 par value commonstock to be held until the loan is paid in full under the terms and conditionsof the agreement.

 

TheCompany awarded 900,000 warrants to Goran Blagojevic on September 1, 2003 forservices rendered. The fair market value of the warrants as determined by theBlack-Scholes pricing model was $333,000 which was recorded as professional feeexpense. The warrants expire on August 31, 2006 and the exercise price is $.75per share.

 
**Note4-Note Payable**
 

TheCompany borrowed $240,000 from Cornerstone Bank under a note that was due August3, 2003. Interest was 2% over the corporate base rate (6.25% at 2/6/03). Thenote was repaid July 7, 2003.

 

OnJuly 1, 2003, the Company entered into an agreement with Enutroff LLC (Enutroff)whereby Enutroff would be paid for introductions that result in completedtransactions as follows: 1) Debt financing, notes, loans-for any introductionsmade by Enutroff a fee will be paid equal to $10,000 plus 12% of the total valueof the financing. 2) Mergers and acquisitions-for any introductions made byEnutroff a fee of 7.5% of the total value of the merger or acquisition. 3) Saleor purchase of real property or mineral rights- a fee of up to 1/32 overridingroyalty interest on those mineral rights involved in a transaction. 4) Workinginterest partners-a fee of up to 1/32 overriding royalty interest on any mineralrights involved with a working interest partner and a fee of 10% of the ultimatevalue of the transaction. 5) Retainer of $40,000 to retain the services ofEnutroff for a period of one year due on July 1, 2003. The retainer fee has beenaccrued as an account payable at September 30, 2003.

 

Enutroffintroduced the Company to CPA Directed Investments (CPA) and on July 2, 2003,the Company received a $400,000 loan from CPA. The interest rate on the loan is10% per annum. The Company issued on 7/7/03 1,000,000 shares of common stock ascollateral to be held by CPA until the loan is paid in full. The loan is for 180days. Pursuant to the loan agreement, upon the occurrence and during acontinuance of default, all remaining amounts of the loan shall, at the optionof CPA, become immediately due and payable, and CPA may exercise at any time anyrights and remedies available to it under applicable law of the State of Nevada.The loan is due and payable upon the earlier of: (i)180 days from the date ofthe agreement, or (ii) within 30 days from closing of the Company's registeredoffering. Enutroff's fee of $58,000 is included as an accounts payable.

 

TheCompany acquired a truck on September 10, 2003 and financed the purchase with afive-year loan from Mayse Automotive Group. Interest is 8.74% and the firstpayment is October 10, 2003.

 

6
**PetrolOil & Gas, Inc.

NotesTo Condensed Financial Statements**
 
**Note5-Subsequent Events**
 

TheCompany sold an additional 665,050 shares of its common stock at a price of$1.00 per share, which were a part of the Company's Initial Direct PublicOffering.
** **
OnNovember 10, 2003, the Company repaid CPA. The Company is in the process ofcanceling the 1,000,000 shares issued to CPA.

7
**Item2. Plan of Operation**
 

Thisreport contains forward-looking statements. Actual results and events coulddiffer materially from those projected, anticipated, or implicit, in theforward-looking statements as a result of the risk factors set forth below andelsewhere in this report.

 

Withthe exception of historical matters, the matters discussed herein areforward-looking statements that involve risks and uncertainties. Forward-lookingstatements include, but are not limited to, statements concerning anticipatedtrends in revenues and net income, the date of introduction or completion of ourdevelopment and production efforts, projections concerning operations andavailable cash flow. Our actual results could differ materially from the resultsdiscussed in such forward-looking statements primarily as the result ofinsufficient cash to pursue production and development efforts. The followingdiscussion of our plan of operation should be read in conjunction with ourfinancial statements and the related notes thereto appearing elsewhere herein.

 
**Overview**
 

PetrolOil and Gas, Inc., a development stage company, was incorporated in the State ofNevada on March 3, 2000 as Euro Technology Outfitters. We changed our name toPetrol Oil and Gas, Inc. on August 20, 2002. We are structured to engage in theexploration, development, acquisition and operation of oil and gas properties.Since our inception, we have not been engaged in any significant operations norhave we had any revenues. Our only recent activities include organization, thenegotiation and execution of an asset purchase agreement, and we have registeredour securities with the Securities and Exchange Commission in order to raiseadditional capital and make our financial information equally available toinvestors or other interested parties. Once we complete the sale of oursecurities, we intend to contact an authorized NASD market maker for sponsorshipof our securities on the Over-the-Counter Electronic Bulletin Board. We believewe will be able to complete that process by the end of the first quarter offiscal 2004.

 
**Planof Operation**
 

Wehave been in discussion with several individuals and entities with regards topotential acquisitions of additional mineral lease properties, working interestpartners, farmout arrangements and consulting services. As of the date of thisfiling we have not finalized any formal agreements with any individual orentity, nor have we determined an acquisition as probable. Once a formalagreement is finalized, if ever, we will file a Form 8-K disclosing the termsand conditions of such agreement.

 

Duringthe next twelve months we plan to focus our efforts on increasing our productionand reserves of natural gas through the development of our existing properties,raising additional equity capital and furthering our business plan.

 

Weintend to fund portions of our field operations through revenues obtained fromsales of our CBM gas production, if any. To accelerate the development programwe plan to take on working interest (WI) partners that will contribute to thecosts of drilling and completion and then share in revenues derived fromproduction. This economic strategy may allow us to utilize our own financialassets toward the growth of our leased acreage holdings, pursue the acquisitionof strategic oil and gas producing companies and generally expand our existingoperations.

 

8

Becauseof our limited operating history we have yet to generate revenues from the saleof oil or natural gas. Our current operation is based upon an acquisition ofmineral leases from Petrol Energy, Inc. Our activities have been limited to thenegotiation of an agreement and preliminary analysis. Consequently, we haveincurred the expenses of start-up.

 

Ourfuture financial results will depend primarily on: (i) the ability to continueto source and screen potential projects; (ii) the ability to discover commercialquantities of natural gas and oil; (iii) the market price for oil and gas; and(iv) the ability to fully implement our exploration and development program,which is dependent on the availability of capital resources. We cannot guaranteethat we will be successful in any of these respects, that the prices of oil andgas prevailing at the time of production will be at a level allowing forprofitable production, or that we will be able to obtain additional funding toincrease our currently limited capital resources.

 

Weanticipate the need for at least $5,000,000, the maximum proceeds we areattempting to raise through our registered offering, of capital over the next 12months. If we do not raise the maximum proceeds, any additional funds needed maybe raised through equity financing, debt financing, or other sources, which mayresult in further dilution in the equity ownership of our stockholders. There isstill no assurance that, even with the funds from the registration and asubsequent private placement, if needed, we will be able to maintain operationsat a level sufficient for an investor to obtain a return on their investment inour common stock. Further, we may continue to be unprofitable for an indefiniteperiod of time.

 

Throughthe date of this filing, we have raised approximately $1,754,873 from theregistered offering.

 

Weare unable to provide an accurate breakdown to the use of funds to be receivedfrom any future private placement as the usage will be solely based upon theoutcome of our initial exploration and development program. We have anticipatedthe need to hire additional staff, continue development and refinement of ouroperations to meet customer needs and provide additional working capital for ouroperations.

 

Wewill face considerable risk in each of our business plan steps, such asdifficulty of hiring competent personnel within our budget and a shortfall offunding due to our inability to raise capital in the equity securities market.If no funding is received during the next twelve months, we will be forced torely on existing cash in the bank and funds received from the offering.

 

Wehave no operating history, no significant current operations, minimum cash onhand, and no profit. Because of these factors, our auditors have issued an auditopinion for Petrol which includes a statement describing our going concernstatus. This means there is substantial doubt about our ability to continue as agoing concern. While we believe we have made good faith estimates of our abilityto secure additional capital in the future to reach our goals, there is noguarantee that we will receive sufficient funding to implement any futurebusiness plan steps.

 

Ourfuture operating results will depend on many factors, including our ability toraise adequate working capital, demand for our oil and gas production, the levelof competition and our ability to deliver products while maintaining quality andcontrolling costs.
** **
9
**FieldDevelopment**
 

Ourcurrent plan of operation for field development starts with identifying the mostpromising and cost-effective drill sites on our current leased acres, drillingand testing wells to prove reserves, completing the more promising test wells,extracting the oil, gas and other hydrocarbons that we find, and delivering themto market. Although we believe that we have leased enough land to move forwardwith our field development, we will have to obtain additional financing beforewe can fully implement this next phase of our operations.

 

Fielddevelopment operations began in August 2002, with the drilling and logging ofthree test wells. Each test well is located on a separate mineral lease in thesouthwest portion of Coffey County. These drill sites were selected based on avariety of factors, including information gathered from historic records anddrill logs (depth, and thickness of coal seams and the results of electric gammaray readings), proximity to existing interstate distribution pipelines, ease ofaccess for drilling equipment, the presence of oil and natural gas in theimmediate vicinity, and consultations with our operator and driller. Since theseare considered to be exploratory or test wells they have only been partiallycompleted in order to allow us to investigate the production capacity ofselected coal intervals, and to obtain important technical information relatedto stimulation activities that are almost always required to make CBM wellscommercially productive. Thus, we do not presently have any estimates of oil andgas reserves on these properties. Consequently, we have not reported our reserveestimates to any state, or federal authority.

 

Duringthis phase of our plan of operation we expect to drill, test and complete about40 coal-bed methane producing wells. These drilling and testing efforts willalso allow us to determine whether there are other forms of commerciallyproducible hydrocarbons present, such as oil or other types of natural gas. Eachwell will be drilled and tested individually. If commercially producible amountsof gas are present, the well will be fully completed and a local distributionpipeline installed. Completed wells that are producing and connected todistribution pipelines will begin generating revenues as soon as they beginpumping, although these revenues may be realized on a quarterly basis.

 

Oncewe have identified a proposed drilling site, we, as a licensed operator in theState of Kansas, will be engaged in all aspects of well site operations. As theoperator, we will be responsible for permitting the well, which will includeobtaining permission from the Kansas Oil and Gas commission relative to spacingrequirements and any other state and federal environmental clearances requiredat the time that the permitting process commences. Additionally, we willformulate and deliver to all interest owners an operating agreement establishingeach participant's rights and obligations in that particular well based on thelocation of the well and the ownership. In addition to the permitting process,we as the operator will be responsible for hiring the driller, geologist andland men to make final decisions relative to the zones to be targeted,confirming that we have good title to each leased parcel covered by the spacingpermit and to actually drill the well to the target zones. Should the well besuccessful, we will be responsible for completing the well and connecting it tothe most appropriate transmission facility for the hydrocarbons produced.

 

Asthe operator, we will be the caretaker of the well once production hascommenced. We have no formal experience in well operations and will have to hireor retain professionals to assist us in our efforts. As the operator, we will beresponsible for paying bills related to the well, billing working interestowners for their proportionate expenses in drilling and completing the well, andselling the production from the well. Again, we have no experience in operatingan oil or gas production company, therefore, we will be forced to hireexperienced operation staff, when needed. Once the production has been sold, weanticipate that the purchaser thereof will carry out its own research withrespect to ownership of that production and will send out a division order toconfirm the nature and amount of each interest owned by each interest owner.Once a division order has been established and confirmed by the interest owners,the production purchaser will issue the checks to each interest owner inaccordance with its appropriate interest. From that point forward, we asoperator will be responsible for maintaining the well and the wellhead siteduring the entire term of the production or until such time as the operator hasbeen replaced or appropriately abandoned. We anticipate hiring professionals toassist us in our operations until such time as our management has sufficientknowledge and operations ability.

 

10

Wehave a working relationship and have used Well Refined Drilling of Thayer,Kansas, to drill our first three exploratory test wells. Owner/Operator JefferyKephart has been a driller since 1978, and has drilled in excess of 10,000 wellsin Kansas, Oklahoma, Texas, Wyoming, and Missouri. More than 200 of those wellshave been CBM wells. The driller will be responsible for performing orcontracting with third parties and supervising their efforts on all aspects ofthe drilling operation, except for geological services.

 

Wehave a one year consulting agreement with Mr. William Stoeckinger, a CertifiedPetroleum Geologist, from Bartlesville, Oklahoma to provide geological servicesboth in the assessment process and in the development program.

 

Basedon our first three test wells we anticipate that each well in our targeted areawill cost approximately $35,000 to locate, drill and test, an additional $30,000to complete, plus an additional $350 per month per well to pay for electricity,pulling and repairs, pumping and other miscellaneous charges. In support ofthese operations we have working agreements with local third parties to monitorand maintain our wells and perform drilling and work-over activities

 

Ifany of our wells proves to hold commercially producible gas, we will need toinstall a distribution infrastructure to transport our gas from the wellhead toone of the major distribution pipelines. We have identified several majorinterstate distribution pipelines that operate within and pass through thecounties in which we have lease holdings. These include pipelines owned andoperated by Williams Energy, CMS Energy, and Enbridge. We have initiated contactwith two of these companies to ascertain the specific locations of theirpipelines, their requirements to purchase gas from us (including volume of gasand quality of gas), and the costs to connect to their pipelines. Traditionally,the major distributors of gas in the United States have purchased productionfrom anyone who can get sufficient quantities of quality gas to theirdistribution pipeline. Because some of these companies have purchased coal bedmethane from producing wells in the southern part of Kansas, we believe that ifthe gas produced from wells drilled in our targeted area meets their criteria inboth quantity and quality, they will purchase our gas at market prices. To date,we have not entered into any purchase agreements nor have we received assurancesfrom anyone that they will enter into such agreements with us in the future.

 

Presently,we cannot accurately predict the costs of transporting our gas products to theseexisting interstate pipelines. The cost of installing a distributioninfrastructure or local gathering system will vary depending upon the distancethe gas must travel from our wellhead to the compressor station and highpressure pipeline tap, and whether the gas must be treated to meet thepurchasing company's quality standards. However, based on the close proximityof several major distribution pipelines to our leased properties, plus ourintent to drill as close to these pipelines as practicable, we anticipate thatthe total cost of installing a distribution infrastructure for ten producingwells will be approximately $150,000, or $15,000 each, plus a one-time expenseof $50,000 to tap into the high pressure interstate pipeline.

 

11

Theprices obtained for oil and gas are dependent on numerous factors beyond ourcontrol, including domestic and foreign production rates of oil and gas, marketdemand and the effect of governmental regulations and incentives. We do not haveany delivery commitments with respect to any oil or gas produced from anyproperties that we acquire. However, due to the U.S. government's recent pushtoward increased domestic production of energy sources the high demand fornatural gas, we do not anticipate any difficulties in selling any oil and gasthat we produce, once it has been delivered to a distribution facility.

 

Thesuccess of this phase of our plan of operation is dependent upon our ability toobtain additional capital to drill exploratory and test wells and also upon oursuccessfully finding commercially producible amounts of coal bed methane gas orother hydrocarbons in the wells that we drill. We cannot assure you that we willobtain the necessary capital or that we will find commercially producibleamounts of gas if our drilling operations commence.

 

Thetiming of most of our capital expenditures is discretionary. Currently there areno material long-term commitments associated with our capital expenditure plans.Consequently, we have a significant degree of flexibility to adjust the level ofsuch expenditures as circumstances warrant. We intend to primarily use fundsraised through the registered offering, funds raised from private placements andinternally generated cash flow, if any, to fund capital expenditures and to fundour working capital needs. The level of our capital expenditures will vary infuture periods depending on energy market conditions and other related economicfactors.

 

**Liquidityand Capital Resources**
 

Acritical component of our operating plan impacting our continued existence isthe ability to obtain additional capital through additional equity and/or debtfinancing. We do not anticipate enough positive internal operating cash flowuntil such time as we can generate substantial revenues, which may take the nextfew years to fully realize. In the event we cannot obtain the necessary capitalto pursue our strategic plan, we may have to cease or significantly curtail ouroperations. This would materially impact our ability to continue operations.

 

Throughthe date of this filing, we have successfully raised approximately $1,754,873from our registered offering. We anticipate these funds to satisfy our workingcapital needs for at least the next 6 months.

 

Sinceinception, we have financed cash flow requirements through debt financing andissuance of common stock for cash and services. As we expand operationalactivities, we may continue to experience net negative cash flows fromoperations, pending receipt of revenues, and will be required to obtainadditional financing to fund operations through common stock offerings and bankborrowings to the extent necessary to provide working capital.

 

Overthe next twelve months we believe that existing capital and anticipated fundsfrom operations will not be sufficient to sustain operations and plannedexpansion. Consequently, we will be required to seek additional capital in thefuture to fund growth and expansion through additional equity or debt financingor credit facilities. Such financing may not be available, and if available itmay take either the form of debt or equity. In either case, the financing couldhave a negative impact on our financial condition and our Stockholders.

 

12

Weanticipate incurring operating losses over the next twelve months. Our lack ofoperating history makes predictions of future operating results difficult toascertain. Our prospects must be considered in light of the risks, expenses anddifficulties frequently encountered by companies in their early stage ofdevelopment, particularly companies in new and rapidly evolving markets. Suchrisks include, but are not limited to, an evolving and unpredictable businessmodel and the management of growth. To address these risks we must, among otherthings, implement and successfully execute our business strategy, continue todevelop and upgrade technology and products, respond to competitivedevelopments, and attract, retain and motivate qualified personnel. There can beno assurance that we will be successful in addressing such risks, and thefailure to do so can have a material adverse effect on our business prospects,financial condition and results of operations.

 

Underour current plan of operation, we are required to make certain lease payments tomaintain our rights to develop and drill for oil and gas. These lease paymentsare material obligations to us and our lease holdings are our biggest asset.

 

Asof September 30, 2003, we had assets of $1,959,267, and $753,606 in liabilities.Resulting in stockholders equity of $1,205,661.

 

OnJuly 2, 2003, we entered into a Secured Promissory Note Agreement with CPADirected Investments, whereby CPA loaned us $400,000. The interest rate on theloan is 10% per annum. Proceeds from the loan were used to repay The Cornerstoneline of credit and for general working capital. As collateral for the loan weissued CPA 1,000,000 shares of our $0.001 par value common stock to be helduntil the loan is paid in full under the terms and conditions of the agreement.** 

Werepaid CPA on November 10, 2003. We are in the process of canceling the1,000,000 shares issued to CPA.
** 

Item3. Controls and Procedures

 **-  Paul    Branagan, President and Chief Accounting Officer of the Company, evaluated    the effectiveness of the design and operation of our disclosure controls and    procedures, as such term is defined under Rule 13a-14(c) promulgated under    the Securities Exchange Act of 1934, as amended, within 90 days prior to the    filing date of this report. Based on his evaluation, Mr. Branagan concluded    that our disclosure controls and procedures are effective.There    have been no significant changes (including corrective actions with regard    to significant deficiencies or material weaknesses) in our internal controls    or in other factors that could significantly affect these controls    subsequent to the date of the evaluation referenced in paragraph (a) above.** **
13
**PARTII--OTHER INFORMATION

 

Item 1.Legal Proceedings**
 

None
** 

Item 2.Changes in Securities**
 

OnJuly 7, 2003, we issued 1,000,000 shares of our $0.001 par value common stock toCPA Directed Investments to hold as collateral for a line of credit in theamount of $400,000. We believe that the issuance of the shares was exempt fromregistration and prospectus delivery requirements of the Securities Act of 1933by virtue of Sections 4(2), 4(6) and Regulation D. The shares were issueddirectly by us and did not involve a public offering or general solicitation.The recipient of the shares was afforded an opportunity for effective access tofiles and records of our company that contained the relevant information neededto make their investment decision, including our financial statements and 34 Actreports. We reasonably believed that the recipient, immediately prior to issuingthe shares, had such knowledge and experience in our financial and businessmatters that they were capable of evaluating the merits and risks of theirinvestment. The recipient had the opportunity to speak with our management onseveral occasions prior to their investment decisions. There were no commissionspaid on the issuance of the shares.

 

OnJuly 29, 2003, our SB-2 registration statement (File No. 333-102643) wasdeclared effective by the SEC. We are offering up to 5,000,000 shares of ourcommon stock at $1.00 per share through December 31, 2003. As of the date ofthis filing 1,754,873 shares have been sold.

 

Warrant

 

OnSeptember 1, 2003, we issued Goran Blagojevic a warrant to purchase 900,000shares of our common stock at $0.75 per share. The warrant is exercisable untilAugust 1, 2006. We believe that the issuance of the warrant was exempt from theregistration and prospectus delivery requirements of the Securities Act of 1933by virtue of Section 4(2) and Regulation S.

 
*Useof Proceeds From Sales of Registered Securities

 *
OurRegistration Statement on Form SB-2 (File No. 333-102643), related to ourinitial public offering, was declared effective by the SEC on July 29, 2003. Atotal of 5,000,000 shares maximum and 500,000 shares minimum of Common Stockwere registered with the SEC with an aggregate offering price of $5,000,000maximum and $500,000 minimum. All of these shares were registered on our behalf.The offering commenced in August, and as of September 30, 2003 1,089,823 sharesof common stock offered were sold resulting in $1,089,823 of proceeds to theCompany with no commissions paid on funds raised.

 

Weincurred offering expenses of approximately $64,375 in connection with theoffering. Thus the net offering proceeds to us (after deducting offeringexpenses) were approximately $1,025,448. No offering expenses were paid directlyor indirectly to any or our directors or officers (or their associates), personsowning ten percent (10%) or more of any class of our equity securities or to anyother affiliates.

 

14

Asof September 30, 2003, none of the net proceeds had been used. The remaining netproceeds remain in our operating account pending future use.

 

Subsequentto September 30, 2003, we sold an additional 665,020 shares resulting in$665,020 of proceeds to the Company with no commissions paid on funds raised.

 
**Item3. Defaults by the Company upon its Senior Securities**
 

None
** 

Item 4.Submission of Matter to a Vote of Security Holders**
 

None
** 

Item 5.Other Information

 **
TermSheet of Compensation for Enutroff LLC

 

OnJuly 1, 2003, we entered into an agreement with Enutroff LLC regarding thecompensation that we will pay, or cause to be paid to Enutroff for introductionsthat result in completed transactions of the following nature:

 
-  Debt    financing, notes, or loans,Mergers    or acquisitions,Sale    or purchase of real property or minerals rights,Working    interest partners,The    acquisition or sale of the company.
For  the introduction and completion of any loans, notes or debt financing of any  kind which were initiated by Enutroff, we shall pay Enutroff $10,000 plus a  12% fee based on the total value of the financing, loan, or note.

 

For  the introduction and completion of any merger or acquisition involving Petrol  which were initiated by Enutroff, then we shall pay Enutroff a 7.5% fee based  on the total value of the merger or acquisition.

 

For  Enutroff initiated transactions involving the sale or purchase of real  property or mineral rights, we will provide Enutroff up to a 1/32 Overriding  Royalty Interest (ORRI) on those mineral rights involved in the transaction.  The amount of the ORRI will be agreed upon in writing prior to closing the  sale or purchase and the transfer of mineral rights by or to us.

 

For  Enutroff initiated transactions involving Working Interest Partners (WIP) we  will provide Enutroff up to a 1/32 Overriding Royalty Interest (ORRI) on those  mineral rights involved in the transaction with the WIP. The amount of the  ORRI will be agreed upon in writing prior to closing the WIP agreement and the  transfer of mineral rights by us.

 

In  addition to the ORRI we will pay a fee of 10% of the ultimate value of the  Working Interest transaction that will be agreed upon in writing by Enutroff  for a period of one year, commencing on the signature date of the agreement.

15

A  copy of the Enutroff agreement is attached hereto as an Exhibit.
**Item 6.Exhibits and Reports of Form 8-K**
 

(a)   Exhibits
 

10.1     Term Sheet of Compensation for Enutroff, dated 7/01/03.

31.1     Certification of Paul Branagan pursuant to Section 302 of the Sarbanes-Oxley  Act

32.1     Certification of Paul Branagan pursuant to Section 906 of the Sarbanes-Oxley  Act

(b)   Form 8-K
 

       None
** 

SIGNATURES**
 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

PETROLOIL AND GAS, INC.

(Registrant)

 

 

By: /s/Paul Branagan
    Paul Branagan, President

 

Date:November 13, 2003** |
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