UNITEDSTATES

SECURITIESAND EXCHANGE COMMISSION

Washington,D.C. 20549

 

FORM10-QSB/A

(AmendmentNo. 1)

 

[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: March 31, 2004

 

Commissionfile number 000-30009

 

PETROLOIL AND GAS, INC.

(Exactname of small business issuer as specified in its charter)

 

| **Nevada   **
** 90-0066187**
(State      or other jurisdiction of   
 (I.R.S.      Employer
incorporation      or organization) I   
dentification      Number)**  **
**3161      E. Warm Springs Road**
**Suite      300**
**Las      Vegas, Nevada   **
** 89120**
(Address      of Principal Executive Offices)   
(Zip      Code)**(702)454-7318**
(Issuer'stelephone number, including area code)

 

Checkmark whether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the last 12 months (orfor 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.

 

YesX No ____

 

Thenumber of shares of Common Stock, $0.001 par value, outstanding on March 31,2004, was 17,192,466 shares.

 

TransitionalSmall Business Disclosure Format (check one):

 

YesNo X
 

*** Weare filing this Amendment No. 1 to Form 10-QSB to amend our Quarterly Report onForm 10-QSB for the period March 31, 2004, (the "Original Filing")filed on May 17, 2004, with the Securities and Exchange Commission in order torevise Item 3. Controls and Procedures to disclose the conclusions of ourPrincipal Executive Officer and Principal Financial Officer regarding theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report.  Further we have replaced the Section 302certifications of our Chief Executive Officer and Chief Financial Officer toinclude new Exhibits 31-1 and 31-2.**

 

**Inconformity with SEC Release 34-47986, we have removed all language from ourChief Executive Officer's and Chief Financial Officer's certificationspertaining to establishing and maintaining internal control over financialreporting.**

 

**ThisAmendment does not amend any other information previously filed in the OriginalFiling.  The Original Filing is hereby supersede and amended with respectto Item 3, and Exhibits 31-1 and 31-2 set forth in this Amendment No. 10**

 

**2**

 

ITEM 1.FINANCIAL STATEMENTS

 
**PetrolOil and Gas, Inc.

(ADevelopment Stage Company)

CondensedBalance Sheet

 **
 

March      31,

2004

(Unaudited)
December      31,

2003

(Audited)
Assets
Current      assets:
 

 

          Cash
$      95,917
$      1,059,838
          Investment
214,300
200,000
               Total current assets
310,217
1,259,838
 

 

 

Equipment
3,516
2,134
Vehicles
28,009
28,009
Accumulated      depreciation
(3,562)
(2,107)
 

27,963
28,036
Other      Assets:
 

 

Notes      receivable from stockholders
350,000
-
Oil      and gas properties using full cost accounting:
 

 

          Properties not subject to amortization
2,093,266
1,289,573
               Total other assets
2,443,266
1,289,573
$      2,781,446
$      2,577,447
 

 

 

Liabilities      and stockholders' equity
Current      liabilities:
 

 

          Notes payable-current
$      4,000
$      4,000
          Accounts payable
290,873
268,071
          Accrued liabilities
6,950
31,316
          Due to officer
-
47,500
               Total current liabilities

350,887
 

 

 

Long-term      debt
21,511
22,923
 

 

 

Contingencies      and commitments
 

 

 

Stockholders'      equity:
          Preferred stock, $.001 par, authorized 10,000,000 shares; no shares issued
-
-
          Common stock, $.001 par, authorized 100,000,000 shares; 17,192,466 and      17,247,466 issued and outstanding at March 31, 2004 and December 31, 2003
17,202
17,247
          Stock for services not issued 911,180 and 160,000 shares at March 31, 2004      and December 31, 2003
911
160
          Unamortized cost of stock issued for services
-
(1,000)
          Additional paid in capital
6,240,807
4,630,713
          Deficit accumulated under the development stage
(3,800,808)
(2,443,483)
               Total stockholders' equity
2,458,112
2,203,637
$      2,781,446
$      2,577,447**Seenotes to condensed financial statements.

3

PetrolOil and Gas, Inc.

(ADevelopment Stage Company)

CondensedStatement of Operations

Unaudited

 ** Quarter      Ended march 31,March      3, 2000 (inception) to March 31, 2004 20042003
Revenue:
$      -
$      -
$      -
 

 

 

 

Professional      and consulting fees
552,311
85,495
2,566,573
Office
32,530
-
100,289
Wages
88,000
33,750
294,155
Travel
23,759
7,065
93,912
Acquisition      of Assets: CBM Energy Inc.
654,000
-
654,000
Miscellaneous      expense
25,698
20,175
95,763
 

 

 

 

Loss      from operations
(1,376,298)
(146,485)
(3,804,692)
 

 

 

 

Other      income (expense):
          Interest income
1,205
-
2,272
          Earnings on investment
18,721
-
18,721
          Interest expense
(953)
-
(17,109)
Other      income (expense)
18,973
-
3,884
Loss      before income tax
(1,357,325)
(146,485)
(3,800,808)
Provision      for income tax
-
-
-
Net      loss
$      (1,357,325)
$      (146,485)
$      (3,800,808)
 

 

 

 

Basic      and diluted earnings per share
$      (0.09)
$      (0.01)
$      (0.41)
Weighted      shares outstanding
15,584,787
13,223,882
9,264,492** 

Seenotes to condensed financial statements.

4

PetrolOil and Gas, Inc.

(ADevelopment Stage Company)

CondensedStatement of Cash Flows

(Unaudited)

 ** Quarter      Ended march 31,March      3, 2000 (inception) to March 31, 2004 20042003
Operating      activities:
 

 

 

          Net loss
$      (1,357,325)
$      (703,245)
$      (3,800,808)
Adjustments      to reconcile net loss to cash used in operating activities-
 

 

 

          Depreciation
1,455
-
3,562
          Stock and options issued for services
496,800
486,870
1,987,670
          Stock issued in asset purchase: CBM
765,000
-
765,000
          Gain on investment net of fees
(14,300)
-
(14,300)
               Change in assets and liabilities-
Investment
 

 

 

          Accounts payable
22,802
20,590
201,492
          Accrued liabilities
(24,366)
-
6,950
          Due to officer
(47,500)
25,000
-
               Cash used in operating activities
(157,434)
(170,785)
(850,434)
Investing      activities:
 

 

 

Equipment      purchased
(1,382)
-
(31,523)
Investment
-
-
(200,000)
Additions      to oil & gas properties not subject to amortization
(803,693)
(142,995)
(1,953,307)
Cash      used in investing activities
(805,075)
(142,995)
(2,184,830)
Financing      activities:
 

 

 

          Stock issued for debt paid by stockholder of Company
-
21
6,476
          Payments made on note payable
(1,412)
-
(2,498)
          Notes payable
-
-
28,009
          Stock sold
-
475,596
3,099,194
               Cash provided from (used in) financing activities
(1,412)
475,617
3,131,181
 

 

 

 

Increase      (decrease) in cash
(963,921)
161,837
95,917
Beginning      cash
1,059,838
-
-
Ending      cash
$      95,917
$      161,837
$      95,917
 

 

 

 

Supplemental      cash flow information:
          Interest paid
$      953
$      --
$      17,109
          Income taxes paid
-
-
-
 

 

 

 

Non      cash financing activities:
 

 

 

 

          Stock issued for assets acquired
$      --
$      50,580
$      50,580
          Addition to oil & gas properties not subject to amortization and      accounts payable assumed in asset purchase
 

-
 

89,381
 

89,381
          Stock contributed to paid in capital
-
5,826
5,826
          Unamortized cost of stock issued for services
(1,000)
-
-
          Stock for services not issued
911
215
911
          Stock, warrants and options issued for services
-
107,500
1,260,870
          Stock issued on exercise of options for a note receivable
350,000
-
350,000** 

Seenotes to condensed financial statements.

5

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. These statementsshould be read in conjunction with the financial statements and footnotesthereto included in the Form 10-KSB for the year ended December 31, 2003.

 
**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. For us to continue as a going concern we must seekadditional sources of capital, and we must attain future profitable operations.We are currently initiating our business plan and are in the process of raisingadditional capital. The accompanying financial statements do not include anyadjustments that might be necessary should we be unable to continue as a goingconcern.

 
**Note3 - Stock Transactions**
 

OnJuly 2, 2003, the Company entered into a loan agreement with CPA DirectedInvestments (CDI). As part of the agreement the Company was required to issue1,000,000 shares of Company stock in CDI's name. The par value of the shares of$1,000 was recorded as common stock with an offsetting amount recorded as areduction of equity in the account-unamortized cost of stock issued forservices. The loan was repaid and the stock was returned and cancelled onJanuary 26, 2004.

 

OnDecember 1, 2003, the Company entered into a Geologist/Technical AdvisorConsulting Agreement with Mr. William Stoeckinger. The term of the agreement wasfor one year (amended to a thirteen month term) and among other items Mr.Stoeckinger received 20,000 shares of common stock per month for thirteen months(as amended in a subsequent agreement). The Company issued 20,000 shares ofstock to Mr. Stoeckinger for January 2004 with a value of $20,000. The expensewas recorded as professional and consulting fees expense. On March 12, 2004, Mr.Stoeckinger also received 160,000 shares of stock due to him that was recordedas stock for services not issued at December 31, 2003.

 

6
**PetrolOil & Gas, Inc.

NotesTo Condensed Financial Statements**
 

OnJanuary 15, 2004, the Company entered into an agreement with Mr. John Haas, Mr.Mark Hass and Mr. W.B. Mitchell, whereas the Company would be allowed access toapproximately 10,000 acres of leased mineral rights for the purpose ofexploring, and evaluating gas production for 6 months. Mr. John Haas agreed tojoin the Board of Directors of the Company. Mr. Mark Hass agreed to be a projectmanager and consultant for the Company. Mr. W.B. Mitchell agreed to provideconsulting support for lease/land acquisitions. Each of the three individualsreceived 600,000 stock warrants (1,800,000 total) to purchase shares at a priceof $1.20 per share; 400,000 stock warrants (1,200,000 total) to purchase sharesat a price of $1.50 per share; and 300,000 stock warrants (900,000 total) topurchase shares at a price of $2.00 per share. The warrants expire on July 15,2006. The value of the warrants, using the Black-Scholes pricing model is$420,700 and was recorded as professional and consulting fees expense.

 

OnJanuary 15, 2004, the Company agreed to issue 765,000 shares of stock to CBMEnergy, Inc, in exchange for oil and gas mineral leases covering approximately36,000 acres and title to approximately 10 existing wells. The value of thetransaction is $765,000, of which $31,000 of value was assigned to capitalizemineral leases based on the unamortized lease cost of each leased acre, $80,000of value was assigned to capitalize oil & gas costs based on the fair marketvalue of the test wells on the leased property, and the remaining $654,000 wasexpensed.

 

OnFebruary 9, 2004, the Company agreed to issue 10,000 shares of common stock toand granted Joseph Blankenship an option to purchase 50,000 shares at $2.50 pershare for the first 25,000 shares and $4.00 for the remaining 25,000 shares. Theoption was granted pursuant to the Research Agreement the Company entered intoon February 9, 2004. The term of the option is for two years. The value of thestock is $10,000 and the value of the options, using the Black-Scholes pricingmodel is $200 and were recorded as professional and consulting fees expense.

 

OnFebruary 18, 2004, the Company granted to CSC Group LLC a stock warrant givingCSC the right to purchase 200,000 shares of the Company's common stock. The termand exercise price of the warrant shares were: (i) 100,000 shares at $1.50 pershare for a term of two years; and (ii) 100,000 shares at $2.50 per share for aperiod of two years. The value of the warrants, using the Black-Scholes pricingmodel, was $7,400 and was recorded as a professional and consulting feesexpense.

 

OnMarch 1, 2004, the Company issued 100,000 stock options with an exercise priceof $1.25 per share and 200,000 stock options with an exercise price of $1.50 pershare to Mr. William Burk. Mr. Burk has performed consulting services for theCompany. The options expire in three years. The value of the options, using theBlack-Scholes pricing model, is $38,500 and was recorded as a professional andconsulting fees expense.

 

OnMarch 19, 2004, Larry Kehoe exercised 325,000 options at a price of $.50 pershare, Cody Felton exercised 325,000 options at a price of $.50 per share andRussell Frierson exercised 50,000 options at a price of $.50 per share. Theoptions were exercised with a note due the Company for the strike price. 50% ofthe stock was issued and 50% of the stock was issued and held as collateral forthe notes. The notes are demand notes and bear interest at a rate of 6%. Thetotal of the three notes is $350,000 and was recorded in the account notesreceivable from stockholders.

 

7
**PetrolOil & Gas, Inc.

NotesTo Condensed Financial Statements**
 

OnMarch 18, 2004, Mr. Branagan exercised 250,000 stock options at a price of $0.50per share. Mr. Branagan received 211,180 shares and the Company retained 38,820shares as payment of the exercise price based on the market value of the Company'sstock on the exercise date of $3.22 per share. As of March 31, 2004, the shareshad not been issued.

 
**Note 4- Note 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 was due on October 10, 2003.

 
**Note 5- Related Party Transactions

 **
TheCompany paid fees in the quarter-ended March 31, 2004 to the followingstockholders': CPA Directed Investments, totaling $4,421 for their management ofthe Company's investment; an entity owned by Mr. Branagan $9,000 for past rentof facilities owned by him; and Mr. Stoeckinger was paid $39,869 forprofessional fees.

 
**Note 6- Subsequent Events

 **
TheCompany entered into a lease for office space on April 2, 2004. The term of thelease is 39 months and the monthly rent is $3,448.40.

 
**8

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., formerly named Euro Technology Outfitters, was incorporatedin Nevada on March 3, 2000. We are an oil and gas exploration and developmentcompany. Our primary business objective is to produce economic quantities ofnatural gas from buried coal seams, denoted as CBM.

 

Wehave yet to generate revenues from any source and there is a substantial goingconcern issue as to whether we will ever be able to commercialize our oil andnatural gas production and generate sufficient, if any, revenues to satisfy ourworking capital requirements. Since inception, we have been dependent on thesale of our equity securities and loans from affiliates to satisfy our workingcapital requirements. We continue to have a working capital deficiency thatraises substantial concern regarding our ability to continue as a going concern.

 
**Planof Operation**
 

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 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 Joint Venture (JV) or Working Interest (WI) partners thatwill contribute to the costs of drilling and completion and then share inrevenues derived from production. This economic strategy may allow us to utilizeour own financial assets toward the growth of our leased acreage holdings,pursue the acquisition of strategic oil and gas producing companies andgenerally expand our existing operations.

 

Becauseof our limited operating history we have yet to generate revenues from the saleof oil or natural gas. Our activities have been limited to the negotiation of WIagreements, mineral lease acquisition and preliminary analysis of reserves andproduction capabilities from our exploratory test wells. Consequently, we haveincurred the expenses of start-up.

 

9

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. There can be noassurance that we will be successful in any of these respects, that the pricesof oil and gas prevailing at the time of production will be at a level allowingfor profitable production, or that we will be able to obtain additional fundingto increase our currently limited capital resources.

 

In2003 we anticipated the need for at least $5,000,000, which was the maximumproceeds we were attempting to raise through our registered offering. We raised$2,350,473 as of the closing date of the offering. The additional funds neededmay be raised through equity financing, debt financing, or other sources, whichmay result in further dilution in the equity ownership of our stockholders.There is still no assurance that even with the funds from subsequent financings,if needed, we will be able to maintain operations at a level sufficient for aninvestor to obtain a return on their investment in our common stock. Thus we arefocusing our attention toward WI partners to assist in funding the developmentof our mineral leases. Nevertheless, we may continue to be unprofitable for anindefinite period of time.

 

Weare unable to provide an accurate breakdown to the use of funds to be receivedfrom any future private placement, or equity investments, as the usage will besolely based upon the outcome of our initial exploration and developmentprogram. We have anticipated the need to hire additional staff, continuedevelopment and refinement of our operations to meet customer needs and provideadditional working capital for our operations. Support for growth of our fieldpersonal and operational activities will be partially derived from funding fromWI partners.

 

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. Weanticipate utilizing our stock and stock options, where possible, to hire newpersonnel and consultants.

 

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 us which includes a statement describing our going concern status.This means there is substantial doubt about our ability to continue as a goingconcern. While we believe we have made good faith estimates of our ability tosecure 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.
** 

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.

 

10

Fieldexploration and development operations began in August 2002, with the drillingand logging of three test wells. Each exploratory/test well is located on aseparate mineral lease in the southwest portion of Coffey County. These drillsites were selected based on a variety of factors, including informationgathered from historic records and drill logs (depth, and thickness of coalseams and the results of electric gamma ray readings), proximity to existinginterstate distribution pipelines, ease of access for drilling equipment thepresence of oil and natural gas in the immediate vicinity, and consultationswith our geologist and driller. Since these are considered to be exploratory ortest wells they have only been partially completed in order to allow us toinvestigate the production capacity of selected coal intervals, and to obtainimportant technical information related to stimulation activities that arealmost always required to make CBM wells commercially productive. Thus we do notpresently have any estimates of oil and gas reserves on these properties.Consequently we have not reported our reserve estimates to any state, or federalauthority.

 

Duringthis exploration and development phase of our plan of operation we expect todrill, test and complete about 12 CBM producing wells on our leases in Kansasand Missouri. These drilling and testing efforts will also allow us to determinewhether there are other forms of commercially producible hydrocarbons present,such as oil or other types of natural gas. Each well will be drilled and testedindividually. If commercially producible amounts of gas are present, the wellwill be fully completed and a local distribution pipeline installed. Completedwells that are producing and connected to distribution pipelines will begingenerating revenues as soon as they begin pumping although these revenues may berealized on a quarterly basis.

 

Oncewe have identified a proposed drilling site, we as a licensed operators in theState of Kansas and Missouri, will be engaged in all aspects of well siteoperations. As the operator we will be responsible for permitting the well,which will include obtaining permission from the Kansas Oil and Gas commissionor Missouri relative to spacing requirements and any other state and federalenvironmental clearances required at the time that the permitting processcommences. Additionally, we will formulate and deliver to all interest owners anoperating agreement establishing each participant's rights and obligations inthat particular well based on the location of the well and the ownership. Inaddition to the permitting process, we as the operator will be responsible forhiring the driller, geologist and land men to make final decisions relative tothe zones to be targeted, confirming that we have good title to each leasedparcel covered by the spacing permit and to actual drill the well to the targetzones. Should the well be successful, we will be responsible for completing thewell and connecting it to the most appropriate transmission facility for thehydrocarbons produced.

 

Asthe operator we will be the caretaker of the well once production has commenced.We have no formal experience in well operations and will have to hire or retainprofessionals 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.

 

11

Wehad a one-year consulting agreement with Mr. William Stoeckinger, a CertifiedPetroleum Geologist, from Bartlesville, Oklahoma. Mr. Stoeckinger providedgeological services both in the assessment process and in the developmentprogram. On January 31, 2004, the term of the agreement expired, however Mr.Stoeckinger continues to provide geologic consulting services on an as neededbasis.

 

OnJanuary 15, 2004, we completed the acquisition of certain oil and gas mineralleases from CBM Energy Inc. in and around Franklin, Coffey, Woodson, Lyon andGreenwood Counties, Kansas, amounting to approximately 36,000 acres in exchangefor 765,000 shares of our unregistered restricted common stock.

 

OnJanuary 15, 2004, we executed an agreement with John Haas, Mark Haas and W.B.Mitchell, wherein they agreed to grant us access to 10,000 acres of leasedmineral rights. Pursuant to the agreement we received access to the acreage forthe purpose of evaluating and exploring for CBM gas production.

 

KansasGeologic Society (KGS) has joined us in our scientific effort designed to assessthe gas reserves from our CBM wells in eastern Kansas. KGS took samples from thecoal beds of our wells in Coffey County, Kansas, and reported that their resultsindicated good to excellent gas content.

 

Basedon our first series of exploratory/test wells we anticipate that each well inour targeted area will cost approximately $30,000 to locate, drill and test, anadditional $80,000 to complete, plus an additional $350 per month per well topay for electricity, pulling and repairs, pumping and other miscellaneouscharges. In support of these operations we have working agreements with localthird parties to monitor and maintain our wells and perform drilling andwork-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 Southern Star, 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 distribution 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 from the Company at marketprices. To date, we have not entered into any purchase agreements nor have wereceived assurances from anyone that they will enter into such agreements withus in the future.

 

12

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 its 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 proximity ofseveral major distribution pipelines to our leased properties, plus our intentto drill as close to these pipelines as practicable, we anticipate that thetotal cost of installing a distribution infrastructure for a group of about 50producing wells will be approximately $6,500 each plus a one-time expense of$5,000 per well to tap into the high pressure interstate pipeline and support acompressor and monitoring system.

 

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 it produces, 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. The level of our capitalexpenditures will vary in future periods depending on energy market conditionsand other related economic factors.
** 

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 and JV or WI partnerships. We do not anticipate enough positiveinternal operating cash flow until such time as we can generate substantialrevenues, which may take the next few years to fully realize. In the event wecannot obtain the necessary capital to pursue our strategic plan, we may have tocease or significantly curtail our operations. This would materially impact ourability to continue operations.

 

Throughour registered offering (declared effective by the SEC on July 29, 2003) wesuccessfully raised approximately $2,350,473. As of March 31, 2004, our cashbalance was approximately $95,917 of the net proceeds. We anticipate theremaining funds will satisfy our working capital for the next 2 to 3 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 sales or development fees, and will be requiredto obtain additional financing to fund operations through common stock offeringsand bank borrowings to the extent necessary to provide working capital.

 

13

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. No assurance can be made that such financing would beavailable, and if available it may take either the form of debt or equity. Ineither case, the financing could have a negative impact on our financialcondition and our Stockholders.

 

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 the oil and gas exploration industry.Such risks include, but are not limited to, an evolving and unpredictablebusiness model and the management of growth. To address these risks we must,among other things, implement and successfully execute our business andmarketing strategy, continue to develop and upgrade technology and products,respond to competitive developments, and attract, retain and motivate qualifiedpersonnel. There can be no assurance that we will be successful in addressingsuch risks, and the failure to do so can have a material adverse effect on ourbusiness 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. There lease paymentsare material obligations to us and our lease holdings are our biggest asset.

 

Asof March 31, 2004, we had assets of $310,217, and $323,334 in liabilities (totalcurrent liabilities of $301,823). Resulting in a stockholder's equity of$2,458,112.

 
**Off-BalanceSheet Arrangements**
 

Wedo not have any off-balance sheet arrangements that have or are reasonablylikely to have a current or future effect on our financial condition, changes infinancial condition, revenues or expenses, results or operations, liquidity,capital expenditures or capital resources that is material to investors.

 
***Weare a development stage company, recently organized and have minimal operatinghistory, which raises substantial doubt as to our ability to successfullydevelop profitable business operations.

 ***
Wehave a limited operating history. Our prospects must be considered in light ofthe risks, expenses and difficulties frequently encountered in establishing abusiness in the oil and natural gas industries. As a result of our recentacquisition of mineral leases we have yet to generate revenues from operationsand have been focused on organizational, start-up, market analysis, exploratorydrilling and fund raising activities. There is nothing at this time on which tobase an assumption that our business operations will prove to be successful orthat we will ever be able to operate profitably. Our future operating resultswill depend on many factors, including:

14
-  our    ability to raise adequate working capital;success    of our development and exploration;demand    for natural gas and oil;the    level of our competition;our    ability to attract and maintain key management and employees; andour    ability to efficiently explore, develop and produce sufficient quantities of    marketable natural gas or oil in a highly competitive and speculative    environment while maintaining quality and controlling costs.
Toachieve profitable operations, we must, alone or with others, successfullyexecute on the factors stated above, along with continually developing ways toenhance our production efforts, when commenced. Despite our best efforts we maynot be successful in our development efforts or obtain required regulatoryapprovals. There is a possibility that some, or all, of our wells may neverproduce natural gas or oil. Since inception, we have incurred a net loss of$(3,800,808) and at March 31, 2004 our assets exceeded our liabilities by$2,458,112.

 
***Atthis stage of our business operations, even with our good faith efforts,potential investors have a high probability of losing their investment.***
 

Becausethe nature of our business is expected to change as a result of shifts in themarket price of oil and natural gas, competition, and the development of new andimproved technology, management forecasts are not necessarily indicative offuture operations and should not be relied upon as an indication of futureperformance.

 

WhileManagement believes its estimates of projected occurrences and events are withinthe timetable of its business plan, our actual results may differ substantiallyfrom those that are currently anticipated.

 
***Becauseour common stock is deemed a low-priced "Penny" stock, an investmentin our common stock should be considered high risk and subject to marketabilityrestrictions.

 ***
Sinceour common stock is a penny stock, as defined in Rule 3a51-1 under theSecurities Exchange Act, it will be more difficult for investors to liquidatetheir investment even if and when a market develops for the common stock. Untilthe trading price of the common stock rises above $5.00 per share, if ever,trading in the common stock is subject to the penny stock rules of theSecurities Exchange Act specified in rules 15g-1 through 15g-10. Those rulesrequire broker-dealers, before effecting transactions in any penny stock, to:
-  Deliver    to the customer, and obtain a written receipt for, a disclosure document;Disclose    certain price information about the stock;Disclose    the amount of compensation received by the broker-dealer or any associated    person of the broker-dealer;Send    monthly statements to customers with market and price information about the    penny stock; andIn    some circumstances, approve the purchaser's account under certain standards    and deliver written statements to the customer with information specified in    the rules.
15

Consequently,the penny stock rules may restrict the ability or willingness of broker-dealersto sell the common stock and may affect the ability of holders to sell theircommon stock in the secondary market and the price at which such holders cansell any such securities. These additional procedures could also limit ourability to raise additional capital in the future.
* 
**Wemay incur substantial write-downs of the carrying value of our gas and oilproperties, which would adversely impact our earnings.***
 

Weintend to periodically review the carrying value of our gas and oil propertiesunder the full cost accounting rules of the Securities and Exchange Commission.Under these rules, capitalized costs of proved gas and oil properties may notexceed the present value of estimated future net revenues from proved reserves,discounted at an annual rate of 10%. Application of this "ceiling"test requires pricing future revenue at the un-escalated prices in effect as ofthe end of each fiscal quarter and requires a write-down for accounting purposesif the ceiling is exceeded, even if prices were depressed for only a shortperiod of time. We may be required to write down the carrying value of our gasand oil properties when natural gas and oil prices are depressed or unusuallyvolatile, which would result in a charge against our earnings. Once incurred, awrite-down of the carrying value of our natural gas and oil properties is notreversible at a later date.

 
***Competitionin our industry is intense. We are very small and have an extremely limitedoperating history as compared to the vast majority of our competitors, and wemay not be able to compete effectively.***
 

Weintend to compete with major and independent natural gas and oil companies forproperty acquisitions. We will also compete for the equipment and labor requiredto operate and to develop natural gas and oil properties. The majority of ouranticipated competitors have substantially greater financial and other resourcesthan we do. In addition, larger competitors may be able to absorb the burden ofany changes in federal, state and local laws and regulations more easily than wecan, which would adversely affect our competitive position. These competitorsmay be able to pay more for natural gas and oil properties and may be able todefine, evaluate, bid for and acquire a greater number of properties than wecan. Our ability to acquire additional properties and develop new and existingproperties in the future will depend on our ability to conduct operations, toevaluate and select suitable properties and to consummate transactions in thishighly competitive environment. In addition, some of our competitors have beenoperating in our core areas for a much longer time than we have and havedemonstrated the ability to operate through industry cycles.

 
***Wewill need additional capital in the future to finance our planned growth, whichwe may not be able to raise or it may only be available on terms unfavorable tous or our stockholders, which may result in our inability to fund our workingcapital requirements and harm our operational results.***
 

Wehave and expect to continue to have substantial capital expenditure and workingcapital needs. We believe that current cash on hand and the other sources ofliquidity are only sufficient enough to fund our operations through July 31,2004. After that time we will need to raise additional funds to fund ouroperations, to fund our anticipated reserve replacement needs and implement ourgrowth strategy, or to respond to competitive pressures and/or perceivedopportunities, such as investment, acquisition, exploration and developmentactivities.

 

16

Iflow natural gas and oil prices, operating difficulties or other factors, many ofwhich are beyond our control, cause our revenues or cash flows from operations,if any, to decrease, we may be limited in our ability to spend the capitalnecessary to complete our development, exploitation and exploration programs. Ifour resources or cash flows do not rapidly commence, we will require additionalfinancing, in addition to anticipated cash generated from our operations, tofund our planned growth. Additional financing might not be available on termsfavorable to us, or at all. If adequate funds were not available or were notavailable on acceptable terms, our ability to fund our operations, takeadvantage of unanticipated opportunities, develop or enhance our business orotherwise respond to competitive pressures would be significantly limited. Insuch a capital restricted situation, we may curtail our acquisition, drilling,development, and exploration activities or be forced to sell some of our assetson an untimely or unfavorable basis.

 

Ifwe raise additional funds through the issuance of equity or convertible debtsecurities, the percentage ownership of our stockholders would be reduced, andthese newly issued securities might have rights, preferences or privilegessenior to those of existing stockholders.

 
***Weare highly dependent on Paul Branagan, our CEO, president and chairman. The lossof Mr. Branagan, whose knowledge, leadership and technical expertise upon whichwe rely, would harm our ability to execute our business plan.

 

Oursuccess depends heavily upon the continued contributions of Paul Branagan, whoseknowledge, leadership and technical expertise would be difficult to replace, andon our ability to retain and attract experienced engineers, geoscientists andother technical and professional staff. We have entered into an employmentagreement with Mr. Branagan; however, maintain no key person insurance on Mr.Branagan. In addition, Mr. Branagan is an officer and director of another publiccompany, which may impact the amount of his time spent on our business matters.If we were to lose his services, our ability to execute our business plan wouldbe harmed and we may be forced to cease operations until such time as we couldhire suitable replacement for Mr. Branagan.
* 
**Futuresales of our common stock may result in a decrease in the market price of ourcommon stock, even if our business is doing well.***
 

Themarket price of our common stock could drop due to sales of a large number ofshares of our common stock in the market or the perception that such sales couldoccur. This could make it more difficult to raise funds through future offeringsof common stock.

 
***Ourmanagement, officers and directors have no previous oil and gas experience,therefore investors should not rely on our management, officers or directors asbeing experts in the area of oil and gas exploration and production, which isour business focus.***
 

Ourmanagement, officers and directors have no previous oil and gas experience. Allbusiness decisions made by them regarding oil and gas exploration and productionwill be in reliance on the advice of others due to this lack of experience. Ifreliable advice is not available, it is unlikely our business will succeed.
*** ***
17
***Gasand Oil prices are volatile. This volatility may occur in the future, causingmaterial adverse effects to our business.***
 

Ourfuture revenues, profitability, future growth and the carrying value of ourproperties is anticipated to depend substantially on the prices we may realizefor our natural gas and oil production. Our realized prices may also affect theamount of cash flow available for capital expenditures and our ability to borrowand raise additional capital.

 

Naturalgas and oil prices are subject to wide fluctuations in response to relativelyminor changes in or perceptions regarding supply and demand. Historically, themarkets for natural gas and oil have been volatile, and they are likely tocontinue to be volatile in the future. For example, natural gas and oil pricesdeclined significantly in late 1998 and 1999 and, for an extended period oftime, remained substantially below prices obtained in previous years. Among thefactors that can cause this volatility are:
-  worldwide    or regional demand for energy, which is affected by economic conditions;the    domestic and foreign supply of natural gas and oil;weather    conditions;domestic    and foreign governmental regulations;political    conditions in natural gas and oil producing regions;the    ability of members of the Organization of Petroleum Exporting Countries to    agree upon and maintain oil prices and production levels; andthe    price and availability of other fuels.
Itis impossible to predict natural gas and oil price movements with certainty.Lower natural gas and oil prices may not only decrease our future revenues on aper unit basis but also may reduce the amount of natural gas and oil that we canproduce economically. A substantial or extended decline in natural gas and oilprices may materially and adversely affect our future business enough to forceus to cease our business operations. In addition, our financial condition,results of operations, liquidity and ability to finance planned capitalexpenditures will also suffer in such a price decline. Further, natural gas andoil prices do not necessarily move together.

 
***Wemay be unable to replace our reserves, when established, on terms satisfactoryto us. If we cannot replace our reserves as we deplete them, it could prevent usfrom continuing our business strategy and could reduce our cash flow andrevenues.***
 

Ournatural gas and oil reserves, when and if established, are anticipated todecline as we commence production of natural gas and oil. Our business strategywill require us to replace our reserves through acquisitions of proved naturalgas and oil properties, further development of our existing properties,development of new properties and exploration activities. Properties may not beavailable for acquisition in the future on terms we find attractive. Asubstantial decrease in the availability of proved natural gas and oilproperties in our areas of operation, or a substantial increase in their cost,would adversely affect our ability to replace our reserves as they are depleted,which may force us to temporarily cease our operations while we try to rectifythese potential problems. In addition, our exploration and developmentactivities may not be successful. If we fail to replace reserves, our level ofproduction and cash flows will decline, which may cause us to cease our businessoperations until such time as we can efficiently replace reserves.

 

18
***Drillingwells is speculative, often involving significant costs that may be more thanour estimates, and may not result in any addition to our production or reserves.Any material inaccuracies in drilling costs, estimates or underlying assumptionswill materially affect our business.***
 

Developingand exploring for natural gas and oil involves a high degree of operational andfinancial risk, which precludes definitive statements as to the time requiredand costs involved in reaching certain objectives. The budgeted costs ofdrilling, completing and operating wells are often exceeded and can increasesignificantly when drilling costs rise due to a tightening in the supply ofvarious types of oilfield equipment and related services. Drilling may beunsuccessful for many reasons, including title problems, weather, cost overruns,equipment shortages and mechanical difficulties. Moreover, the successfuldrilling of a natural gas or oil well does not ensure a profit on investment.Exploratory wells bear a much greater risk of loss than development wells. Avariety of factors, both geological and market-related, can cause a well tobecome uneconomical or only marginally economic. In addition to their cost,unsuccessful wells can hurt our efforts to replace reserves, when and ifestablished. We have recently begun drilling operations and have drilled only 3exploratory wells. Our initial drilling and development sites, and any potentialadditional sites that may be developed, require significant additionalexploration and development, regulatory approval and commitments of resourcesprior to commercial development. Any success that we may have with these wellsor any future drilling operations will most likely not be indicative of ourcurrent or future drilling success rate, particularly, because we intend toemphasize on exploratory drilling. If our actual drilling and development costsare significantly more than our estimated costs, we may not be able to continueour business operations as proposed and would be forced to modify our plan ofoperation.

 

Developmentof our reserves, when and if established, may not occur as scheduled and theactual results may not be as anticipated. Drilling activity may result indownward adjustments in reserves or higher than anticipated costs. Our estimateswill be based on various assumptions, including assumptions required by theSecurities and Exchange Commission relating to natural gas and oil prices,drilling and operating expenses, capital expenditures, taxes and availability offunds. The process of estimating our natural gas and oil reserves is anticipatedto be extremely complex, and will require significant decisions and assumptionsin the evaluation of available geological, geophysical, engineering and economicdata for each reservoir. Due to our inexperience in the oil and gas industry andrecent start-up nature, our estimates may not be reliable enough to allow us tobe successful in our intended business operations. Our actual production,revenues, taxes, development expenditures and operating expenses will likelyvary from those anticipated. These variances may be material.
*** 

Thenatural gas and oil business involves numerous uncertainties and operating risksthat can prevent us from realizing profits and can cause substantial losses.***
 

Ourdevelopment, exploitation and exploration activities may be unsuccessful formany reasons, including weather, cost overruns, equipment shortages andmechanical difficulties. Moreover, the successful drilling of a natural gas andoil well does not ensure a profit on investment. A variety of factors, bothgeological and market-related, can cause a well to become uneconomical or onlymarginally economic. In addition to their cost, unsuccessful wells can hurt ourefforts to replace reserves.

 

19

Thenatural gas and oil business involves a variety of operating risks, including:
-  fires;explosions;blow-outs    and surface cratering;uncontrollable    flows of oil, natural gas, and formation water;natural    disasters, such as hurricanes and other adverse weather conditions;pipe,    cement, or pipeline failures;casing    collapses;embedded    oil field drilling and service tools;abnormally    pressured formations; andenvironmental    hazards, such as natural gas leaks, oil spills, pipeline ruptures and    discharges of toxic gases.
Ifwe experience any of these problems, it could affect well bores, gatheringsystems and processing facilities, which could adversely affect our ability toconduct operations. We could also incur substantial losses as a result of:
-  injury    or loss of life;severe    damage to and destruction of property, natural resources and equipment;pollution    and other environmental damage;clean-up    responsibilities;regulatory    investigation and penalties;suspension    of our operations; andrepairs    to resume operations.
Becausewe intend to use third-party drilling contractors to drill our wells, we may notrealize the full benefit of worker compensation laws in dealing with theiremployees. Our insurance does not protect us against all operational risks. Wedo not carry business interruption insurance at levels that would provide enoughfunds for us to continue operating without access to other funds. For somerisks, we may not obtain insurance if we believe the cost of available insuranceis excessive relative to the risks presented. In addition, pollution andenvironmental risks generally are not fully insurable. If a significant accidentor other event occurs and is not fully covered by insurance, it could impact ouroperations enough to force us to cease our operations.

 
***Theunavailability or high cost of drilling rigs, equipment, supplies, personnel andother services could adversely affect our ability to execute on a timely basisour development, exploitation and exploration plans within our budget.***
 

Shortagesor an increase in cost of drilling rigs, equipment, supplies or personnel coulddelay or interrupt our operations, which could impact our financial conditionand results of operations. Drilling activity in the geographic areas in which weconduct drilling activities may increase, which would lead to increases inassociated costs, including those related to drilling rigs, equipment, suppliesand personnel and the services and products of other vendors to the industry.Increased drilling activity in these areas may also decrease the availability ofrigs. We do not have any contracts with providers of drilling rigs and we cannotassure you that drilling rigs will be readily available when we need them.Drilling and other costs may increase further and necessary equipment andservices may not be available to us at economical prices.

 

20
***Weare subject to complex laws and regulations, including environmentalregulations, which can adversely affect the cost, manner or feasibility of doingbusiness.***
 

Development,production and sale of natural gas and oil in the United States are subject toextensive laws and regulations, including environmental laws and regulations. Wemay be required to make large expenditures to comply with environmental andother governmental regulations. Matters subject to regulation include:
-  location    and density of wells;the    handling of drilling fluids and obtaining discharge permits for drilling    operations;accounting    for and payment of royalties on production from state, federal and Indian    lands;bonds    for ownership, development and production of natural gas and oil properties;transportation    of natural gas and oil by pipelines;operation    of wells and reports concerning operations; andtaxation.
Underthese laws and regulations, we could be liable for personal injuries, propertydamage, oil spills, discharge of hazardous materials, remediation and clean-upcosts and other environmental damages. Failure to comply with these laws andregulations also may result in the suspension or termination of our operationsand subject us to administrative, civil and criminal penalties. Moreover, theselaws and regulations could change in ways that substantially increase our costs.Accordingly, any of these liabilities, penalties, suspensions, terminations orregulatory changes could materially adversely affect our financial condition andresults of operations enough to possibly force us to cease our businessoperations.
** 
*Ouroil and gas operations may expose us to environmental liabilities.***
 

Anyleakage of crude oil and/or gas from the subsurface portions of our wells, ourgathering system or our storage facilities could cause degradation of freshgroundwater resources, as well as surface damage, potentially resulting insuspension of operation of the wells, fines and penalties from governmentalagencies, expenditures for remediation of the affected resource, and liabilitiesto third parties for property damages and personal injuries. In addition, anysale of residual crude oil collected as part of the drilling and recoveryprocess could impose liability on us if the entity to which the oil wastransferred fails to manage the material in accordance with applicableenvironmental health and safety laws.
** 
*Ourlease ownership may be diluted due to financing strategies we may employ in thefuture due to our lack of capital.*
 **
Toaccelerate our development efforts we plan to take on working interest partnersthat will contribute to the costs of drilling and completion and then share inrevenues derived from production. In addition, we may in the future, due to alack of capital or other strategic reasons, establish joint venture partnershipsor farm out all or part of our development efforts. These economic strategiesmay have a dilutive effect on our lease ownership and will more than likelyreduce our operating revenues.

 

21
**Personnel**
 

Wecurrently have two full time employees and two part time employees. As drillingproduction activities commence, we intend to hire additional technical,operational and administrative personnel as appropriate. We do not expect asignificant change in the number of full time employees over the next 12 months.We intend to use the services of independent consultants and contractors toperform various professional services, particularly in the area of landservices, drilling, water hauling, pipeline construction, well design, well-sitemonitoring and surveillance, permitting and environmental assessment. We believethat this use of third-party service providers may enhance our ability tocontain general and administrative expenses.

 
**GoingConcern

 **
Thefinancial statements included in this filing have been prepared in conformitywith generally accepted accounting principles that contemplate the continuanceof the Company as a going concern. The Company's cash position may be inadequateto pay all of the costs associated with testing, production and marketing ofproducts. Management intends to use borrowings and security sales to mitigatethe effects of its cash position, however no assurance can be given that debt orequity financing, if and when required will be available. The financialstatements do not include any adjustments relating to the recoverability andclassification of recorded assets and classification of liabilities that mightbe necessary should the Company be unable to continue existence.
** 

Item3. Controls and Procedures

 **
Wemaintain disclosure controls and procedures designed to ensure that informationrequired to be disclosed in reports filed under the Securities Exchange Act of1934, as amended, is recorded, processed, summarized and reported within thespecified time periods.  As of the end of the period covered by thisreport, our Chief Executive Officer and Chief Financial Officer evaluated theeffectiveness of our disclosure controls and procedures.  Based on theevaluation, which disclosed no significant deficiencies or material weaknesses,our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective.  There were no changes inour internal control over financial reporting that occurred during our mostrecent fiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

22
**PARTII--OTHER INFORMATION

 

Item 1.Legal Proceedings

 **
None

 
**Item 2.Changes in Securities

 **
OnJuly 2, 2003, we entered into a loan agreement with CPA Directed Investments (CDI).As part of the agreement we were required to issue 1,000,000 shares of Companystock in CDI's name. The loan was repaid and the stock was returned andcancelled on January 26, 2004.

 

Pursuantto a one-year geologist/technical advisor consulting agreement we entered intowith William Stoeckinger on December 19, 2002, we issued a total of 180,000shares of common stock to him in March 6, 2004 for services; 160,000 were due,but not issued at December 31, 2003 and 20,000 were for January 2004. We believethat the issuance of the shares was exempt from the registration and prospectusdelivery requirements of the Securities Act of 1933 by virtue of Section 4(2).The shares were issued directly by us and did not involve a public offering orgeneral solicitation. The recipient of the shares occupied a privileged positionwith our company, due to its preexisting relationship with our president, thatafforded them an opportunity for effective access to files and records of ourcompany that contained the relevant information needed to make their investmentdecision, including our financial statements and 34 Act reports. We reasonablybelieved that the recipient, immediately prior to issuing the shares, had suchknowledge and experience in our financial and business matters that they werecapable of evaluating the merits and risks of their investment. The recipient'shad the opportunity to speak with our president and directors on severaloccasions prior to their investment decision.

 

OnJanuary 15, 2004, we issued 765,000 shares of stock to CBM Energy, Inc inexchange for oil and gas mineral leases covering approximately 36,000 acres andtitle to approximately 10 existing wells. We believe that the issuance of theshares was exempt from the registration and prospectus delivery requirements ofthe Securities Act of 1933 by virtue of Section 4(2). The shares were issueddirectly by us and did not involve a public offering or general solicitation.The recipient of the shares occupied a privileged position with our company, dueto its preexisting relationship with our president, that afforded them anopportunity for effective access to files and records of our company thatcontained the relevant information needed to make their investment decision,including our financial statements and 34 Act reports. We reasonably believedthat the recipient, immediately prior to issuing the shares, had such knowledgeand experience in our financial and business matters that they were capable ofevaluating the merits and risks of their investment. The recipient's managementhad the opportunity to speak with our president and directors on severaloccasions prior to their investment decision.

 

Issuancesof Stock Options and Warrants

 

OnJanuary 15, 2004, we entered into an agreement with Mr. John Haas, Mr. Mark Hassand Mr. W.B. Mitchell whereas we would be allowed access to approximately 10,000acres of leased mineral rights for the purpose of exploring, and evaluating gasproduction for 6 months. Each of the three individuals received 600,000 stockwarrants (1,800,000 total) to purchase shares at a price of $1.20 per share;400,000 stock warrants (1,200,000 total) to purchase shares at a price of $1.50per share; and 300,000 stock warrants (900,000 total) to purchase shares at aprice of $2.00 per share. The warrants expire on July 15, 2006. We believe thatthe issuances of the warrants were exempt from the registration and prospectusdelivery requirements of the Securities Act of 1933 by virtue of Section 4(2).

 

23

OnFebruary 9, 2004, we agreed to issue 10,000 shares of common stock to andgranted Joseph Blankenship an option to purchase 50,000 shares at $2.50 pershare for the first 25,000 shares and $4.00 for the remaining 25,000 shares. Theoption was granted pursuant to the Research Agreement we entered into onFebruary 9, 2004. The term of the option is for two years.

 

OnFebruary 18, 2004, we granted to CSC Group LLC a stock warrant giving CSC theright to purchase 200,000 shares of our common stock. The term and exerciseprice of the warrant shares is: (i) 100,000 shares at $1.50 per share for aperiod of two years; and (ii) 100,000 shares at $2.50 per share for a period oftwo years.

 

OnMarch 1, 2004 we issued 100,000 stock options with an exercise price of $1.25per share and 200,000 stock options with an exercise price of $1.50 per share toMr. William Burk. Mr. Burk has performed consulting services for the Company.The options expire in three years.

 

OnMarch 18, 2004, Mr. Branagan exercised 250,000 stock options at a price of $0.50per share. Mr. Branagan received 211,180 shares and the Company retained 38,820shares as payment of the exercise price based on the market value of the Company'sstock on the exercise date of $3.22 per share. As of March 31, 2004, theseshares have not been issued.

 

OnMarch 19, 2004, Larry Kehoe exercised 325,000 options at a price of $.50 pershare, Cody Felton exercised 325,000 options at a price of $.50 per share andRussell Frierson exercised 50,000 options at a price of $.50 per share. Theoptions were exercised with a note due to the Company for the strike price. 50%of the stock will be issued and 50% of the stock will be issued and held ascollateral for the notes. As of March 31, 2004, the shares have not been issued.

 

SubsequentEvents

 

InApril 2004, we filed a post-effective amendment to our SB-2 RegistrationStatement to deregister the 2,649,527 shares which remained unsold at thetermination of the offering.

 

**Useof Proceeds from 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 terminated in December 2003. We sold2,350,473 shares of common stock, which resulted in $2,350,473 of proceeds tothe Company with no commissions paid on funds raised.

 

24

Weincurred offering expenses of approximately $64,375 in connection with theoffering. Thus the net offering proceeds to us (after deducting offeringexpenses) were approximately $2,286,098. No offering expenses were paid directlyor indirectly to any of our directors or officers (or their associates), personsowning ten percent (10%) or more of any class of our equity securities or to anyother affiliates.

 

Asof December 31, 2003, approximately $1,227,000 of the net proceeds had beenused, leaving approximately $1,059,000 of the proceeds for future use. As ofMarch 31, 2004, approximately $964,000 of the remaining net proceeds had beenused. During the quarter, approximately $1,412 was used to repay short-termdebt, approximately $157,978 was used as general working capital andapproximately $803,693 was used for our drilling and development program. As ofMarch 31, 2004, the remaining net proceeds (approximately $95,000) remain in ouroperating account pending future use.

 

Exceptfor prior payments to David Polay, our CFO, and salaries paid to officers aspart of our working capital, no offering proceeds were paid directly orindirectly to any of our directors or officers (or their associates), personsowning ten percent (10%) or more of any class of our equity securities or to anyother affiliates.

 

InApril 2004, we filed a post-effective amendment to the Registration Statement toderegister the 2,649,527 shares which remained unsold at the termination of theoffering.

 
**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
* 

CBMEnergy Inc. Agreement***
 

OnJanuary 15, 2004 we completed the acquisition of certain oil and gas mineralleases ("Leases") from CBM Energy Inc. in and around Franklin, Coffey,Woodson, Lyon and Greenwood Counties, Kansas (the "Prospect Area"),amounting to approximately 36,000 acres in exchange for 765,000 shares of ourunregistered restricted common stock. The agreement was attached as an exhibitto Form 10-KSB filed on April 15, 2004.

 

OnApril 23, 2004, we issued a press release announcing testing of one of our newlyacquired wells from CBM Energy Inc. A copy of the press release was attached asan exhibit to Form 8-K filed on April 28, 2004.

 
***JohnHaas, Mark Haas and W.B. Mitchell Agreement

 

OnJanuary 15, 2004, we executed an agreement with John Haas, Mark Haas and W.B.Mitchell. John Haas, Mark Haas, and W.B. Mitchell agreed to grant us access to10,000 acres of leased mineral rights. Pursuant to the agreement we receivedaccess to the acreage for the purpose of evaluating and exploring for CBM gasproduction. In exchange for the opportunity to explore and evaluate the acreagefor purposes of future gas exploration, we issued warrants to John Haas, MarkHaas, and W.B. Mitchell as follows:

25
-  600,000    warrants to purchase restricted common shares at $1.20 per share for a    period of 2.5 years (for a collective total of 1,800,000 shares)400,000    warrants to purchase restricted common shares at $1.50 per share for a    period of 2.5 years (for a collective total of 1,200,000 shares)300,000    warrants to purchase restricted common shares at $2.00 per share for a    period of 3 years (for a collective total of 900,000 shares)
Theagreement terminates on or about July 15, 2004; however is subject to 6 monthextensions. The agreement was attached as an exhibit to Form 10-KSB filed onApril 15, 2004.

 
***ResearchAgreement***
 

OnFebruary 9, 2004, we entered into a Research Agreement with Joseph E.Blankenship (the "Analyst") for purposes of providing analysis andresearch, valuation and investment opinions on common stocks, preferred stocks,debt instruments, convertible debentures and/or other corporate securities. Workproduct from the Analyst will consist of "Research Reports" which aredisseminated to individual and institutional investors as well as researchdistributors.

 

Forthe Scope of Work outlined above, we agreed to pay Source Capital, abroker-dealer Mr. Blankenship is employed by, an amount of $6,000. We alsoissued Mr. Blankenship 10,000 shares of our $0.001 par value restricted commonstock and granted an option to purchase a total of 50,000 shares. The optionincludes 25,000 shares at $2.50 per share and the remaining 25,000 shares at$4.00 per share. The term of the options is for a period of two (2) years. Theagreement was attached as an exhibit to Form 10-KSB filed on April 15, 2004.

 

InApril 2004, the board of directors received a Research Analysis Report (the"Report") prepared by Joe Blankenship (the "Analyst") ofSource Capital Group, Inc. We intend to use the Report in presentations made tobrokers, dealers and marketing agencies and also post the Report on ourcorporate website (www.petroloilandgas.com). Compensation was paid to theAnalyst prior to the report being written.

 
***ConsultantAgreement with CSC Group LLC***
 

OnFebruary 18, 2004, Petrol entered into a Consultant Agreement with CSC Group LLCfor purposes of assisting us in locating working interest partners and similarfinancing agreements to further our business on a "best efforts"basis. The Consultant's services shall include locating and evaluating potentialbusinesses and/or individuals that would make high quality candidates as WorkingInterest (WI) Partners for our field development program. The term of theagreement is for six months commencing on February 18, 2004 and may be extendedat any time prior to the expiration of the term. We agreed to compensate theConsultant for its efforts in assisting us in locating WI partners, 1% for allfunds raised in an executed transaction between Petrol and Consultant's Clients.As an inducement for the Consultant to begin his engagement, we agreed to issuestock warrants, giving the Consultant the right to purchase 200,000 shares ofour common stock, $0.001 par value. The term and exercise price of the WarrantShares shall be: (i) 100,000 shares at $1.50 per share for a period of twoyears; and (ii) 100,000 shares at $2.50 per share for a period of two years. TheConsultant Agreement was attached to Form 10-KSB filed on April 15, 2004.

 

26
***LetterAgreement with William D. Burk***
 

OnMarch 1, 2004, we executed a letter agreement with William D. Burk("Burk"), wherein it identifies the terms and conditions under whichBurk has performed certain oil and gas services and legal services for us sinceAugust of 2003. In consideration of the Services and for Burk's continuedassistance to us, we agreed to grant Burk 100,000 options to purchase shares ofour common stock at $1.25 per share and 200,000 options to purchase shares ofour common stock at $1.50 per share. The term of the options is for a period ofthree (3) years.

 

Wealso agreed to reimburse Burk for reasonable business expenses incurred inperforming his services. Burk agreed to be available to assist us in thepreparation of agreements with future farmout and working interest participants.In addition, we also may from time to time request Burk to provide specificlegal or consultation services, in this event, Burk may perform such additionalservices on an hourly, daily or project fee basis, upon the agreement of bothparties. The letter agreement was attached as an exhibit to Form 10-KSB filed onApril 15, 2004.

 
**SubsequentEvents**
 
**NewCorporate Office**
 

OnApril 2, 2004, we executed a thirty-nine (39) month lease for new corporateoffice space located at 3161 East Warm Springs Road, Suite 300, Las Vegas,Nevada 89120. The space consists of approximately 1,864 square feet, whichhouses administrative and corporate offices.

 

**Addendum#2 to Employment Agreement of Paul Branagan**

 

OnApril 20, 2004, we amended Paul Branagan's Employment Agreement to amend theroyalty provisions as follows:

 

1.Mr. Branagan shall receive a 1/100 Over Riding Royalty on production from anywells completed on Employer leased acreage.

2.The term of the payment of the Over Riding Royalty shall be in perpetuity.

 

Acopy of the Addendum to the Employment Agreement is attached hereto as anexhibit.

 
**PressRelease**
 

OnMay 10, 2004, we issued a press release to announce our receipt of preliminaryresults from the Kansas Geologic Society (KGS) indicating good to excellent gascontent in samples taken from coal beds in our wells in Coffey County, Kansas. Acopy of the press release is attached hereto as an exhibit.

 
**Item 6.Exhibits and Reports of Form 8-K**
 

(a)Exhibits
 

10.1**
Letter      Agreement with William D. Burk
10.2**
Consultant      Agreement with CSC Group LLC
10.3**
Research      Agreement
10.4**
John      Haas, Mark Haas and W.B. Mitchell Agreement
10.5**
CBM      Energy Agreement
31.1*
Certification      of Paul Branagan pursuant to Section 302 of the Sarbanes-Oxley Act
31.2*
Certification      of David Polay pursuant to Section 302 of the Sarbanes-Oxley Act
32.1****
Certification      of Paul Branagan pursuant to Section 906 of the Sarbanes-Oxley Act
32.2****
Certification      of David Polay pursuant to Section 906 of the Sarbanes-Oxley Act
99.1***
Research      Analysis Report prepared by Joe Blankenship of Source Capital Group, Inc.
99.2****
Press      Release dated May 10, 2004
_____

*Filed herewith

**Filed in Form 10-KSB on April 15, 2004

***Filed in Form 8-K on April 28, 2004

****Filed in Form 10-QSB on May 17, 2004

27

(b)Form 8-K
 

8-KReport filed on April 2, 2004, Notification of trading on the OTC:BB.

8-KReport filed on April 28, 2004, Press Release, New Corporate Office andRegulation FD Disclosure.
** 

 

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/JohnGarrison                            
JohnGarrison, Chief Financial Officer

(Onbehalf of the registrant and as

principalaccounting officer)

Date:December 16, 2004****** |
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