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** **

 

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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 

| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2010**

 

**OR**

 

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom              to              **

 

**Commission file number 001-16749**

 

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**GeoPetroResources Company**

(Exact name of registrant as specified in its charter)

 

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| **California**                            | ** ** | **94-3214487**                       |
|-------------------------------------------|------------|--------------------------------------|
| (State of incorporation)                  |       | (IRS Employer Identification Number) |
|                                      |       |                                 |
| **150  California Street Suite 600**      | ** ** | ** **                           |
| **San  Francisco, CA**                    | ** ** | **94111**                            |
| (Address of principal  executive offices) |       | (Zip Code)                           |

 

**(415) 398-8186**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o.

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post suchfiles).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o                |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o  No x.

 

Therewere 34,284,646 shares of no par value common stock outstanding on August 16,2010

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| **PART I. FINANCIAL INFORMATION**                                                                   |   |   |   |
|----------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Item 1. Financial Statements                                                                        |   | 3      |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   | 11     |   |
| Item 3. Quantitative and Qualitative Disclosures  about Market Risk                                 |   | 18     |   |
| Item 4. Controls and Procedures                                                                     |   | 18     |   |
| **PART II.  OTHER INFORMATION**                                                                     |   |   |   |
| Item 1.  Legal Proceedings                                                                          |   | 19     |   |
| Item 1A.  Risk Factors                                                                              |   | 19     |   |
| Item 2. Unregistered Sales of Securities and Use of  Proceeds                                            |   | 19     |   |
| Item 3. Defaults Upon Senior Securities                                                             |   | 19     |   |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        |   | 19     |   |
| Item 5.  Other Information                                                                          |   | 19     |   |
| Item 6. Exhibits                                                                                    |   | 20     |   |
| **SIGNATURES**                                                                                           |   | 21     |   |

 

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Table of Contents

 

**PART I.FINANCIAL INFORMATION**

 

**Item 1.   Financial Statements.**

 

**GEOPETRO RESOURCES COMPANY**

**UNAUDITED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                      | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                      |       |              |       |                  |       |
| **Current Assets**                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                       |       | $                 | 1,122,335  |                  | $          | 2,429,891 |   |
| Trade accounts receivable—natural gas sales                                                                                                                                                                                                                                |       | 290,466           |       | 473,944               |       |
| Accounts receivable—other                                                                                                                                                                                                                                                  |       | 456,391           |       | 8,658                 |       |
| Prepaid expenses                                                                                                                                                                                                                                                                |       | 213,710           |       | 132,238               |       |
| Total Current Assets                                                                                                                                                                                                                                                            |       | 2,082,902         |       | 3,044,731             |       |
|                                                                                                                                                                                                                                                                            |       |              |       |                  |       |
| **Oil and gas properties, at cost  (full cost method)**                                                                                                                                                                                                                         |       |              |       |                  |       |
| Unproved properties                                                                                                                                                                                                                                                             |       | 7,535,273         |       | 8,411,773             |       |
| Proved properties                                                                                                                                                                                                                                                               |       | 51,260,331        |       | 51,194,852            |       |
| Gas processing plant, at cost                                                                                                                                                                                                                                                   |       | 10,285,573        |       | 10,285,573            |       |
| Less—accumulated depletion, depreciation, and  impairment                                                                                                                                                                                                                  |       | (39,344,259       | )          | (38,950,914           | )          |
| Net Oil and Gas Properties                                                                                                                                                                                                                                                      |       | 29,736,918        |       | 30,941,284            |       |
|                                                                                                                                                                                                                                                                            |       |              |       |                  |       |
| **Furniture, fixtures and  equipment, at cost, net of depreciation**                                                                                                                                                                                                            |       | 49,006            |       | 2,071                 |       |
| **Other assets**                                                                                                                                                                                                                                                                |       | 45,281            |       | 16,127                |       |
| **Total Assets**                                                                                                                                                                                                                                                                |       | $                 | 31,914,107 |                  | $          | 34,004,213 |   |
|                                                                                                                                                                                                                                                                            |       |              |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                  |       |              |       |                  |       |
|                                                                                                                                                                                                                                                                            |       |              |       |                  |       |
| **Current Liabilities**                                                                                                                                                                                                                                                         |       |              |       |                  |       |
| Trade payables                                                                                                                                                                                                                                                                  |       | $                 | 1,358,567  |                  | $          | 950,097 |   |
| Current portion of long term notes payable                                                                                                                                                                                                                                      |       | 2,032,509         |       | 1,549,829             |       |
| Interest payable                                                                                                                                                                                                                                                                |       | 248,023           |       | 136,233               |       |
| Dividends payable                                                                                                                                                                                                                                                               |       | 112,536           |       | 110,462               |       |
| Production taxes payable                                                                                                                                                                                                                                                        |       | 132,333           |       | 309,904               |       |
| Other taxes payable                                                                                                                                                                                                                                                             |       | 8,719             |       | 11,147                |       |
| Royalty owners payable                                                                                                                                                                                                                                                          |       | 1,143,104         |       | 1,151,284             |       |
| Total Current Liabilities                                                                                                                                                                                                                                                       |       | 5,035,791         |       | 4,218,956             |       |
|                                                                                                                                                                                                                                                                            |       |              |       |                  |       |
| **Long Term Notes Payable**                                                                                                                                                                                                                                                     |       | 5,412,111         |       | 5,986,645             |       |
| **Asset Retirement Obligations**                                                                                                                                                                                                                                                |       | 68,182            |       | 65,009                |       |
| **Other Long Term Liabilities**                                                                                                                                                                                                                                                 |       | 40,577            |       | —                |       |
| **Total Liabilities**                                                                                                                                                                                                                                                           |       | 10,556,661        |       | 10,270,610            |       |
|                                                                                                                                                                                                                                                                            |       |              |       |                  |       |
| **Shareholders’ Equity**                                                                                                                                                                                                                                                   |       |              |       |                  |       |
| Series B preferred stock, no par value;  7,523,000 shares authorized 7,523,000 shares issued and outstanding at  June 30, 2010 and December 31, 2009, respectively. Liquidation  preference of $5,642,250 at June 30, 2010 and December 31, 2009,  respectively. |       | 5,448,602         |       | 5,448,602             |       |
| Common stock, no par value; 100,000,000 shares  authorized; 34,284,646 shares issued and outstanding at June 30,  2010 and December 31, 2009, respectively                                                                                                       |       | 53,397,733        |       | 53,397,733            |       |
| Additional paid-in capital                                                                                                                                                                                                                                                      |       | 3,264,764         |       | 3,060,187             |       |
| Accumulated deficit                                                                                                                                                                                                                                                             |       | (40,753,653       | )          | (38,172,919           | )          |
| Total Shareholders’ Equity                                                                                                                                                                                                                                                 |       | 21,357,446        |       | 23,733,603            |       |
|                                                                                                                                                                                                                                                                            |       |              |       |                  |       |
| **Total Liabilities and  Shareholders’ Equity**                                                                                                                                                                                                                            |       | $                 | 31,914,107 |                  | $          | 34,004,213 |   |

 

***See accompanying notes tothese unaudited consolidated financial statements***

 

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**GEOPETRO RESOURCES COMPANY**

 

**UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                              | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Natural gas sales                                                       |       | $                                                   | 810,796    |                                              | $          | 1,070,202 |   | $ | 2,006,369 |   | $ | 1,946,270 |   |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Costs and expenses                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Plant operating                                                         |       | 1,046,835                                           |       | 1,308,367                                         |       | 2,186,949 |   | 2,353,139 |   |
| Lease operating                                                         |       | 70,278                                              |       | 83,535                                            |       | 194,583 |   | 384,414 |   |
| General and administrative                                              |       | 502,842                                             |       | 616,655                                           |       | 1,237,022 |   | 1,465,593 |   |
| Depreciation and depletion                                              |       | 187,789                                             |       | 416,405                                           |       | 396,482 |   | 726,491 |   |
| Total costs and expenses                                                |       | 1,807,744                                           |       | 2,424,962                                         |       | 4,015,036 |   | 4,929,637 |   |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Loss from operations                                                    |       | (996,948                                            | )          | (1,354,760                                        | )          | (2,008,667 | ) | (2,983,367 | ) |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Other Income and (Expense)                                              |       |                                                |       |                                              |       |   |   |   |   |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense                                                        |       | (174,889                                            | )          | (167,907                                          | )          | (348,908 | ) | (400,346 | ) |
| Interest income                                                         |       | 607                                                 |       | 330                                               |       | 1,476 |   | 3,973 |   |
| Total other expense                                                     |       | (174,282                                            | )          | (167,577                                          | )          | (347,432 | ) | (396,373 | ) |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Loss Before Taxes                                                       |       | (1,171,230                                          | )          | (1,522,337                                        | )          | (2,356,099 | ) | (3,379,740 | ) |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Income tax expense                                                      |       | (800                                                | )          | (1,845                                            | )          | (800 | ) | (1,845 | ) |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Net Loss                                                                |       | (1,172,030                                          | )          | (1,524,182                                        | )          | (2,356,899 | ) | (3,381,585 | ) |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Preferred stock dividend                                                |       | (112,536                                            | )          | (24,712                                           | )          | (223,835 | ) | (24,712 | ) |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Net Loss Applicable to Common Shareholders                              |       | $                                                   | (1,284,566 | )                                                 | $          | (1,548,894 | ) | $ | (2,580,734 | ) | $ | (3,406,297 | ) |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Net loss per common share basic and diluted                             |       | $                                                   | (0.04      | )                                                 | $          | (0.05 | ) | $ | (0.08 | ) | $ | (0.10 | ) |
|                                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of common shares  outstanding basic and diluted |       | 34,284,646                                          |       | 34,284,646                                        |       | 34,284,646 |   | 34,284,646 |   |

 

***See accompanying notes to theseunaudited consolidated financial statements.***

 

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**GEOPETRO RESOURCES COMPANY**

 

**UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                     | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                     | ** ** | **June 30,  2010**                          | ** ** | **June 30,  2009** | ** ** |
| **Cash Flows From Operating Activities**                                       |       |                                             |       |   |   |
|                                                                           |       |                                             |       |   |   |
| Net loss                                                                       |       | $                                                | (2,356,899 | ) | $ | (3,381,585 | ) |
| *Adjustments to reconcile net  loss to net cash used in operating activities:* |       |                                             |       |   |   |
| Depreciation and depletion                                                     |       | 396,482                                          |       | 726,491 |   |
| Share-based compensation expense                                               |       | 204,577                                          |       | 201,468 |   |
| Non-cash interest expense                                                      |       | 58,146                                           |       | 21,990 |   |
| Accretion of discount on asset retirement  obligations                         |       | 2,539                                            |       | 2,307 |   |
| *Changes in operating assets and  liabilities:*                                |       |                                             |       |   |   |
| Accounts receivable - natural gas sales                                        |       | 183,478                                          |       | (503,662 | ) |
| Other assets                                                                   |       | (101,388                                         | )          | 117,052 |   |
| Current liabilities                                                            |       | 112,859                                          |       | 671,924 |   |
| Other long term liabilities                                                    |       | 25,873                                           |       | — |   |
| Net cash used in operating activities                                          |       | (1,474,333                                       | )          | (2,144,015 | ) |
|                                                                           |       |                                             |       |   |   |
| **Cash Flows from Investing  Activities**                                      |       |                                             |       |   |   |
|                                                                           |       |                                             |       |   |   |
| Additions to oil and gas properties                                            |       | (74,483                                          | )          | (557,311 | ) |
| Additions to gas treatment plant                                               |       | —                                           |       | (53,500 | ) |
| Acquisition of furniture, fixtures &  equipment                       |       | (35,368                                          | )          | — |   |
| Dispositions of oil and gas properties                                         |       | 648,389                                          |       | — |   |
| Net cash provided by (used in) investing  activities                           |       | 538,538                                          |       | (610,811 | ) |
|                                                                           |       |                                             |       |   |   |
| **Cash Flows from Financing  Activities**                                      |       |                                             |       |   |   |
|                                                                           |       |                                             |       |   |   |
| Proceeds from sale of preferred shares series B                                |       | —                                           |       | 1,850,000 |   |
| Proceeds from promissory notes                                                 |       | —                                           |       | 765,000 |   |
| Repayments of notes payable                                                    |       | (150,000                                         | )          | (300,000 | ) |
| Payments of preferred stock dividend                                           |       | (221,761                                         | )          | — |   |
| Net cash provided by (used in) financing  activities                           |       | (371,761                                         | )          | 2,315,000 |   |
|                                                                           |       |                                             |       |   |   |
| **Net Decrease in Cash and Cash  Equivalents**                                 |       | (1,307,556                                       | )          | (439,826 | ) |
|                                                                           |       |                                             |       |   |   |
| **Cash and Cash Equivalents**                                                  |       |                                             |       |   |   |
| Beginning of period                                                            |       | 2,429,891                                        |       | 770,779 |   |
| End of period                                                                  |       | $                                                | 1,122,335  |   | $ | 330,953 |   |
|                                                                           |       |                                             |       |   |   |
| **Supplemental Disclosure of Cash  Flow Information**                          |       |                                             |       |   |   |
| Cash paid for interest                                                         |       | $                                                | 176,910    |   | $ | 379,355 |   |
|                                                                           |       |                                             |       |   |   |
| Cash paid for income taxes                                                     |       | $                                                | 800        |   | $ | 1,845 |   |

 

***See accompanying notes to theseunaudited consolidated financial statements.***

 

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**GEOPETRO RESOURCES COMPANY**

 

**UNAUDITED STATEMENT OF SHAREHOLDERS’ EQUITY**

 
| ** **                                  | ** ** | **Preferred Stock  Series B** | ** ** | **Common Stock** | ** ** | **Additional Paid-  in** | ** ** | **Accumulated** | ** ** | **Total  Shareholders’** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|-------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **Shares**                              | ** ** | **Amount**            | ** ** | **Shares**                    | ** ** | **Amount**      | ** ** | **Capital**                   | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| Balances,  January 1, 2010             |       | 7,523,000                               |       | $                     | 5,448,602  |                          | 34,284,646 |            | $          | 53,397,733                    |       | $ | 3,060,187 |   | $ | (38,172,919 | ) | $ | 23,733,603 |   |
|                                        |       |                                    |       |                  |       |                          |       |            |       |                          |       |   |   |   |   |
| Share  based compensation expense           |       | —                                  |       | —                |       | —                        |       | —          |       | 204,577                       |       | — |   | 204,577 |   |
| Net  loss                                   |       | —                                  |       | —                |       | —                        |       | —          |       | —                        |       | (2,356,899 | ) | (2,356,899 | ) |
| Dividends  on Series B Preferred Stock |       | —                                  |       | —                |       | —                        |       | —          |       | —                        |       | (223,835 | ) | (223,835 | ) |
|                                        |       |                                    |       |                  |       |                          |       |            |       |                          |       |   |   |   |   |
| Balances,  June 30, 2010               |       | 7,523,000                               |       | $                     | 5,448,602  |                          | 34,284,646 |            | $          | 53,397,733                    |       | $ | 3,264,764 |   | $ | (40,753,653 | ) | $ | 21,357,446 |   |

 

***See accompanying notes to theseunaudited consolidated financial statements.***

 

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**GEOPETRO RESOURCES COMPANY**

 

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****             ****BASIS OFPRESENTATION AND USE OF ESTIMATES**

 

The interim consolidatedfinancial statements of GeoPetro Resources Company (“we,” “us,” “our,” “GeoPetro”or the “Company”) are unaudited and contain all adjustments (consistingprimarily of normal recurring accruals) necessary for a fair statement of theresults for the interim periods presented. Results for interim periods are notnecessarily indicative of results to be expected for a full year or forpreviously reported periods due in part, but not limited to, the volatility incrude oil and natural gas commodity prices, interest rates, estimates ofreserves, drilling risks, geological risks, transportation restrictions, thetiming of acquisitions, product demand, market competition, interruption inproduction and our ability to obtain additional capital. You should read theseconsolidated interim financial statements in conjunction with the auditedconsolidated financial statements and notes thereto included in GeoPetro’sAnnual Report on Form 10-K for the year ended December 31, 2009.

 

The accompanying financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) and include theaccounts of GeoPetro and its wholly-owned subsidiaries. Intercompany accountsand transactions are eliminated. In preparing the accompanying financialstatements, management has made certain estimates and assumptions that affectreported amounts in the financial statements. Actual results may differ fromthose estimates. Significant assumptions are required in the valuation ofproved oil and natural gas reserves, which may affect the amount at which oiland natural gas properties are recorded. The computation of share-basedcompensation expense requires assumptions such as volatility, expected life andthe risk-free interest rate. It is at least reasonably possible these estimatescould be revised in the near term, and these revisions could be material.

 

**2.****             ****LIQUIDITY**

 

As of June 30, 2010, wehad a working capital deficit of $2,952,889, and for the six months ended June 30,2010, our cash used in operating activities amounted to $1,474,333.  Weestimate our minimum investment needs during 2010 amount to $3,103,000 relatedto our natural gas processing plant and our natural gas properties within theMadisonville field and our California properties.   Our results ofoperations resulted in a deficit of $2,008,667 for the six months ended June 30,2010.  Further, we have maturing debt obligations, debt service anddividend requirements that will require cash payments.  We hold workinginterests in undeveloped leases, seismic options, lease options and foreignconcessions and we have participated in seismic surveys and the drilling oftest wells on undeveloped properties.  We plan further leaseholdacquisitions and seismic operations for the remainder of 2010 and futureperiods.  Exploratory and developmental drilling is scheduled during 2010and future periods on our undeveloped properties.  We will need to raiseadditional equity or enter into new borrowing arrangements to finance ouroperating deficit and our continued participation in planned activities. Ifadditional financing is not available, we will be compelled to reduce the scopeof our business activities.  On February 26, 2010, we sold our 100%working interest in approximately 122,000 acres onshore in the Cook Inletregion of Alaska (Note 5). If we are unable to fund our operating cash flowneeds and planned capital investments, it will be necessary to farm-out ourinterest in proposed wells, sell a portion of our interest in prospects, sell aportion of our interest in our producing oil and gas properties, reduce generaland administrative expenses, or a combination of all of these factors.

 

**3.****             ****RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

 

InApril 2010, the Financial Accounting Standards Board issued AccountingStandards Update 2010-14, “Accounting for Extractive Industries ` Update2010-14 provides amendments to add the SEC’s Regulation S-X Rule 4-10, “FinancialAccounting and Reporting for Oil and Gas Producing Activities Pursuant to theFederal Securities Laws and the Energy Policy and Conservation Act of 1975” (“S-XRule 4-10”) to Accounting Standards Codification (“ASC”) Topic 932 “ExtractiveActivities — Oil and Gas”. S-X Rule 4-10 was included in the SEC’s FinalRule, “Modernization of Oil and Gas Reporting, which became effectiveJanuary 1, 2010. As Update 2010-14 only served to align the FASB’s ASCTopic 932 with the SEC’s S-X Rule 4-10, the Company’s adoption did nothave a material impact on its financial position, results of operations orrelated disclosures.

 

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**4.****             ****LOSS PERCOMMON SHARE**

 

Basic net loss per commonshare is computed by dividing the net loss attributable to common shareholdersby the weighted average number of shares of common stock outstanding during theperiod.

 

Diluted net loss per commonshare is computed in the same manner, but also considers the effect of commonstock shares underlying the following:

 
| ** **                                 | ** ** | **For the six months ended** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **June 30,  2010**      | ** ** | **June 30,  2009** | ** ** |
| Stock options                              |       | 2,700,000                    |       | 2,720,000 |   |
| Warrants                                   |       | 1,519,047                    |       | 1,316,357 |   |
| Convertible Preferred Stock, Series B |       | 7,523,000                    |       | 2,466,670 |   |

 

All of the common shares underlyingthe stock options, warrants and convertible preferred stock, Series Babove were excluded from diluted weighted average shares outstanding for thesix months ended June 30, 2010 and June 30, 2009 because theireffects were antidilutive.

 

**5.****             ****OIL AND GASPROPERTIES**

 

On February 26, 2010,we sold our 100% working interest in approximately 122,000 acres onshore in theCook Inlet region of Alaska (“the Alaskan leases”). The leasehold positionconsisted of two separate target areas, the Point MacKenzie Prospect and theTrading Bay Prospect, which have been selected for oil and gas exploration. ThePoint MacKenzie Prospect is located twelve miles northwest of Anchorage. TheTrading Bay Prospect is located fifty miles west of Anchorage across the CookInlet.

 

In exchange for our 100%working interest in our Alaskan leases we received the following consideration:

 

A cash payment ofapproximately $1.0 million, which was held in escrow and released to us uponapproval of the assignment of the Alaskan leases to the purchaser. As of June 30,2010 we had received partial release of this cash payment with final amountsbeing released in July, 2010. This amount has been included in accountsreceivable — other on our unaudited consolidated balance sheet as of June 30,2010.

 

A $4.0 million payment fromthe first 75% of 8/8ths of the proceeds from any oil and gas production fromthe Alaskan leases.

 

Subsequent to our receipt ofthe $4.0 million payment, we will thereafter receive an overriding royaltyinterest of 10% of 8/8ths in and to the Alaskan leases issued by the State ofAlaska and the Alaska Mental Health Trust, comprised of conventional oil andgas production and coal bed methane production.

 

The purchaser has agreed topay all of the costs of maintaining the Alaskan leases at least through the endof the primary terms thereof.

 

We anticipate the drillingof the LEA #1 exploration well to evaluate a conventional oil and gas prospectidentified and developed by us to commence in the fall of 2010.

 

Amounts recordedpursuant to this transaction had been previously classified as unevaluatedcosts on our December 31, 2009 balance sheet.

 

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**6.****             ****DEBT**

 

Asof June 30, 2010 and December 31, 2009 debt consisted of thefollowing:

 
| ** **                               | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ***Long Term  Portion***                 |       |                    |       |                        |       |
| Promissory notes                         |       | $                       | 1,415,000  |                        | $          | 1,715,000 |   |
| Bank of Oklahoma loan                    |       | 4,072,847               |       | 4,372,847                   |       |
| Less discount on promissory notes        |       | (75,736                 | )          | (101,202                    | )          |
| ***Net long term  notes payable***       |       | 5,412,111               |       | 5,986,645                   |       |
|                                     |       |                    |       |                        |       |
| ***Current Portion***                    |       |                    |       |                        |       |
| Promissory notes                         |       | 1,300,000               |       | 1,000,000                   |       |
| Bank of Oklahoma loan                    |       | 750,000                 |       | 600,000                     |       |
| Less discount on promissory notes        |       | (17,491                 | )          | (50,171                     | )          |
| ***Net current  portion notes payable*** |       | 2,032,509               |       | 1,549,829                   |       |
| **Total**                                |       | $                       | 7,444,620  |                        | $          | 7,536,474 |   |

 

OnMarch 25, 2010 the Bank of Oklahoma, “BOK” waived compliance of a minimumtangible net worth requirement related to our $6,697,847 three year Term LoanAgreement.  The terms of the three year loan provide for minimum quarterlyprincipal payments of $150,000 and interest payable quarterly in arrears atprime plus 4% or LIBOR plus 5.5% at the option of the Company. At June 30,2010, the interest rate was approximately 5.816% (LIBOR + 5.5%). The Term LoanAgreement contains customary affirmative and negative covenants includingrestrictions on incurring additional debt and minimum tangible net worthrequirements.

 

**7.**              **INCOME TAXES**

 

Theeffective income tax rates for the six month periods ended June 30, 2010were negligible, primarily due to adjustments to the valuation allowance ondeferred tax assets.

 

**8.**              **COMMON STOCK OPTIONS**

 

Therewere no material changes to common stock options from those disclosed in theaudited annual consolidated financial statements for the year endedDecember 31, 2009.

 

**9.**              **COMMON STOCK WARRANTS**

 

Therewere no material changes to common stock warrants from those disclosed in theaudited annual consolidated financial statements for the year endedDecember 31, 2009.

 

**10.**       **COMMITMENTS AND CONTINGENCIES**

 

***Office Lease -*** In February,2010, we entered into a lease for our principal executive office.  Theterms of the lease provide for an eighty-four (84) month term. Minimum annualrentals due under this agreement as of June 30, 2010 are as follows:

 
| 2010       |   | 35,708  |      |
|------------|--------|---------|-----------|
| 2011       |   | 145,635 |      |
| 2012       |   | 149,836 |      |
| 2013       |   | 154,037 |      |
| 2014       |   | 158,238 |      |
| Thereafter |   | 385,091 |      |
| Total      |   | $       | 1,028,545 |   |
|            |        |         |           |  |

 

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***Employment Agreements*** — OnMarch 31, 2010 Chief Financial Officer, J. Chris Steinhauser with whom wehad entered into an employment contract dated April 27, 2009, resignedfrom his positions as the Chief Financial Officer, Vice President of Financeand Secretary of the Company.

 

OnApril 26, 2010 we extended our Vice President of Exploration, David V.Creel’s employment agreement through December 31, 2010; all other provisionsper the terms of the original employment agreement remain unchanged.

 

**11.****      ****SUBSEQUENTEVENTS**

 

Wehave evaluated all activity of the Company and concluded that no subsequentevents have occurred that would require recognition in the consolidatedfinancial statements or disclosure in the notes to the consolidated financialstatements except the following:

 

OnJuly 19, 2010, we modified the original exercise price for 740,000 stockoptions from $4.28 as issued on June 27, 2008 to $0.50 per share.

 

OnJuly 19, 2010, we issued a total of 195,000 common stock options tonon-employee directors at an exercise price of $0.50 per share. These optionswill vest ratably over five (5) years pursuant to the terms of the 2004Stock Option and Appreciation Rights Plan.

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

*The following discussion and analysis should be read inconjunction with accompanying financial statements and related notes includedelsewhere in this report. It contains forward looking statements that reflectour future plans, estimates, beliefs and expected performance. The forwardlooking statements are dependent upon events, risks and uncertainties that maybe outside our control. Our actual results could differ materially from thosediscussed in these forward looking statements.*

 

*Factors that could cause or contribute to such differencesinclude, but are not limited to, market prices for natural gas and oil,economic and competitive conditions, regulatory changes, estimates of provedreserves, potential failure to achieve production from development drillingprojects, capital expenditures and other uncertainties, as well as thosefactors discussed below and elsewhere in this report, particularly in “RiskFactors”, all of which are difficult to predict and which expressly qualify allsubsequent oral and written forward-looking statements attributable to us orpersons acting on our behalf. In light of these risks, uncertainties andassumptions, the forward looking events discussed may not occur. We do not haveany intention or obligation to update forward-looking statements included inthis report after the date of this report, except as required by law.*

 

**Overview**

 

Weare an oil and gas company in the business of exploring and developing oil andnatural gas reserves on a worldwide basis. Since inception, we have conductedleasehold acquisition, exploration and drilling activities on our NorthAmerican, Australian and Indonesian prospects. These projects currentlyencompass approximately 255,506 gross (40,540 net) acres, consisting of mineralleases, production sharing contracts and exploration permits that give us theright to explore for, develop and produce oil and natural gas. Most of theseproperties are in the exploration, appraisal or development drilling phase andhave not begun to produce revenue from the sale of oil and natural gas.Excluding minor interest and dividend income, our only significant cash inflowsuntil 2003 were the recovery of capital invested in projects through sale orother divestiture of interests in oil and gas prospects to industry partners.

 

Since2003, substantially all of our revenue has been generated from natural gassales derived from the Magness #1, the Fannin #1, and the Mitchell #1 wells inthe Madisonville Field in East Texas under spot gas purchase contracts atmarket prices. Natural gas sales from the Madisonville Field are expected toaccount for substantially all of our revenues for the remainder of 2010. Weexpect the majority of our capital expenditures for the remainder of 2010 andin 2011 will be for the Madisonville Project and gas processing plant.

 

**Results of Operations**

 

Thefinancial information with respect to the six months ended June 30, 2010and 2009 as discussed below is unaudited. In the opinion of management, suchinformation contains all adjustments consisting only of normal recurringaccruals, necessary for a fair presentation of the results for suchperiods.  The results of operations for interim periods are notnecessarily indicative of the results of operations for the full fiscal years.

 
| ** **                                      | ** ** | **Six Months Ended**    | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **                                      | ** ** | **(unaudited)**         | ** ** | **(unaudited)** | ** ** |
| **Consolidated Statement of  Operations:**      |       |                    |       |   |   |
| **Revenues**                                    |       | $                       | 2,006,369  |   | $ | 1,946,270 |   |
| **Plant operating**                             |       | 2,186,949               |       | 2,353,139 |   |
| **Lease operating**                             |       | 194,583                 |       | 384,414 |   |
| **General and administrative**                  |       | 1,237,022               |       | 1,465,593 |   |
| **Depreciation and depletion**                  |       | 396,482                 |       | 726,491 |   |
| **Loss from operations**                        |       | (2,008,667              | )          | (2,983,367 | ) |
| **Net loss**                                    |       | (2,356,899              | )          | (3,381,585 | ) |
| **Net loss applicable to common  shareholders** |       | $                       | (2,580,734 | ) | $ | (3,406,297 | ) |

 

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**Revenue and Operating Trends**

 

Wehave developed an onsite plan to treat and remove impurities from theMadisonville Project natural gas in order to meet pipeline-qualityspecifications. The Madisonville Project is located in East Texas. In 2003, theconstruction and installation of a natural gas treatment plant with a designedcapacity of 18 million cubic feet of gas per day (“MMcf/d”) and associatedpipeline and gathering facilities were completed. The treatment plant andassociated gathering facilities were owned by an unaffiliated third party.

 

In2005 we secured a commitment from the Madisonville Gas Plant (“MGP”) to installand make operational additional treating facilities capable of treating 50MMcf/d, which combined with the capacity of the current in-service treatingfacilities will represent a total designed treating capacity of 68 MMcf/d forthe Madisonville treatment plant.   In early November 2007, MGPbegan testing the additional treatment facilities by accepting 20 MMcf/d at theinlet.   Subsequently in December 2007, MGP suspended theoperations of the additional treatment facilities in order to makemodifications to more effectively deal with the presence of diamondoids in thegas stream produced from the Rodessa Formation.

 

During2008, MGP analyzed various options for removing the diamondoids; however, theydid not complete the necessary plant system modifications.  OnDecember 31, 2008, we purchased the gas treatment plant (the “Plant”) andrelated gathering pipeline from MGP in exchange for assumption of secured debt,payment of certain outstanding payables of MGP and shares of GeoPetro’s commonstock.  The effective date of the acquisition was December 31, 2008and the new owner of the Plant is GeoPetro’s wholly-owned, indirect subsidiary,Madisonville Midstream LLC (“MM”).  We expect to complete installation ofthe system modifications required in the new plant by the end of 2010.  Inthe meantime, the existing, in service portion of the plant continues tooperate with a design capacity of approximately 18 MMcf/d of inlet gas.

 

Whilethere can be no assurance,  our goal is to make the necessary upgrades tothe plant and increase the production rates from our wells which may result inhigher net production and increased revenue during the remainder of 2010 ascompared to 2009 and prior periods. To accomplish the plant upgrades, we willneed to raise additional capital. Due to the unsettled state of the capitalmarkets, funds may not be available, or may not be available on favorableterms.

 

Duringthe six months ended June 30, 2010, we did not generate sufficientrevenues to cover the plant operating expenses and lease operating expenses inour Madisonville Project.  This was due to low production volumes, highshrinkage rates in the gas plant and low natural gas prices. Subject to capitalavailability, we plan to workover the Mitchell #1 well and to frac and connectvia gathering line the Wilson #1 well. Once the above production enhancementsare completed, the Company expects the combined Rodessa formation production toincrease from current rates.  The Company hopes to continue to realizeboth intermediate and long term cost and operating efficiencies byconsolidating the upstream and midstream portions of Madisonville under commonownership. Despite the challenges of the current environment, we accomplishedthe necessary goal of vertically integrating our position in the Madisonvillefield.  We continue to explore other longer term cost saving andefficiency measures in the plant.

 

**Industry Overview for the six months ended June 30, 2010**

 

Naturalgas prices have been very volatile during 2010 and 2009 due to supply concernsearlier in 2009, and more recently due to recession concerns arising from thecurrent global financial crisis and a resultant decline in demand for naturalgas.

 

**Company Overview for the six months ended June 30, 2010**

 

Ournet loss applicable to common shareholders for the six months ended June 30,2010 was $2,580,734. From our inception, through mid-2003, we only receivednominal revenues from our oil and natural gas activities, while incurringsubstantial acquisition and exploration costs and overhead expenses which haveresulted in an accumulated deficit through June 30, 2010 of$40,753,653.  All of our natural gas sales for six months ended June 30,2010 were derived from our Madisonville Project, from three producing wells,the UMC Ruby Magness #1 well (the “Magness Well”), the Angela Farris Fannin #1well (the “Fannin Well”), and the Mitchell #1 well (the “Mitchell Well”).

 

**Comparison of Results of Operations for the three monthsended June 30, 2010 and 2009**

 

Duringthe three months ended June 30, 2010, we had gross natural gas revenues of$810,796. During this period the sales of gas from our wells amounted to205,128 Mcf and our average natural gas price realized was $3.95 per Mcf.During the three months ended June 30, 2009 we had gross natural gasrevenues of $1,070,202. Our natural gas sales for the three months ended June 30,2009 were 357,276 Mcf and our average natural gas price realized was $3.00 perMcf.

 

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Revenuesdecreased during the three months ended June 30, 2010 as compared to theprior year period due to a 43% decrease in production volumes related to normaldecline curves as well as treatment plant downtime offset by a 32% increase innatural gas prices.

 

Duringthe three months ended June 30, 2010, we incurred plant operating expensesof $1,046,835. During the three months ended June 30, 2009, the plantoperating expense was $1,308,367.  Thedecrease in plant operating expense of $261,532 or 20% was primarilyattributable to cost cutting measures at our facility.  We anticipate our future plant operatingexpenses will remain fairly consistent with amounts recorded in the currentthree month period.

 

Duringthe three months ended June 30, 2010, we incurred lease operating expensesof $70,278. Our net average lifting cost for the 2010 period was $0.34 per Mcf.During the three months ended June 30, 2009, we incurred lease operatingexpenses of $83,535. Our net average lifting cost for the 2009 period was $0.23per Mcf. The average lifting cost per Mcf in 2010 was higher due to lowerproduction volume. The gross lease operating expense for three months ended June 30,2010 was lower than the same prior year period due mainly to a reduction of advalorem property taxes applicable to the wells.

 

Generaland administrative (“G&A”) expenses for the three months ended June 30,2010 were $502,842 compared to $616,655 for the three months ended June 30,2009. This represents a $113,813 or 18% decrease over the prior period. Thelower G&A expense incurred in 2010 was attributable primarily to reducedsalary expense, lower legal costs, reduced public relations expense as well aslower US filing costs.

 

Depreciation,depletion and amortization expense (“DD&A”) for the three months ended June 30,2010 was $187,789 as compared to $416,405 in the corresponding 2009 period.These amounts primarily represent amortization of the oil and gas properties.The 55% decrease was attributable primarily to lower depletion expenseresulting from the lower value of oil and gas properties which decreased as theresult of ceiling test write-offs in the US cost pool recorded during thefiscal year ended December 31, 2009.

 

Lossfrom operations totaled $996,948 for the three months ended June 30, 2010as compared to $1,354,760 for the three months ended June 30, 2009. Thedecrease in the loss from operations was due primarily to lower operating andadministrative expenses as well as reduced depreciation and depletion expenses.

 

Duringthe three months ended June 30, 2010 and 2009, we incurred interestexpense of $174,889 and $167,907, respectively.

 

**Comparison of Results of Operations for the six months endedJune 30, 2010 and 2009**

 

Duringthe six months ended June 30, 2010, we had gross natural gas revenues of$2,006,369.  During this period sales ofnatural gas from our wells was 447,476 Mcf at an average price of $4.48 perMcf. During the six months ended June 30, 2009, we had gross natural gasrevenues of $1,946,270. Our sales of natural gas for the six months endedJune 30, 2009 were 610,866 Mcf at an average price of $3.19 per Mcf.Revenues increased in the six months ended June 30, 2010 as compared tothe prior year period due to higher natural gas prices offset by 27% lowerproduction volumes related to normal decline curves as well as treatment plantdowntime.

 

Duringthe six months ended June 30, 2010, we incurred plant operating expensesof $2,186,949, as compared to $2,353,139 in the same prior year period. The decrease of $166,190 or 7% was attributable to cost cutting measurescomprised primarily of reduced costs associated with field personnel.  We anticipate our future plant operatingexpenses will remain fairly consistent with amounts recorded in the current sixmonth period.

 

Duringthe six months ended June 30, 2010, we incurred lease operating expensesof $194,583. Our average lifting cost for the 2010 period was $0.43 per Mcf.During the six months ended June 30, 2009, we incurred lease operating expensesof $384,414. Our average lifting cost for the 2009 period was $0.63 per Mcf.The average lifting cost per Mcf in 2010 was lower due to cost reductionsassociated with field personnel, insurance costs, and workover costs.

 

Generaland administrative (“G&A”) expenses for the six months ended June 30,2010 were $1,237,022 compared to $1,465,593 for the six months endedJune 30, 2009. This represents a $228,571 or 16% decrease over the prioryear period. The lower G&A expense incurred in 2010 was due primarily tolower expenses incurred in connection with the issuance of our 2009 annualreport, decreased salaries and decreased consulting expense.

 

Depreciation,depletion and amortization expense (“DD&A”) for the six months endedJune 30, 2010 was $396,482 as compared to $726,491 in the same period in2009, these amounts primarily represent amortization of the oil and gasproperties for the six months ended June 30, 2010 and 2009, respectively.The 45% decrease was due to lower net production

 

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inthe six months ended June 30, 2010 as well as lower value of oil and gasproperties resulting from ceiling test write-offs in the US cost poolrecorded during the fiscal year ended December 31, 2009.

 

Duringthe six months ended June 30, 2010 and 2009, we incurred interest expenseof $348,908 and $400,346, respectively. The lower interest expense in 2010 wasprimarily due to one-time loan fee paid in 2009.

 

**Recent Developments**

 

***Office Lease -*** In February,2010, we entered into a lease for our principal executive office.  Theterms of the lease provide for an eighty-four (84) month term. Minimum annualrentals due under this agreement as of June 30, 2010 are as follows:

 
| 2010       |   | 35,708  |      |
|------------|--------|---------|-----------|
| 2011       |   | 145,635 |      |
| 2012       |   | 149,836 |      |
| 2013       |   | 154,037 |      |
| 2014       |   | 158,238 |      |
| Thereafter |   | 385,091 |      |
| Total      |   | $       | 1,028,545 |   |
|            |        |         |           |  |

 

***Working Interest Sales*** - OnFebruary 26, 2010, we sold our 100% working interest in approximately122,000 acres onshore in the Cook Inlet region of Alaska  (“the Alaskanleases”). The leasehold position consisted of two separate target areas, thePoint MacKenzie Prospect and the Trading Bay Prospect, which have been selectedfor oil and gas exploration. The Point MacKenzie Prospect is located twelvemiles northwest of Anchorage. The Trading Bay Prospect is located fifty mileswest of Anchorage across the Cook Inlet.

 

In exchange for our 100%working interest in our Alaskan leases we received the following consideration:

 

A cash payment ofapproximately $1.0 million, which was held in escrow and released to us uponapproval of the assignment of the Alaskan leases to the purchaser. As of June 30,2010 we had received partial release of this cash payment with final amountsbeing released in July, 2010. This amount has been included in accountsreceivable — other on our unaudited consolidated balance sheet as of June 30,2010.

 

A $4.0 million payment fromthe first 75% of 8/8ths of the proceeds from any oil and gas production fromthe Alaskan leases.

 

Subsequent to our receipt ofthe $4.0 million payment, we will thereafter receive an overriding royaltyinterest of 10% of 8/8ths in and to the Alaskan leases issued by the State ofAlaska and the Alaska Mental Health Trust, comprised of conventional oil andgas production and coal bed methane production.

 

The purchaser has agreed topay all of the costs of maintaining the Alaskan leases at least through the endof the primary terms thereof.

 

We anticipate the drillingof the LEA #1 exploration well to evaluate a conventional oil and gas prospectidentified and developed by us to commence in the fall of 2010.

 

OnMarch 31, 2010, J. Chris Steinhauser resigned from his positions as theChief Financial Officer, Vice President of Finance and Secretary of the Companyto pursue other interests. The resignation notification submitted byMr. Steinhauser did not reference any disagreement with the Company on anymatter relating to the Company’s operations, policies and practices.

 

OnApril 26, 2010 we extended our Vice President of Exploration, David V.Creel’s employment agreement through December 31, 2010 all otherprovisions per the terms of the original employment agreement remain unchanged.

 

OnJuly 19, 2010, we modified the original exercise price for 740,000 stockoptions from $4.28 as issued on June 27, 2008 to $0.50 per share.

 

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OnJuly 19, 2010, we issued a total of 195,000 common stock options tonon-employee directors at an exercise price of $0.50 per share. These optionswill vest ratably over five (5) years pursuant to the terms of the 2004Stock Option and Appreciation Rights Plan.

 

**Liquidity and Capital Resources**

 

Wehad a working capital deficit of $2,952,889 at June 30, 2010 versus$1,174,225 at December 31, 2009. Our working capital deficit increasedduring six months ended June 30, 2010 due primarily to losses incurred inconnection with natural gas operations, the payment of dividends on ourpreferred shares, and the repayment of debt.

 

Wehave historically financed our business activities principally throughissuances of common shares, preferred shares, promissory notes and common sharepurchase warrants issued in private placements and an initial public offering.These financings are summarized as follows:

 
| ** **                                           | ** ** | **Six Months Ended**   | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **June 30, 2010** | ** ** | **June 30, 2009** | ** ** |
| Proceeds from sale of Preferred Series B        |       | $                           |       |   | $ | 1,850,000 |   |
| Proceeds from the issuance of promissory notes       |       | —                      |       | 765,000 |   |
| Repayment of notes payable                           |       | (150,000                    | )          | (300,000 | ) |
| Payment of preferred stock dividend                  |       | (221,761                    | )          | — |   |
|                                                 |       |                        |       |   |   |
| Net cash provided by (used in) financing  activities |       | $                           | (371,761   | ) | $ | 2,315,000 |   |

 

Thenet proceeds of our equity financings have been primarily used in to satisfyworking capital requirement and invested in oil and natural gas properties andthe gas treatment plant totaling $74,483 and $610,811 for the six months ended June 30,2010 and 2009, respectively.

 

Ourcash balance at June 30, 2010 was $1,122,335 compared to a cash balance of$2,429,891 at December 31, 2009. The change in our cash balance issummarized as follows:

 
| Cash balance at December 31, 2009       |   | $          | 2,429,891 |   |
|----------------------------------------------|--------|------------|-----------|--------|
| Sources of cash:                             |   |       |      |
| Cash provided by investing activities        |   | 538,538    |      |
| Total sources of cash including cash on hand |   | 2,968,429  |      |
| Uses of cash:                                |   |       |      |
| Cash used in operating activities            |   | (1,474,333 | )         |
| Cash used in financing activities            |   | (371,761   | )         |
| Total uses of cash                           |   | (1,846,094 | )         |
|                                         |   |       |      |
| Cash balance at June 30, 2010           |   | $          | 1,122,335 |   |

 

Ourcurrent cash and cash equivalents and anticipated cash flow from operations maynot be sufficient to meet our working capital, and capital expenditurerequirements for the foreseeable future. Additional financing is required to carry out our business plan. Sellingcertain equipment at the new Madisonville Treatment plant will be our firstpreference in raising the capital needed. See “Outlook for 2010 Capital” for adescription of our expected capital expenditures for the remainder of 2010. Ifwe are unable to generate revenues necessary to finance our operations over thelong-term, we may have to seek additional capital through the sale of ourequity or borrowing. We periodically borrow funds through the issuance of shortand long term promissory notes to finance our activities.

 

Asof June 30, 2010, we have a working capital deficit of $2,952,889, and forthe six months ended June 30, 2010, our cash used in operating activitiesamounted to $1,474,333.  Further, we estimate our minimum investment needsduring the remainder of 2010 to be $3,103,000 related to our natural gasprocessing plant and our natural gas properties within the Madisonville fieldand our California properties.  Due to the current natural gas commodityprice environment, our results of natural gas operations amounted to a loss of$2,008,667 for the six months ended June 30, 2010.  Further, we havematuring debt obligations, debt service and dividend requirements that willrequire cash payments.  We hold working interests in undeveloped leases,seismic options, lease options and foreign concessions and we have participatedin seismic surveys and the drilling of test wells on undevelopedproperties.  We plan further leasehold acquisitions and seismic operationsfor the

 

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remainderof 2010 and future periods.  Exploratory and developmental drilling isscheduled during 2010 and future periods on our undevelopedproperties.   We are attempting to raise additional cash through thesale or farmout of certain of our unproved properties.   We also needto raise additional equity or enter into new borrowing arrangements to financeour operating deficit and our continued participation in planned activities. Ifadditional financing is not available, we will be compelled to reduce the scopeof our business activities.  If we are unable to fund our operating cashflow needs and planned capital investments, it will be necessary to farm-outour interest in proposed wells, sell a portion of our interest in prospects,sell a portion of our interest in our producing oil and gas properties, sellall or a portion of our gas plant, reduce general and administrative expenses,or a combination of all of these factors.

 

Asdiscussed in the “Outlook for 2010 Capital”, we are forecasting capitalexpenditures of $3.1 million during the remainder of 2010. We will need toobtain adequate sources of cash to fund these anticipated capital expendituresand to follow through with our plans for continued investments in oil and gasproperties. Our success, in part, depends on our ability to generate additionalfinancing and farmout certain of our projects.  Additionally, as a resultof the current economic downturn, the Company may have difficulty raisingsufficient funds to meet our projected funding requirements. The tight creditmarkets and downturn in the stock market may impair our ability to generateadditional financing.

 

Wewill continue to analyze the potential effects of the global economic downturnon our business and prospects and our ability to generate additional financing.

 

**Contractual Obligations**

 

Wehave assumed various contractual obligations and commitments in the normalcourse of our operations and financing activities.  We have describedthese obligations and commitments in our “Management’s Discussion and Analysisof Financial Condition and Results of Operations” section in our Annual Reporton Form 10-K for the year ended December 31, 2009.  There wereno material changes to our contractual obligations since December 31, 2009except items described in “Recent Developments”.

 

**Off Balance Sheet Arrangements**

 

Fromtime to time, we enter into off-balance sheet arrangements and transactionsthat can give rise to off-balance sheet obligations. As of June 30, 2010,our off-balance sheet arrangements and transactions include operating leaseagreements. We do not believe that these arrangements are reasonably likely tomaterially affect our liquidity or availability of, or requirements for,capital resources.

 

**Financial Instruments**

 

Wecurrently have no natural gas price financial instruments or hedges inplace.  Our natural gas marketing contracts use “spot” market prices.Given the uncertainty of the timing and volumes of our natural gas productionthis year, we do not currently plan to enter into any long term fixed-pricenatural gas contracts, swap or hedge positions, other gas financial instrumentsin 2010.

 

**Outlook for 2010 Capital**

 

Dependingon capital availability, we are forecasting capital spending of up toapproximately $3,103,000 during the year 2010, allocated as follows:

 

1.               MadisonvilleProject, Madison County, Texas — Approximately $3,028,000 may be expended inthe Madisonville Field area as follows: $1,433,000 million for capitalmaintenance and repair on new gas treatment plant; $945,000 toward the fracturestimulation and hook up costs of the Wilson Well; and $650,000 for the Mitchellwell workover.

 

2.               California  — Approximately $75,000 to be utilized for land and permitting costs.

 

Wemay, in our discretion, decide to allocate resources towards other projects inaddition to or in lieu of, those listed above should other opportunities ariseand as circumstances warrant. We currently do not have sufficient workingcapital to fund all of the capital expenditures listed above. We may, in ourdiscretion, fund the foregoing planned expenditures from operating cash flows,asset sales, potential debt and equity issuances and/or a combination of allfour. The Madisonville Project forecasted capital expenditures will play animportant part in the Company achieving our 2010 cash flow projections. See “Liquidity and Capital Resources.”

 

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Weexpect commodity prices to be volatile, reflecting the current supply and demandfundamentals for North American natural gas and world crude oil. Political andeconomic events around the world, which are difficult to predict, will continueto influence both oil and gas prices. Significant price changes for oil and gasoften lead to changes in the levels of drilling activity which in turn lead tochanges in costs to explore, develop and acquire oil and gas reserves.Significant change in costs could affect the returns on our capitalexpenditures. Higher crude prices could also help keep natural gas prices highby keeping alternative fuels, such as heating oil and residual fuel, expensive.

 

**Impact of Inflation & Changing Prices**

 

Weare highly dependent upon natural gas pricing. A material decrease in currentand projected natural gas prices could impair our ability to raise additionalcapital on acceptable terms. Likewise, a material decrease in current andprojected natural gas prices could also impact our revenues and cash flows.This could impact our ability to fund future activities.

 

Changingprices have had a significant impact on costs of drilling and completing wells,particularly in the Madisonville Field area where we are currently the mostactive. The estimated cost of drilling and completing a Rodessa formation wellat approximately 12,300 feet of depth has increased from $3.0 million in 2001to $4.2 million in 2010 due to higher costs associated with tubular goods, wellequipment, and day rates for drilling contracts, among other factors. Thesehigher costs have impacted and will continue to impact our income fromoperations in the form of higher depletion expense.

 

**Critical Accounting Estimates**

 

Ourconsolidated financial statements have been prepared by management inaccordance with U.S. GAAP. We refer you to the corresponding section inPart II, Item 7 and the notes to the consolidated financialstatements of our Annual Report on Form 10-K for the year endedDecember 31, 2009 for the description of critical accounting policies andestimates.

 

**Risks and Uncertainties**

 

Thereare a number of risks that face participants in the U.S., Canadian andinternational oil and natural gas industry, including a number of risks thatface us in particular. Accordingly, there are risks involved in an ownership ofour securities. See “Risk Factors” in our Annual Report on Form 10-K forthe year ended December 31, 2009 for a description of the principal risksfaced by us.

 

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**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Weare exposed to market risks arising from fluctuating prices of crude oil,natural gas and interest rates as discussed below.

 

***Commodity Risk****.*  Ourmajor commodity price risk exposure is to the prices received for our naturalgas production. Realized commodity prices received for our production are thespot prices applicable to natural gas in the East Texas region. Prices receivedfor natural gas are volatile and unpredictable and are beyond our control.

 

***Currency Translation Risk.****  *Because ourrevenues and expenses are primarily in U.S. dollars, we have littleexposure to currency translation risk, and, therefore, we have no plans in theforeseeable future to implement hedges or financial instruments to manageinternational currency changes.

 

***Interest Rate Risk*****.** Interest rates on futuredebt offerings could be higher than current levels, causing our financing coststo increase accordingly. We do not currently utilize hedging contracts toprotect against interest rate risk.

 

**Item 4. Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Ourmanagement, with the participation of our President, Chief Executive Officerand Chairman and our interim Chief Financial Officer, has evaluated theeffectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30,2010.  Based on this evaluation, we have concluded that, as of June 30,2010, our disclosure controls and procedures were effective, in that theyensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is (1) recorded, processed,summarized and reported within the time periods specified in the SEC’srules and forms, and (2) accumulated and communicated to ourmanagement, including our President and Chief Executive Officer and interimChief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

Duringthe most recent fiscal quarter, there have been no changes in our internalcontrol over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II.OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

Fromtime to time, we are party to litigation or other legal and administrativeproceedings that we consider to be a part of the ordinary course of ourbusiness. On September 11, 2009, our subsidiary, Redwood EnergyProduction, L.P. filed an Original Petition for Declaratory Judgment againstDevon Energy Production Company (“Devon”) regarding certain overriding royaltyinterests and related revenue amounts claimed by Devon.  The Companypreviously accrued all amounts owed pursuant to these overriding royaltyinterests as royalty owners payable.  In the opinion of management basedon consultation with legal counsel, these proceedings are not expected to havea material adverse effect on our financial condition or results of operations.

 

**Item 1A.  Risk Factors.**

 

Asof the date of this filing, there have been no material changes from the riskfactors previously disclosed in our “Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2009, referred to as our2009 Annual Report. An investment in our securities involves various risks.When considering an investment in our company, you should consider carefullyall of the risk factors described in our 2009 Annual Report. These risks anduncertainties are not the only ones facing us and there may be additionalmatters that we are unaware of or that we currently consider immaterial.

 

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

 

None

 

**Item 3.  Defaults Upon Senior Securities**

 

Notapplicable.

 

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

 

Notapplicable.

 

**Item 5.  Other Information.**

 

Notapplicable

 

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**Item 6.  Exhibits**

 

EXHIBIT INDEX

 
| **Exhibit  Number** |   |                                                                                                                                            |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                            |
| 31.1                |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                   |
|                |   |                                                                                                                                            |
| 31.2                |   | Rule 13a-14(a)/15d-14(a) Certification  of Interim Chief Financial Officer.                                                           |
|                |   |                                                                                                                                            |
| 32.1 (1)            |   | Certification  of Chief Executive Officer and Interim Chief Financial Officer of GeoPetro  Resources Company pursuant to 18 U.S.C. § 1350. |

 

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(1) Furnished herewith

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on August 16, 2010.

 
|   | **GEOPETRO RESOURCES COMPANY** |
|--------|--------------------------------|
|   |                           |   |
|   | By:                            | /s/  Stuart J. Doshi |
|   |                           | Stuart  J. Doshi |
|   |                           | Chairman  of the Board of Directors, President and Chief Executive Officer |
|   |                           |   |
|   | By:                            | /s/  Paul D. Maniscalco |
|   |                           | Paul  D. Maniscalco |
|   |                           | Interim  Chief Financial Officer, Principal Accounting Officer |

 

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