Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

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

 

**OR**

 

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

 

**For the transition period from               to               **

 

**Commission file number 001-16749**

 

**GeoPetro Resources Company**

(Exactname of registrant as specified in its charter)

 

| **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’stelephone number, including area code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x No o.

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting 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) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x.

 

There were 37,979,646 sharesof no par value common stock outstanding on November 15, 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                                                             | 20     |
|                                                                                                     |   |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        | 20     |
|                                                                                                     |   |
| Item 5.  Other Information                                                                          | 20     |
|                                                                                                     |   |
| Item 6.  Exhibits                                                                                   | 20     |
|                                                                                                     |   |
| **SIGNATURES**                                                                                           | 22     |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item1.   Financial Statements.**

 

**GEOPETRO RESOURCES COMPANY**

**UNAUDITED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                 |
| **Current Assets**                                                                                                                                                                                                                                                                         |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                 |       | $                      | 1,889,965  |                  | $          | 2,429,891 |   |
| Trade  accounts receivable—natural gas sales                                                                                                                                                                                                                                          |       | 161,741                |       | 473,944               |       |
| Accounts  receivable—other                                                                                                                                                                                                                                                            |       | 31,373                 |       | 8,658                 |       |
| Prepaid  expenses                                                                                                                                                                                                                                                                          |       | 150,223                |       | 132,238               |       |
| Total  Current Assets                                                                                                                                                                                                                                                                      |       | 2,233,302              |       | 3,044,731             |       |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| **Oil and gas properties, at cost (full cost method)**                                                                                                                                                                                                                                     |       |                   |       |                  |       |
| Unproved  properties                                                                                                                                                                                                                                                                       |       | 7,558,892              |       | 8,411,773             |       |
| Proved  properties                                                                                                                                                                                                                                                                         |       | 51,320,517             |       | 51,194,852            |       |
| Gas  processing plant, at cost                                                                                                                                                                                                                                                             |       | 10,285,573             |       | 10,285,573            |       |
| Less—accumulated  depletion, depreciation, and impairment                                                                                                                                                                                                                             |       | (39,504,399            | )          | (38,950,914           | )          |
| Net  Oil and Gas Properties                                                                                                                                                                                                                                                                |       | 29,660,583             |       | 30,941,284            |       |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| **Furniture, fixtures and equipment, at cost, net of  depreciation**                                                                                                                                                                                                                       |       | 46,114                 |       | 2,071                 |       |
| **Other assets**                                                                                                                                                                                                                                                                           |       | 45,281                 |       | 16,127                |       |
| **Total Assets**                                                                                                                                                                                                                                                                           |       | $                      | 31,985,280 |                  | $          | 34,004,213 |   |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| **Current Liabilities**                                                                                                                                                                                                                                                                    |       |                   |       |                  |       |
| Trade  payables                                                                                                                                                                                                                                                                            |       | $                      | 1,304,461  |                  | $          | 950,097 |   |
| Current  portion of notes payable                                                                                                                                                                                                                                                          |       | 1,793,611              |       | 1,549,829             |       |
| Accrued  settlement payable                                                                                                                                                                                                                                                                |       | 300,000                |       | —                |       |
| Interest  payable                                                                                                                                                                                                                                                                          |       | 224,621                |       | 136,233               |       |
| Dividends  payable                                                                                                                                                                                                                                                                         |       | 113,772                |       | 110,462               |       |
| Production  taxes payable                                                                                                                                                                                                                                                                  |       | 182,300                |       | 309,904               |       |
| Other  taxes payable                                                                                                                                                                                                                                                                       |       | 5,528                  |       | 11,147                |       |
| Royalty  owners payable                                                                                                                                                                                                                                                                    |       | 371,484                |       | 1,151,284             |       |
| Total  Current Liabilities                                                                                                                                                                                                                                                                 |       | 4,295,777              |       | 4,218,956             |       |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| **Long Term Notes Payable**                                                                                                                                                                                                                                                                |       | 5,549,417              |       | 5,986,645             |       |
| **Asset Retirement Obligations**                                                                                                                                                                                                                                                           |       | 69,826                 |       | 65,009                |       |
| **Other Long Term Liabilities**                                                                                                                                                                                                                                                            |       | 75,051                 |       | —                |       |
| **Total Liabilities**                                                                                                                                                                                                                                                                      |       | 9,990,071              |       | 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 September 30, 2010 and December 31, 2009,  respectively. Liquidation preference of $5,642,250 at September 30, 2010  and December 31, 2009, respectively. |       | 5,448,602              |       | 5,448,602             |       |
| Common  stock, no par value; 100,000,000 shares authorized; 37,879,646 and 34,284,646  shares issued and outstanding at September 30, 2010 and  December 31, 2009, respectively                                                                                                  |       | 55,123,333             |       | 53,397,733            |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                |       | 3,384,876              |       | 3,060,187             |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                       |       | (41,961,602            | )          | (38,172,919           | )          |
| Total  Shareholders’ Equity                                                                                                                                                                                                                                                           |       | 21,995,209             |       | 23,733,603            |       |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                                                                                                                        |       | $                      | 31,985,280 |                  | $          | 34,004,213 |   |

 

***See accompanying notes to these unauditedconsolidated financial statements***

 

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**GEOPETRO RESOURCES COMPANY**

 

**UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenues                                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Natural gas sales                                                       |       | $                                                        | 641,603    |                                                    | $          | 973,653 |   | $ | 2,647,972 |   | $ | 2,919,923 |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Costs and expenses                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Plant operating                                                         |       | 973,189                                                  |       | 1,396,346                                               |       | 3,160,138 |   | 3,749,484 |   |
| Lease operating                                                         |       | 69,469                                                   |       | 93,773                                                  |       | 264,052 |   | 478,187 |   |
| General and administrative                                              |       | 539,492                                                  |       | 561,227                                                 |       | 1,776,514 |   | 2,026,821 |   |
| Impairment                                                              |       | —                                                   |       | 939,703                                                 |       | — |   | 939,703 |   |
| Depreciation and depletion                                              |       | 163,380                                                  |       | 432,559                                                 |       | 559,862 |   | 1,159,050 |   |
| Total costs and expenses                                                |       | 1,745,530                                                |       | 3,423,608                                               |       | 5,760,566 |   | 8,353,245 |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Loss from operations                                                    |       | (1,103,927                                               | )          | (2,449,955                                              | )          | (3,112,594 | ) | (5,433,322 | ) |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Other Income and (Expense)                                              |       |                                                     |       |                                                    |       |   |   |   |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest expense                                                        |       | (173,103                                                 | )          | (163,645                                                | )          | (522,011 | ) | (563,991 | ) |
| Interest income                                                         |       | 103                                                      |       | 976                                                     |       | 1,579 |   | 4,949 |   |
| Gain on sale of equipment                                               |       | —                                                   |       | 1,488,687                                               |       | — |   | 1,488,687 |   |
| Gain recognized in connection with settlement of  accrued liability     |       | 182,751                                                  |       | —                                                  |       | 182,751 |   | — |   |
| Total other income (expense)                                            |       | 9,751                                                    |       | 1,326,018                                               |       | (337,681 | ) | 929,645 |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Loss Before Taxes                                                       |       | (1,094,176                                               | )          | (1,123,937                                              | )          | (3,450,275 | ) | (4,503,677 | ) |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Income tax (expense) benefit                                            |       | —                                                   |       | 2,836                                                   |       | (800 | ) | 991 |   |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Net Loss                                                                |       | (1,094,176                                               | )          | (1,121,101                                              | )          | (3,451,075 | ) | (4,502,686 | ) |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Preferred stock dividend                                                |       | (113,773                                                 | )          | (43,871                                                 | )          | (337,608 | ) | (68,583 | ) |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Net Loss Applicable to Common Shareholders                              |       | $                                                        | (1,207,949 | )                                                       | $          | (1,164,972 | ) | $ | (3,788,683 | ) | $ | (4,571,269 | ) |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss per common share basic and diluted                             |       | $                                                        | (0.03      | )                                                       | $          | (0.03 | ) | $ | (0.11 | ) | $ | (0.13 | ) |
|                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average number of common shares outstanding  basic and diluted |       | 34,520,298                                               |       | 34,284,646                                              |       | 34,363,770 |   | 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 Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,  2010**                      | ** ** | **September 30,  2009** | ** ** |
|                                                                           |       |                                              |       |   |   |
| **Cash  Flows From Operating Activities**                                      |       |                                              |       |   |   |
|                                                                           |       |                                              |       |   |   |
| Net  loss                                                                      |       | $                                                 | (3,451,075 | ) | $ | (4,502,686 | ) |
| *Adjustments to reconcile net loss to net cash used in  operating activities:* |       |                                              |       |   |   |
| Depreciation  and depletion                                                    |       | 559,862                                           |       | 1,159,050 |   |
| Share-based  compensation expense                                              |       | 316,883                                           |       | 299,133 |   |
| Non-cash  interest expense                                                     |       | 86,676                                            |       | 37,849 |   |
| Impairment  expense                                                            |       | —                                            |       | 939,703 |   |
| Gain  on sales of assets                                                       |       | —                                            |       | (1,488,687 | ) |
| Gain  recognized in connection with settlement of accrued liability            |       | (182,751                                          | )          | — |   |
| Accretion  of discount on asset retirement obligations                         |       | 3,854                                             |       | 3,503 |   |
| *Changes in operating assets and liabilities:*                                 |       |                                              |       |   |   |
| Accounts  receivable - natural gas sales                                       |       | 312,203                                           |       | (274,598 | ) |
| Other  assets                                                                  |       | (69,855                                           | )          | 82,663 |   |
| Current  liabilities                                                           |       | 163,708                                           |       | 393,236 |   |
| Other  long term liabilities                                                   |       | 60,348                                            |       | — |   |
| Net  cash used in operating activities                                         |       | (2,200,147                                        | )          | (3,350,834 | ) |
|                                                                           |       |                                              |       |   |   |
| **Cash Flows from Investing Activities**                                       |       |                                              |       |   |   |
|                                                                           |       |                                              |       |   |   |
| Additions  to oil and gas properties                                           |       | (138,164                                          | )          | (678,352 | ) |
| Additions  to gas treatment plant                                              |       | —                                            |       | (83,097 | ) |
| Acquisition  of furniture, fixtures & equipment                       |       | (35,717                                           | )          | — |   |
| Dispositions  of oil and gas properties                                        |       | 1,000,000                                         |       | — |   |
| Dispositions  of equipment                                                     |       | —                                            |       | 2,500,000 |   |
| Net  cash provided by investing activities                                     |       | 826,119                                           |       | 1,738,551 |   |
|                                                                           |       |                                              |       |   |   |
| **Cash Flows from Financing Activities**                                       |       |                                              |       |   |   |
|                                                                           |       |                                              |       |   |   |
| Proceeds  from sale of common shares                                           |       | 1,725,600                                         |       | — |   |
| Proceeds  from sale of preferred stock Series B, net                           |       | —                                            |       | 3,031,710 |   |
| Proceeds  from promissory notes                                                |       | —                                            |       | 1,177,000 |   |
| Payments  of loan fee                                                          |       | (7,200                                            | )          | (15,200 | ) |
| Repayments  of notes payable                                                   |       | (550,000                                          | )          | (1,707,000 | ) |
| Payments  of preferred stock dividend                                          |       | (334,298                                          | )          | — |   |
| Net  cash provided by financing activities                                     |       | 834,102                                           |       | 2,486,510 |   |
|                                                                           |       |                                              |       |   |   |
| **Net (Decrease) Increase in Cash and Cash Equivalents**                       |       | (539,926                                          | )          | 874,227 |   |
|                                                                           |       |                                              |       |   |   |
| **Cash and Cash Equivalents**                                                  |       |                                              |       |   |   |
| Beginning  of period                                                           |       | 2,429,891                                         |       | 770,779 |   |
| End  of period                                                                 |       | $                                                 | 1,889,965  |   | $ | 1,645,006 |   |
|                                                                           |       |                                              |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                           |       |                                              |       |   |   |
| Cash  paid for interest                                                        |       | $                                                 | 346,947    |   | $ | 412,769 |   |
|                                                                           |       |                                              |       |   |   |
| Cash  paid for income taxes                                                    |       | $                                                 | 800        |   | $ | (991 | ) |

 

***See accompanying notes to these unauditedconsolidated 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 |   |
| Issuance of common stock  for cash          |       | —                                  |       | —                |       | 3,595,000                     |       | 1,725,600       |       | —                        |       | — |   | 1,725,600 |   |
| Share-based compensation  expense           |       | —                                  |       | —                |       | —                        |       | —          |       | 316,883                       |       | — |   | 316,883 |   |
| Fair value of warrants  issued with notes   |       | —                                  |       | —                |       | —                        |       | —          |       | 7,806                         |       | — |   | 7,806 |   |
| Net loss                                    |       | —                                  |       | —                |       | —                        |       | —          |       | —                        |       | (3,451,075 | ) | (3,451,075 | ) |
| Dividends on  Series B Preferred Stock |       | —                                  |       | —                |       | —                        |       | —          |       | —                        |       | (337,608 | ) | (337,608 | ) |
| Balances,  September 30, 2010          |       | 7,523,000                               |       | $                     | 5,448,602  |                          | 37,879,646 |            | $          | 55,123,333                    |       | $ | 3,384,876 |   | $ | (41,961,602 | ) | $ | 21,995,209 |   |

 

***See accompanying notes to these unauditedconsolidated 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(consisting primarily of normal recurring accruals) necessary for a fairstatement of the results for the interim periods presented. Results for interimperiods are not necessarily indicative of results to be expected for a fullyear or for previously reported periods due in part, but not limited to, thevolatility in crude oil and natural gas commodity prices, interest rates,estimates of reserves, drilling risks, geological risks, transportationrestrictions, the timing of acquisitions, product demand, market competition,interruption in production and our ability to obtain additional capital. Youshould read these consolidated interim financial statements in conjunction withthe audited consolidated financial statements and notes thereto included inGeoPetro’s Annual 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 September 30,2010, we had a working capital deficit of $2,062,475, and for the nine monthsended September 30, 2010, our cash used in operating activities amountedto $2,200,147.  We estimate our minimum investment needs during (i) theremainder of 2010 and (ii) calendar 2011, amount to $3,207,000 related to ournatural gas processing plant and our natural gas properties within theMadisonville field and our California properties.  Our results of operations resulted in anaccumulated deficit of $41,961,602 from inception through the nine months endedSeptember 30, 2010.  Further, we have maturing debt obligations, debtservice and dividend requirements that will require cash payments.  Wehold working interests in undeveloped leases, seismic options, lease optionsand foreign concessions and we have participated in seismic surveys and thedrilling of test wells on undeveloped properties.  We plan furtherleasehold acquisitions and seismic operations for the remainder of 2010 andfuture periods.  Exploratory and developmental drilling is scheduledduring 2010 and future periods on our undeveloped properties. During thenine months ended September 30, 2010, we raised $1,725,600 through a privateplacement transaction to certain institutional and individual accreditedinvestors (Note 8).  On September 1,2010, we renewed three of our notes payable for an additional one year term(Note 6).  On February 26, 2010, wesold our 100% working interest in approximately 122,000 acres onshore in theCook Inlet region of Alaska (Note 5). In addition to these items, we will 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, reducegeneral and administrative expenses, or a combination of all of these factors.

 

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

 

 Accountingstandards-setting organizations frequently issue new or revised accountingrules. We regularly review all new pronouncements to determine their impact, ifany, on our financial statements. No pronouncements materially affecting ourfinancial statements have been issued since the filing of our Form 10-K for theyear ended December 31, 2009.

 

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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:

 
| ** **                             | ** ** | **As of**               | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
|                                   |       |                         |       |   |   |
| Stock  options                         |       | 2,895,000                    |       | 2,720,000 |   |
| Warrants                               |       | 3,279,469                    |       | 1,342,857 |   |
| Convertible  Preferred Stock, Series B |       | 7,523,000                    |       | 4,121,004 |   |

 

All of the common sharesunderlying the stock options, warrants and convertible preferred stock,Series B above were excluded from diluted weighted average sharesoutstanding for the three and nine months ended September 30, 2010 andSeptember 30, 2009 because their effects 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 of $1.0million.

 

·                  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.

 

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

 

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

 

As of September 30,2010 and December 31, 2009 debt consisted of the following:

 
| ** **                                    | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ***Long Term Portion***                       |       |                         |       |                        |       |
| Promissory  notes (c)                         |       | $                            | 1,415,000  |                        | $          | 1,715,000 |   |
| Promissory  note dated September 30, 2010 (b) |       | 350,000                      |       | —                      |       |
| Bank  of Oklahoma loan (a)                    |       | 3,922,847                    |       | 4,372,847                   |       |
| Less  discount on promissory notes            |       | (138,430                     | )          | (101,202                    | )          |
| ***Net long term notes payable***             |       | 5,549,417                    |       | 5,986,645                   |       |
|                                          |       |                         |       |                        |       |
| ***Current Portion***                         |       |                         |       |                        |       |
| Promissory  notes (c)                         |       | 1,200,000                    |       | 1,000,000                   |       |
| Promissory  note dated September 30, 2010 (b) |       | 25,000                       |       | —                      |       |
| Bank  of Oklahoma loan (a)                    |       | 600,000                      |       | 600,000                     |       |
| Less  discount on promissory notes            |       | (31,389                      | )          | (50,171                     | )          |
| ***Net current portion notes payable***       |       | 1,793,611                    |       | 1,549,829                   |       |
| **Total**                                     |       | $                            | 7,343,028  |                        | $          | 7,536,474 |   |

 

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(a)          On March 25, 2010 theBank of Oklahoma, “BOK” waived compliance of a minimum tangible net worthrequirement related to our $6,697,847 three year Term Loan Agreement, the termsof the waiver relate to all periods subsequent to December 31, 2009.  Theterms of the three year loan provide for minimum quarterly principal paymentsof $150,000 and interest payable quarterly in arrears at prime plus 4% or LIBORplus 5.5% at the option of the Company. At September 30, 2010, theinterest rate was approximately 6% (LIBOR + 5.5%), and we were in compliancewith all covenants of the loan.

(b)         On September 30, 2010, weissued a 5-year non-interest bearing note payable in the amount of $375,000 inconnection with the execution of a settlement agreement (Note 11).  Payments are due as follows: $25,000 in March2011, $50,000 in October 2011, and $75,000 each October thereafter until2015.  An imputed interest rate of 10%per annum has been used to record a discount in connection with this note.

(c)          On August 31, and September1, 2010, we partially repaid a promissory note in the amount of $50,000, werenewed two promissory notes in the amount of $100,000 and $30,000 and renewedone promissory note in the amount of $50,000. Prior to the note renewals we repaid all outstanding accrued interest onthe notes. The terms of the renewed notes payable remain materially consistentthose previously issued. In connection with the issuance of these notes weissued a total of 23,000 warrants to purchase our common stock (Note 10).

 

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

 

The effective income taxrates for the nine month periods ended September 30, 2010 were negligible,primarily due to adjustments to the valuation allowance on deferred tax assets.

 

**8.****             ****STOCKHOLDERSEQUITY**

 

OnSeptember 30, 2010, we completed a sale through a private placementtransaction to certain institutional and individual accredited investors. Unitswere priced at $0.48 per unit, and each unit consisted of one share of no parvalue common stock, and a one-half common share purchase warrant. Each onewhole warrant entitles the holder to acquire one common share at a price of$0.75 per share for a period of three years. The total aggregate purchase pricefor the units sold was $1,725,600, and represented the sale of 3,595,000 commonshares and 1,797,500 warrants (Note 10). We granted “piggyback” registration rights to the investors with respectto the shares of common stock and common stock issuable upon exercise of thewarrants which the investors acquired in the transaction.

 

**9.**              **COMMON STOCK OPTIONS**

 

On July 19, 2010, wemodified the original exercise price for 740,000 stock options from $4.28 asissued on June 27, 2008 to $0.50 per share. We considered ASC 718 “*Share Based Compensation*” when recording the impact of thisre-pricing.  The additional compensationcost to be recognized in connection with the re-pricing of these options is$113,882 and will be recognized over the requisite service periods of theunderlying options.

 

On July 19, 2010, wegranted a total of 195,000 stock options to five non-management directors at anexercise price of $0.50 per share. These options will vest ratably over fiveyears pursuant to the terms of the 2004 Stock Option and Appreciation RightsPlan. The grant-date fair value of the options was $59,984.

 

Theweighted average fair value of these options was calculated under theBlack-Scholes pricing model. We estimated the dividend yield at 0% consideringthat we have not historically paid dividends on our common stock, nor do weexpect to pay dividends in the foreseeable future.  Volatility estimates representthe historic trading volatility underlying our common stock at the date ofgrant. Volatility used to value the option grant and re-pricing was 112%. Weestimated risk-free interest rates based on the U.S. Treasury yield curve atthe date of grant to be 0.95%.  Expected lives are based on our historicexperience with employee option exercise behavior and consider the vestingperiod and the contractual lives of the related options. Expected lives used inour calculations were 2.94 years and 5.0 years for the re-pricing and the grantof new options respectively. As of September 30, 2010 a total of 2,895,000options were outstanding, of which 2,178,000 were exercisable. The weightedaverage exercise price for outstanding options as of September 30, 2010 was$1.59.

 

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**10.**       **COMMON STOCK WARRANTS**

 

OnSeptember 1, 2010 we issued 23,000 warrants to purchase our common shares at$0.50 in conjunction with the renewal of three of our promissory notes payable(Note 6). The warrants expire as of August 31, 2013.  The total fair value of the warrants ascalculated using the Black - Scholes pricing model was not material to ourfinancial statements.

 

OnSeptember 30, 2010, we issued 1,797,500 warrants to purchase our common sharesat $0.75 in conjunction with a private placement of our common stock (Note 8).The warrants expire on September 30, 2013. The total fair value of the warrants as calculated using theBlack-Scholes pricing model was $415,323. Key assumptions used in valuing the warrants included: an estimateddividend yield of 0%, volatility of 92%, an estimated risk-free interest ratebased on the U.S. Treasury yield curve at the date of grant of 0.64% and anexpected life of three years.

 

As of September 30, 2010 wehave reserved 3,279,469 shares of common stock for the exercise of our stockpurchase warrants.

 

**11.**       **COMMITMENTS AND CONTINGENCIES**

 

***Legal Settlement*** - On September30, 2010, we entered into a settlement agreement with Devon Energy ProductionCompany L.P.  (“Devon”) related toover-riding royalty interests and related revenue amounts claimed by Devon.Prior to the settlement we had accrued $767,635 as royalties payable to Devon.In connection with the settlement agreement we issued a 5-year non-interestbearing note in the amount of $375,000, (Note 6) and agreed to pay $300,000 onOctober 1, 2010. We have recorded a gain on the settlement of $182,751 whichhas been included in other income on our unaudited consolidated statement ofoperations. Of the gain recognized $90,116 relates to imputed interest whichwill be recognized as expense over the term of the note.

 

***Employment Agreements******-*** On March 31,2010 Chief Financial Officer, J. Chris Steinhauser with whom we had enteredinto an employment contract dated April 27, 2009, resigned from hispositions as the Chief Financial Officer, Vice President of Finance andSecretary of the Company.

 

On April 26, 2010 weextended our Vice President of Exploration, David V. Creel’s employmentagreement through December 31, 2010; all other provisions per the terms of theoriginal employment agreement remain unchanged.

 

***Office Lease -*** In February, 2010, weentered into a lease for our principal executive office.  The terms of thelease provide for an eighty-four (84) month term. Minimum annual rentals dueunder this agreement as of September 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 |   |
|            |        |         |           |  |

 

**12.****      ****SUBSEQUENT EVENTS**

 

On October 1, 2010 we paid$300,000 in accrued settlement liabilities recorded in connection with asettlement agreement executed with Devon on September 30, 2010.

 

On October 8, 2010, wecompleted the sale of an additional 100,000 units through our private placementof common shares (Note 8).

 

On October 31, 2010 a notepayable in the amount of $720,000 matured and became due. We are currentlynegotiating its renewal.

 

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*The followingdiscussion and analysis should be read in conjunction with accompanyingfinancial statements and related notes included elsewhere in this report. Itcontains forward looking statements that reflect our future plans, estimates,beliefs and expected performance. The forward looking statements are dependentupon events, risks and uncertainties that may be outside our control. Ouractual results could differ materially from those discussed in these forwardlooking statements.*

 

*Factorsthat could cause or contribute to such differences include, but are not limitedto, market prices for natural gas and oil, economic and competitive conditions,regulatory changes, estimates of proved reserves, potential failure to achieveproduction from development drilling projects, capital expenditures and otheruncertainties, as well as those factors discussed below and elsewhere in thisreport, particularly in “Risk Factors”, all of which are difficult to predictand which expressly qualify all subsequent oral and written forward-lookingstatements attributable to us or persons acting on our behalf. In light ofthese risks, uncertainties and assumptions, the forward looking eventsdiscussed may not occur. We do not have any intention or obligation to updateforward-looking statements included in this report after the date of thisreport, except as required by law.*

 

**Overview**

 

We are an oil and gascompany in the business of exploring and developing oil and natural gasreserves on a worldwide basis. Since inception, we have conducted leaseholdacquisition, exploration and drilling activities on our North American,Australian and Indonesian prospects. These projects currently encompassapproximately 255,506 gross (40,540 net) acres, consisting of mineral leases,production sharing contracts and exploration permits that give us the right toexplore for, develop and produce oil and natural gas. Most of these propertiesare in the exploration, appraisal or development drilling phase and have notbegun to produce revenue from the sale of oil and natural gas. Excluding minorinterest and dividend income, our only significant cash inflows until 2003 werethe recovery of capital invested in projects through sale or other divestitureof interests in oil and gas prospects to industry partners.

 

Since 2003, substantiallyall of our revenue has been generated from natural gas sales derived from theMagness #1, the Fannin #1, and the Mitchell #1 wells in the Madisonville Fieldin East Texas under spot gas purchase contracts at market prices. Natural gassales from the Madisonville Field are expected to account for substantially allof our revenues for the remainder of 2010. We expect the majority of ourcapital expenditures for the remainder of 2010 and in 2011 will be for theMadisonville Project and gas processing plant.

 

**Results ofOperations**

 

The financial informationwith respect to the nine months ended September 30, 2010 and 2009 asdiscussed below is unaudited. In the opinion of management, such informationcontains all adjustments consisting only of normal recurring accruals,necessary for a fair presentation of the results for such periods.  Theresults of operations for interim periods are not necessarily indicative of theresults of operations for the full fiscal years.

 

 
| ** **                                     | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 30,  2010**    | ** ** | **September 30,  2009** | ** ** |
| ** **                                     | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** |
| **Consolidated Statement of Operations:**      |       |                            |       |   |   |
| **Revenues**                                   |       | $                               | 2,647,972  |   | $ | 2,919,923 |   |
| **Plant operating**                            |       | 3,160,138                       |       | 3,749,484 |   |
| **Lease operating**                            |       | 264,052                         |       | 478,187 |   |
| **General and administrative**                 |       | 1,776,514                       |       | 2,026,821 |   |
| **Impairment expense**                         |       | —                          |       | 939,703 |   |
| **Depreciation and depletion**                 |       | 559,862                         |       | 1,159,050 |   |
| **Loss from operations**                       |       | (3,112,594                      | )          | (5,433,322 | ) |
| **Net loss**                                   |       | (3,451,075                      | )          | (4,502,686 | ) |
| **Net loss applicable to common shareholders** |       | $                               | (3,788,683 | ) | $ | (4,571,269 | ) |

 

**Revenue andOperating Trends**

 

We have developed an onsiteplan to treat and remove impurities from the Madisonville Project natural gasin order to meet pipeline-quality specifications. The Madisonville Project islocated in East Texas. In 2003, the construction and installation of a naturalgas treatment plant with a designed capacity of 18 million cubic feet of gasper day (“MMcf/d”) and associated pipeline and gathering facilities werecompleted. The treatment plant and associated gathering facilities were ownedby an unaffiliated third party.

 

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In 2005 we secured acommitment from the Madisonville Gas Plant (“MGP”) to install and makeoperational additional treating facilities capable of treating 50 MMcf/d, whichcombined with the capacity of the current in-service treating facilities willrepresent a total designed treating capacity of 68 MMcf/d for the Madisonvilletreatment plant.   In early November 2007, MGP began testing theadditional 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.

 

During 2008, MGP analyzedvarious options for removing the diamondoids; however, they did not complete thenecessary plant system modifications.  On December 31, 2008, wepurchased the gas treatment plant (the “Plant”) and related gathering pipelinefrom MGP in exchange for assumption of secured debt, payment of certainoutstanding payables of MGP and shares of GeoPetro’s common stock.  Theeffective date of the acquisition was December 31, 2008 and the new ownerof the Plant is GeoPetro’s wholly-owned, indirect subsidiary, MadisonvilleMidstream LLC (“MM”).  We expect to complete installation of the system modificationsrequired in the new plant by the end of 2011.  In the meantime, theexisting, in service portion of the plant continues to operate with a designcapacity of approximately 18 MMcf/d of inlet gas.

 

While there can be noassurance, our goal is to make the necessary upgrades to the plant and increasethe production rates from our wells which may result in higher net productionand increased revenue during the remainder of 2010 as compared to 2009 andprior periods. To accomplish the plant upgrades, we will need to raiseadditional capital. Due to the unsettled state of the capital markets, fundsmay not be available, or may not be available on favorable terms.

 

During the nine months endedSeptember 30, 2010, we did not generate sufficient revenues to cover theplant operating expenses and lease operating expenses in our MadisonvilleProject.  This was due to low production volumes, high shrinkage rates inthe gas plant and low natural gas prices. Subject to capital availability, weplan to workover the Mitchell #1 well and to frac and connect via gatheringline the Wilson #1 well. Once the above production enhancements are completed,the Company expects the combined Rodessa formation production to increase fromcurrent rates.  The Company hopes to continue to realize both intermediateand long term cost and operating efficiencies by consolidating the upstream andmidstream portions of Madisonville under common ownership. Despite thechallenges of the current environment, we accomplished the necessary goal ofvertically integrating our position in the Madisonville field.  Wecontinue to explore other longer term cost saving and efficiency measures inthe plant.

 

**IndustryOverview for the nine months ended September 30, 2010**

 

Natural gas prices have beenvery volatile during 2010 and 2009 due to supply concerns earlier in 2009, andmore recently due to recession concerns arising from the current globalfinancial crisis and a resultant decline in demand for natural gas.

 

**CompanyOverview for the nine months ended September 30, 2010**

 

Our net loss applicable tocommon shareholders for the nine months ended September 30, 2010 was$3,788,683. From our inception, through mid-2003, we only received nominalrevenues from our oil and natural gas activities, while incurring substantialacquisition and exploration costs and overhead expenses which have resulted inan accumulated deficit through September 30, 2010 of $41,961,602. All of our natural gas sales for nine months ended September 30, 2010 werederived from our Madisonville Project, from three producing wells, the UMC RubyMagness #1 well (the “Magness Well”), the Angela Farris Fannin #1 well (the“Fannin Well”), and the Mitchell #1 well (the “Mitchell Well”).

 

**Comparisonof Results of Operations for the three months ended September 30, 2010 and2009**

 

During the three monthsended September 30, 2010, we had gross natural gas revenues of $641,603.During this period the sales of gas from our wells amounted to 164,220 Mcf andour average natural gas price realized was $3.91 per Mcf. During the threemonths ended September 30, 2009 we had gross natural gas revenues of$973,653. Our natural gas sales for the three months ended September 30,2009 were 374,697 Mcf and our average natural gas price realized was $2.59 perMcf. Revenues decreased during the three months ended September 30, 2010as compared to the prior year period due to a 56% decrease in productionvolumes related to normal decline curves as well as treatment plant downtimepartially offset by a 51% increase in natural gas prices.

 

During the three monthsended September 30, 2010, we incurred plant operating expenses of$973,189. During the three months ended September 30, 2009, the plantoperating expense was $1,396,346.  The decrease in plant operating expenseof $423,157 or 30% was primarily attributable to cost cutting measures at ourfacility.  We anticipate our future plant operating expenses will remainfairly consistent with amounts recorded in the current three month period.

 

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During the three monthsended September 30, 2010, we incurred lease operating expenses of $69,469.Our net average lifting cost for the 2010 period was $0.42 per Mcf. During thethree months ended September 30, 2009, we incurred lease operatingexpenses of $93,773. Our net average lifting cost for the 2009 period was $0.25per Mcf. The average lifting cost per Mcf in 2010 was higher due to lowerproduction volumes. The gross lease operating expense for three months endedSeptember 30, 2010 was lower than the same prior year period due mainly toa reduction of ad valorem property taxes applicable to the wells.

 

General and administrative(“G&A”) expenses for the three months ended September 30, 2010 were$539,492 compared to $561,227 for the three months ended September 30,2009. This represents a $21,735 or 4% decrease over the prior period. The lowerG&A expense incurred in 2010 was attributable primarily to reduced salaryexpense.

 

Forthe three months ended September 30, 2010, the impairment expense was $0versus $939,703 for the same period of 2009.  The 2009 impairmentwrite-downs were attributable to the costs of certain wells drilled on ourCanadian oil and gas properties which were deemed to be fully evaluated duringthe latest quarter resulting in ceiling test write downs.  We determinedduring the quarter that the reserve potential associated with these wells didnot merit further expenditures.

 

Depreciation, depletion andamortization expense (“DD&A”) for the three months ended September 30,2010 was $163,380 as compared to $432,559 in the corresponding 2009 period.These amounts primarily represent amortization of the oil and gas properties.The 62% 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 as well as lower production volumes.

 

Loss from operations totaled$1,103,927 for the three months ended September 30, 2010 as compared to$2,449,955 for the three months ended September 30, 2009. The decrease inthe loss from operations was primarily attributable to lower operating andadministrative expenses, reduced depreciation and depletion expenses, andimpairments recorded in the corresponding prior period.

 

During the three monthsended September 30, 2010 and 2009, we incurred interest expense of$173,103 and $163,645, respectively.

 

Duringthe three months ended September 30, 2010, we realized a gain in connectionwith the settlement of previously accrued liabilities of $182,751.  During the three months endedSeptember 30, 2009, we realized a gain on the sale of equipment of$1,488,687 relating to the sale of idle equipment in our Madisonville Plant.

 

**Comparisonof Results of Operations for the nine months ended September 30, 2010 and2009**

 

During the nine months endedSeptember 30, 2010, we had gross natural gas revenues of $2,647,972. During this period our sales of natural gas from our wells was 611,696 Mcf atan average price of $4.33 per Mcf. During the nine months endedSeptember 30, 2009, we had gross natural gas revenues of $2,919,923. Oursales of natural gas for the nine months ended September 30, 2009 were985,563 Mcf at an average price of $2.96 per Mcf. Revenues decreased in thenine months ended September 30, 2010 as compared to the prior year perioddue to 38% lower production volumes related to normal decline curves as well astreatment plant downtime partially offset by 46% higher natural gas prices.

 

During the nine months endedSeptember 30, 2010, we incurred plant operating expenses of $3,160,138, ascompared to $3,749,484 in the same prior year period.  The decreaseof $589,346 or 16% was attributable to cost cutting measures comprisedprimarily of reduced costs associated with field personnel, chemicals,electricity and ad valorem taxes.  We anticipate our future plantoperating expenses will remain fairly consistent with amounts recorded in thecurrent nine month period.

 

During the nine months endedSeptember 30, 2010, we incurred lease operating expenses of $264,052. Ouraverage lifting cost for the 2010 period was $0.43 per Mcf. During the ninemonths ended September 30, 2009, we incurred lease operating expenses of$478,187. Our average lifting cost for the 2009 period was $0.49 per Mcf. Theaverage lifting cost per Mcf in 2010 was lower due to cost reductionsassociated with field personnel, insurance costs, and workover costs.

 

General and administrative(“G&A”) expenses for the nine months ended September 30, 2010 were$1,776,514 compared to $2,026,821 for the nine months ended September 30,2009. This represents a $250,307 or 12% decrease over the prior year period.The lower G&A expense incurred in 2010 was due primarily to lower expensesincurred in connection with the issuance of our 2009 annual report, decreasedsalaries, decreased consulting expense, and lower insurance cost.

 

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Forthe nine months ended September 30, 2010, the impairment expense was $0versus $939,703 for the same period of 2009.  The 2009 impairmentwrite-downs were due to cost of certain wells drilled on our Canadian oil andgas properties which were deemed to be fully evaluated during the latestquarter resulting in ceiling test write downs.

 

Depreciation, depletion andamortization expense (“DD&A”) for the nine months ended September 30,2010 was $559,862 as compared to $1,159,050 in the same period in 2009, theseamounts primarily represent amortization of the oil and gas properties for thenine months ended September 30, 2010 and 2009, respectively. The 52%decrease was due to lower net production in the nine months endedSeptember 30, 2010 as well as lower value of oil and gas propertiesresulting from ceiling test write-offs in the US cost pool recorded duringthe fiscal year ended December 31, 2009.

 

During the nine months endedSeptember 30, 2010 and 2009, we incurred interest expense of $522,011 and$563,991, respectively. The lower interest expense in 2010 was primarily due toone-time loan fee paid in 2009.

 

During nine months endedSeptember 30, 2010, we realized a gain in connection with the settlement ofpreviously accrued liabilities in amount of $182,751. During the nine monthsended September 30, 2009, we realized a gain on the sale of equipment of$1,488,687 relating to the sale of idle equipment in our Madisonville Plant.

 

**RecentDevelopments**

 

In February, 2010, weentered into a lease for our principal executive office.  The terms of thelease provide for an eighty-four (84) month term. Minimum annual rentals dueunder this agreement as of September 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 |   |
|            |        |         |           |  |

 

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 of $1.0million.

 

·                  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.

 

On October 21, 2010, the LEA#1 exploration well was spudded to evaluate a conventional oil and gas prospectidentified and developed by us.

 

On March 31, 2010, J.Chris Steinhauser resigned from his positions as the Chief Financial Officer,Vice President of Finance and Secretary of the Company to pursue otherinterests. The resignation notification submitted by Mr. Steinhauser didnot reference any disagreement with the Company on any matter relating to theCompany’s operations, policies and practices.

 

On April 26, 2010 weextended our Vice President of Exploration, David V. Creel’s employmentagreement through December 31, 2010, all other provisions per the terms ofthe original employment agreement remain unchanged.

 

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On July 19, 2010, wemodified the original exercise price for 740,000 stock options from $4.28 asissued on June 27, 2008 to $0.50 per share.

 

On July 19, 2010, wegranted a total of 195,000 stock options to five non-management directors at anexercise price of $0.50 per share. These options will vest ratably over five(5) years pursuant to the terms of the 2004 Stock Option and AppreciationRights Plan.

 

OnSeptember 1, 2010, we issued 23,000 warrants to purchase our common shares at$0.50 in conjunction with the renewal of certain promissory notes payable. Thewarrants expire on August 31, 2013.

 

OnSeptember 30, 2010, we entered into a legal settlement with Devon in connectionwith the settlement we issued a non-interest note in the amount of $375,000payable over 5 years, and agreed to pay $300,000 on October 1, 2010. We haverecorded a gain in the amount of $182,751 in connection with this settlement.

 

OnSeptember 30, 2010, we completed a sale through a private placementtransaction to certain institutional and individual accredited investors. Thetotal placement consisted of 3,595,000 units priced at $0.48 per unit.  Each unit consisted of one share of no parvalue common stock, and a one-half common share purchase warrant. Each onewhole warrant entitles the holder to acquire one common share at a price of$0.75 per share for a period of three years. The total aggregate purchase pricefor the units sold was $1,725,600, and represented the sale of 3,595,000 commonshares and 1,797,500 warrants.

 

InOctober 2010, we completed the sale of an additional 100,000 units for proceedsof $48,000.

 

On October 31, 2010 a notepayable in the amount of $720,000 matured and became due. We are currently negotiatingits renewal.

 

**Liquidityand Capital Resources**

 

 We had a working capital deficit of $2,062,475at September 30, 2010 versus $1,174,225 at December 31, 2009. Ourworking capital deficit increased during nine months ended September 30,2010 due primarily to losses incurred in connection with natural gasoperations, the payment of dividends on our preferred shares, and therepayments of debt obligations.

 

Our cash balance atSeptember 30, 2010 was $1,889,965 compared to a cash balance of $2,429,891at December 31, 2009. The change in our cash balance is summarized asfollows:

 
| Cash  balance at December 31, 2009       |   | $          | 2,429,891 |   |
|-----------------------------------------------|--------|------------|-----------|--------|
| Sources  of cash:                             |   |       |      |
| Cash  provided by investing activities        |   | 826,119    |      |
| Cash  provided by financing activities        |   | 834,102    |      |
| Total  sources of cash including cash on hand |   | 4,090,112  |      |
| Uses  of cash:                                |   |       |      |
| Cash  used in operating activities            |   | (2,200,147 | )         |
| Total  uses of cash                           |   | (2,200,147 | )         |
|                                          |   |       |      |
| Cash  balance at September 30, 2010      |   | $          | 1,889,965 |   |

 

 Net cash used inoperating activities of $2,200,147 and $3,350,834 for the nine months endedSeptember 30, 2010 and 2009 respectively are attributable to our net incomeadjusted for non-cash charges as presented in the consolidated statements ofcash flows and changes in working capital as discussed above.

 

We have historicallyfinanced our business activities principally through issuances of commonshares, preferred shares, promissory notes and common share purchase warrantsissued in private placements and an initial public offering. These financingsare summarized as follows:

 
| ** **                                      | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **September 30, 2010** | ** ** | **September 30, 2009** | ** ** |
| Proceeds  from sale of common shares            |       | $                                | 1,725,600  |   | $ | — |   |
| Proceeds  from sale of Preferred Series B  |       | —                           |       | 3,031,710 |   |
| Proceeds  from the issuance of promissory notes |       | —                           |       | 1,177,000 |   |
| Repayment  of notes payable                     |       | (550,000                         | )          | (1,707,000 | ) |
| Payments  of loan fee                           |       | (7,200                           | )          | (15,200 | ) |
| Payment  of preferred stock dividend            |       | (334,298                         | )          | — |   |
|                                            |       |                             |       |   |   |
| Net  cash provided by financing activities      |       | $                                | 834,102    |   | $ | 2,486,510 |   |

 

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The net proceeds of ourequity financings have been primarily used to satisfy working capitalrequirement and invest in oil and natural gas properties and the gas treatmentplant totaling $138,164 and $761,449 for the nine months endedSeptember 30, 2010 and 2009, respectively.

 

Net cash provided byinvesting activities of $826,119 for the nine months ended September 30,2010  related to net proceeds from thedispositions of oil and gas properties offset by additions to our oil and gasproperties. Net cash provided by investing of $1,738,551 for the nine monthsended September 30, 2009 related to dispositions of idle equipment offset byadditions to our oil and gas properties and gas processing plant.

 

Our current cash and cashequivalents and anticipated cash flow from operations may not be sufficient tomeet our working capital, and capital expenditure requirements for theforeseeable future.  Additional financing is required to carry out ourbusiness plan. Selling certain idle equipment at the new Madisonville Treatmentplant will be our first preference in raising the capital needed. See “Outlookfor 2010 and 2011 Capital” for a description of our expected capitalexpenditures for the remainder of 2010. If we are unable to generate revenuesnecessary to finance our operations over the long-term, we may have to seekadditional capital through the sale of our equity or borrowing. We periodicallyborrow funds through the issuance of short and long term promissory notes tofinance our activities.

 

As of September 30,2010, we have a working capital deficit of $2,062,475, and for the nine monthsended September 30, 2010, our cash used in operating activities amountedto $2,200,147.  Further, we estimate our minimum investment needs duringthe remainder of 2010 and 2011 to be $3,207,000 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$3,112,594 for the nine months ended September 30, 2010.  Further, wehave maturing debt obligations, debt service and dividend requirements thatwill require cash payments.  We hold working interests in undevelopedleases, seismic options, lease options and foreign concessions and we haveparticipated in seismic surveys and the drilling of test wells on undevelopedproperties.  We plan further leasehold acquisitions and seismic operationsfor the remainder of 2010 and future periods.  Exploratory anddevelopmental drilling is scheduled during 2010 and future periods on ourundeveloped properties.   We are attempting to raise additional cashthrough the sale or farmout of certain of our unproved properties.  We also need to raise additional equity or enter into new borrowing arrangementsto finance our operating deficit and our continued participation in plannedactivities. If additional financing is not available, we will be compelled toreduce the scope of our business activities.  If we are unable to fund ouroperating cash flow needs and planned capital investments, it will be necessaryto farm-out our interest in proposed wells, sell a portion of our interest inprospects, sell a portion of our interest in our producing oil and gasproperties, sell all or a portion of our gas plant, reduce general and administrativeexpenses, or a combination of all of these factors.

 

As discussed in the “Outlookfor 2010 and 2011 Capital”, we are forecasting capital expenditures of $3.2million during the remainder of 2010 and 2011. We will need to obtain adequatesources of cash to fund these anticipated capital expenditures and to followthrough with our plans for continued investments in oil and gas properties. Oursuccess, in part, depends on our ability to generate additional financing and/orfarmout certain of our projects.  Additionally, as a result of the currenteconomic downturn, the Company may have difficulty raising sufficient funds tomeet our projected funding requirements. The tight credit markets and downturn inthe stock market may impair our ability to generate additional financing.

 

We will continue to analyzethe potential effects of the global economic downturn on our business andprospects and our ability to generate additional financing.

 

**ContractualObligations**

 

We have assumed variouscontractual obligations and commitments in the normal course of our operationsand financing activities.  We have described these obligations andcommitments in our “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” section in our Annual Report on Form 10-K forthe year ended December 31, 2009.  There were no material changes toour contractual obligations since December 31, 2009 except items describedin “Recent Developments”.

 

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**Off BalanceSheet Arrangements**

 

From time to time, we enterinto off-balance sheet arrangements and transactions that can give rise tooff-balance sheet obligations. As of September 30, 2010, our off-balancesheet arrangements and transactions include operating lease agreements. We donot believe that these arrangements are reasonably likely to materially affectour liquidity or availability of, or requirements for, capital resources.

 

**FinancialInstruments**

 

We currently have no naturalgas price financial instruments or hedges in place.  Our natural gasmarketing contracts use “spot” market prices. Given the uncertainty of thetiming and volumes of our natural gas production this year, we do not currentlyplan to enter into any long term fixed-price natural gas contracts, swap orhedge positions, or other gas financial instruments in 2010.

 

**Outlook for2010 and 2011 Capital**

 

Depending on capitalavailability, we are forecasting capital spending of up to approximately$3,207,000 during the remaining year 2010 and the calendar year of 2011,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$179,000 to be utilized for land and permitting costs.

 

We may, in our discretion,decide to allocate resources towards other projects in addition to or in lieuof, those listed above should other opportunities arise and as circumstanceswarrant. We currently do not have sufficient working capital to fund all of thecapital expenditures listed above. We may, in our discretion, fund theforegoing planned expenditures from operating cash flows, asset sales,potential debt and equity issuances and/or a combination of all four. TheMadisonville Project forecasted capital expenditures will play an importantpart in the Company achieving our 2010 and 2011 cash flow projections. See “Liquidity and Capital Resources.”

 

We expect commodity pricesto be volatile, reflecting the current supply and demand fundamentals for NorthAmerican natural gas and world crude oil. Political and economic events aroundthe world, which are difficult to predict, will continue to influence both oiland gas prices. Significant price changes for oil and gas often lead to changesin the levels of drilling activity which in turn lead to changes in costs toexplore, develop and acquire oil and gas reserves. Significant change in costscould affect the returns on our capital expenditures. Higher crude prices couldalso help keep natural gas prices high by keeping alternative fuels, such asheating oil and residual fuel, expensive.

 

**Impact ofInflation & Changing Prices**

 

We are highly dependent uponnatural gas pricing. A material decrease in current and projected natural gasprices could impair our ability to raise additional capital on acceptableterms. Likewise, a material decrease in current and projected natural gasprices could also impact our revenues and cash flows. This could impact ourability to fund future activities.

 

Changing prices have had asignificant impact on costs of drilling and completing wells, particularly inthe Madisonville Field area where we are currently the most active. Theestimated cost of drilling and completing a Rodessa formation well atapproximately 12,300 feet of depth has increased from $3.0 million in 2001 to$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.

 

**CriticalAccounting Estimates**

 

Our consolidated financialstatements have been prepared by management in accordance with U.S. GAAP.We refer you to the corresponding section in Part II, Item 7 and thenotes to the consolidated financial statements of our Annual Report onForm 10-K for the year ended December 31, 2009 for the description ofcritical accounting policies and estimates.

 

**Risks andUncertainties**

 

There are a number of risksthat face participants in the U.S., Canadian and international oil and naturalgas industry, including a number of risks that face us in particular.Accordingly, there are risks involved in an ownership of our securities. See “RiskFactors” in our Annual Report on Form 10-K for the year endedDecember 31, 2009 for a description of the principal risks faced by us.

 

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**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

We are exposed to marketrisks arising from fluctuating prices of crude oil, natural gas and interestrates 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 rateson future debt offerings could be higher than current levels, causing ourfinancing costs to increase accordingly. We do not currently utilize hedgingcontracts to protect against interest rate risk.

 

**Item 4. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our management, with theparticipation of our President, Chief Executive Officer and Chairman and ourinterim Chief Financial Officer, has evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of September 30, 2010. Based on this evaluation, we have concluded that, as of September 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.

 

During the most recentfiscal quarter, there have been no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

From time to time, we areparty to litigation or other legal and administrative proceedings that weconsider to be a part of the ordinary course of our business. OnSeptember 11, 2009, our subsidiary, Redwood Energy Production, L.P. filedan Original Petition for Declaratory Judgment against Devon Energy ProductionCompany L.P.  (“Devon”) regarding certainoverriding royalty interests and related revenue amounts claimed byDevon.  The Company previously accrued all amounts owed pursuant to theseoverriding royalty interests as royalty owners payable. On September 30,2010, we entered into a settlement agreement with Devon.

** **

**Item 1A.  Risk Factors.**

 

As of the date of thisfiling, there have been no material changes from the risk factors previouslydisclosed in our “Risk Factors” in our Annual Report on Form 10-K for theyear ended December 31, 2009, referred to as our 2009 Annual Report. Aninvestment in our securities involves various risks. When considering aninvestment in our company, you should consider carefully all of the riskfactors described in our 2009 Annual Report. These risks and uncertainties arenot the only ones facing us and there may be additional matters that we areunaware of or that we currently consider immaterial.

 

**Item 2.**   **UnregisteredSales of Securities and Use of Proceeds.**

 

**UnregisteredSales of Securities**

 

OnSeptember 30, 2010, we completed a sale through a private placementtransaction to certain institutional and individual accredited investors. Unitswere priced at $0.48 per unit, and each unit consists of one share of no parvalue common stock, and a one-half common share purchase warrant. Each onewhole warrant entitles the holder to acquire one common share at a price of$0.75 per share for a period of three years. The total aggregate purchase pricefor the units sold was $1,725,600, and represented the sale of 3,595,000 commonshares and 1,797,500 warrants.  Wegranted “piggyback” registration rights to the investors with respect to theshares of common stock and common stock issuable upon exercise of the Warrantswhich the investors acquired in the transaction. The Company paid no fees orcommissions in connection with the sale of the units.

 

Thesale of the Securities was undertaken without registration under the SecuritiesAct in reliance upon an exemption from the registration requirements of theSecurities Act set forth in Sections 4(2) thereunder.  The investorseach qualified as an “accredited investor” within the meaning of Rule 501(a) ofRegulation D.  In addition, the Securities, which were taken forinvestment purposes and not for resale, were subject to restrictions ontransfer.  We did not engage in any public advertising or generalsolicitation in connection with this transaction, and we provided the investorswith disclosure of all aspects of our business, including providing theinvestor with our reports filed with the Securities and Exchange Commission andother financial, business and corporate information.  Based on ourinvestigation, we believed that the accredited investors obtained allinformation regarding the Company that they requested received answers to allquestions posed and otherwise understood the risks of accepting our Securitiesfor investment purposes.

** **

**Use of Proceeds**

 

Proceedsrealized will be spent in the following order of priority:

 

Proceedsfrom this offering will be used by the Company

 

1.                             Debt Service

 

2.                             General WorkingCapital

 

3.                             MadisonvilleProject, Madison County

 

4.                             CaliforniaProject

 

Wedo not know if, or how many, of the warrants or options will be exercised. Thisis our best estimate of our use of proceeds generated from the possibleexercise of warrants or options based on the current state of our businessoperations, our current plans and current economic and industry conditions. Anychanges in the projected use of proceeds will be made at the sole discretion ofour board of directors.

 

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**Item 3.  Defaults Upon Senior Securities**

 

Not applicable.

 

**Item 4.  Submission of Matters to a Vote of theSecurity Holders.**

 

Not applicable.

 

**Item 5.  Other Information.**

 

Not applicable

** **

**Item 6.  Exhibits**

 

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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 November 15,2010.

 

 
| **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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