UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 xQuarterly Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
 
 For the quarterly period ended
March 31,
2009 or
 
 oTransition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 For
the transition period from _____________ to _____________
 
 Commission
file number 001-33777
 
 
 SOUTH
TEXAS OIL COMPANY
 (Exact
Name of Registrant as Specified in its Charter)
 
 Nevada
              
              74-2949620(State
      or Other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)
 
 300
East Sonterra Boulevard, Suite 1220
 San
Antonio, Texas
 (Address
of Principal Executive Offices)
 78258
 (Zip
Code)
 
 (210)
545-5994
 (Registrant’s
Telephone Number, Including Area Code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  x Yes       o No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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
registrant was required to submit and post such files. o Yes       o No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer o
                Accelerated
      filer oNon-accelerated
      filer o
                Smaller
      reporting company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2 of the Exchange Act).    o
Yes      x No
 
 The
issuer had 16,788,862 shares of common stock outstanding as of May 13,
2009.
  
 
 TABLE OF
CONTENTS
  PagePART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements (Unaudited)
                  1Consolidated
      Balance Sheets as of March 31, 2009 and December 31, 2008
                  2Consolidated
      Statements of Operations for the Three Months Ended March 31, 2009 and
      2008
                  3Consolidated
      Statements of Stockholders’ Equity (Deficit) for the Three Months Ended
      March 31, 2009
                  4Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2009 and
      2008
                  5Notes
      to Consolidated Financial Statements
                  6Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
                  12Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                  20Item
      4T. Controls and Procedures
                  20PART
      II - OTHER INFORMATION
                  21Item
      1. Legal Proceedings
                  21Item
      1A.  Risk Factors
                  21Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                  22Item
      3.  Defaults Upon Senior Securities
                  22Item
      4.  Submission of Matters to a Vote of Security
      Holders
                  22Item
      5.  Other Information
                  22Item
      6. Exhibits
                  23
  
  PART
I.   FINANCIAL INFORMATION
 
 Item
1. Financial Statements.
 
 The
consolidated financial statements of South Texas Oil Company (the “Company” or
“we”, “us” or “our”) included herein have been prepared in accordance with the
instructions to quarterly reports for a smaller reporting company, as defined in
Exchange Act Rule 12b-2, on Form 10-Q pursuant to the rules and regulations of
the United States Securities and Exchange Commission (the
“SEC”).  Certain information and footnote data necessary for fair
presentation of financial position and results of operations in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”) have been condensed or omitted.  We suggest that these
financial statements be read in conjunction with the summary of significant
accounting policies and notes to financial statements included in our Annual
Report on
 Form 10-K
for the year ended December 31, 2008.
 
 In the
opinion of management, all adjustments necessary in order to make our financial
position, results of operations and changes in financial position at March 31,
2009, and for all periods presented, not misleading, have been
made.  The results of operations for the three months ended March 31,
2009 are not necessarily indicative of the Company’s actual operating results
for the full year ending December 31, 2009.
  1
 
 SOUTH
TEXAS OIL COMPANY
 Consolidated
Balance Sheets
 
 March 31, 2009
                                      
                                      
                                      December 31, 2008(Unaudited)
                                      
                                      
                                      (Audited)ASSETSCurrent
      AssetsCash
      and equivalents
                                      
                                      $
                                      2,471,126
                                      
                                      
                                      $
                                      4,254,642Accounts
      receivable
                                      
                                      
                                      1,394,563
                                      
                                      
                                      
                                      3,084,498Prepaid
      expenses and other
                                      
                                      
                                      238,150
                                      
                                      
                                      
                                      279,574Assets
      held for sale
                                      
                                      
                                      9,490,030
                                      
                                      
                                      
                                      9,520,109Total
      current assets
                                      
                                      
                                      13,593,869
                                      
                                      
                                      
                                      17,138,823Property
      and Equipment:Oil
      and gas properties, successful efforts methodProved
      properties
                                      
                                      
                                      49,808,944
                                      
                                      
                                      
                                      49,489,536Unproved
      properties
                                      
                                      
                                      6,267,511
                                      
                                      
                                      
                                      5,868,754Less
      accumulated depreciation, depletion and amortization
                                      
                                      
                                      (10,259,894
                                      )
                                      
                                      
                                      (9,656,545
                                      )Total
      oil and gas properties, net
                                      
                                      
                                      45,816,561
                                      
                                      
                                      
                                      45,701,745Other
      property and equipmentDrilling
      equipment
                                      
                                      
                                      1,300,000
                                      
                                      
                                      
                                      1,300,000Vehicles
                                      
                                      
                                      271,412
                                      
                                      
                                      
                                      288,632Other
                                      
                                      
                                      189,811
                                      
                                      
                                      
                                      189,811Less
      accumulated depreciation and amortization
                                      
                                      
                                      (198,626
                                      )
                                      
                                      
                                      (173,522
                                      )Total
      other property and equipment, net
                                      
                                      
                                      1,562,597
                                      
                                      
                                      
                                      1,604,921Total
      property and equipment, net
                                      
                                      
                                      47,379,158
                                      
                                      
                                      
                                      47,306,666Debt
      issuance costs, net of amortization
                                      
                                      
                                      2,586,637
                                      
                                      
                                      
                                      3,456,094Total
      Assets
                                      
                                      $
                                      63,559,664
                                      
                                      
                                      $
                                      67,901,583LIABILITIES
      AND STOCKHOLDER'S EQUITYCurrent
      LiabilitiesAccounts
      payable, trade
                                      
                                      $
                                      6,601,174
                                      
                                      
                                      $
                                      7,628,453Other
      payables and accrued liabilities
                                      
                                      
                                      1,474,703
                                      
                                      
                                      
                                      1,598,994Participant
      advances received
                                      
                                      
                                      156,990
                                      
                                      
                                      
                                      69,313Current
      maturities of notes payable and long-term debt
                                      
                                      
                                      16,992,834
                                      
                                      
                                      
                                      17,146,710Current
      maturities of notes payable and long-term debt, related
    party
                                      
                                      
                                      26,132,400
                                      
                                      
                                      
                                      25,325,341Current
      portion of deferred liability
                                      
                                      
                                      1,000,000
                                      
                                      
                                      
                                      1,000,000Total
      current liabilities
                                      
                                      
                                      52,358,101
                                      
                                      
                                      
                                      52,768,811Noncurrent
      LiabilitiesNotes
      payable and long-term debt
                                      
                                      
                                      759,388
                                      
                                      
                                      
                                      727,128Asset
      retirement obligation, net of current portion
                                      
                                      
                                      967,760
                                      
                                      
                                      
                                      948,821Deferred
      liability, net of current portion
                                      
                                      
                                      500,000
                                      
                                      
                                      
                                      500,000Total
      noncurrent liabilities
                                      
                                      
                                      2,227,148
                                      
                                      
                                      
                                      2,175,949Stockholders'
      EquityPreferred
      stock, $0.001 par value, 5,000,000 shares authorized, none issued or
      outstanding
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Common
      stock, $0.001 par value, 50,000,000 shares authorized,
                                        17,769,862
      shares issued, 16,761,529 shares outstanding (2009) and
                                        17,738,862
      shares issued, 16,730,529 shares outstanding (2008)
                                      
                                      
                                      17,770
                                      
                                      
                                      
                                      17,740Additional
      paid-in capital
                                      
                                      
                                      46,126,533
                                      
                                      
                                      
                                      44,321,215Accumulated
      deficit
                                      
                                      
                                      (34,267,878
                                      )
                                      
                                      
                                      (28,480,122
                                      )Less
      treasury stock, at cost, 1,008,333 shares
                                      
                                      
                                      (2,902,010
                                      )
                                      
                                      
                                      (2,902,010
                                      )Total
      stockholders' equity
                                      
                                      
                                      8,974,415
                                      
                                      
                                      
                                      12,956,823Total
      Liabilities and Stockholders' Equity
                                      
                                      $
                                      63,559,664
                                      
                                      
                                      $
                                      67,901,583
 
 See
notes to consolidated financial statements.
  2
 
 SOUTH
TEXAS OIL COMPANY
 Consolidated
Statements of Operations
 (Unaudited)
 
 Three Months
                          
                          
                          Three MonthsEnded
                          
                          
                          EndedMarch 31, 2009
                          
                          
                          March 31, 2008RevenuesOil
      and gas sales
                          
                          $
                          612,594
                          
                          
                          $
                          1,877,635Total
      revenues
                          
                          
                          612,594
                          
                          
                          
                          1,877,635Costs
      and ExpensesProduction
      expenses
                          
                          
                          472,894
                          
                          
                          
                          708,265Production
      taxes
                          
                          
                          29,147
                          
                          
                          
                          84,800General
      and administrative expenses
                          
                          
                          2,729,576
                          
                          
                          
                          1,244,065Exploration
      expense
                          
                          
                          232,799
                          
                          
                          
                          -Depreciation,
      depletion and amortization
                          
                          
                          663,124
                          
                          
                          
                          1,084,367Total
      costs and expenses
                          
                          
                          4,127,540
                          
                          
                          
                          3,121,497Loss
      from Operations
                          
                          
                          (3,514,946
                          )
                          
                          
                          (1,243,862
                          )Other
      Income (Expense)Interest
      income
                          
                          
                          1,726
                          
                          
                          
                          4,374Loss
      from derivatives
                          
                          
                          -
                          
                          
                          
                          (1,050,000
                          )Interest
      expense
                          
                          
                          (1,405,079
                          )
                          
                          
                          (437,063
                          )Debt
      issuance costs amortization
                          
                          
                          (869,457
                          )
                          
                          
                          (635,793
                          )Other
      income (expense), net
                          
                          
                          (2,272,810
                          )
                          
                          
                          (2,118,482
                          )Net
      Loss Before Tax
                          
                          
                          (5,787,756
                          )
                          
                          
                          (3,362,344
                          )Income
      tax expense (benefit)
                          
                          
                          -
                          
                          
                          
                          -Net
      Loss
                          
                          $
                          (5,787,756
                          )
                          
                          $
                          (3,362,344
                          )Loss
      Per Common Share:Basic
      and Diluted
                          
                          $
                          (0.35
                          )
                          
                          $
                          (0.20
                          )Weighted
      average number of common shares outstanding:Basic
      and Diluted
                          
                          
                          16,733,807
                          
                          
                          
                          16,482,571
 
 See
notes to consolidated financial statements.
  3
 
 SOUTH
TEXAS OIL COMPANY
 Consolidated
Statements of Stockholders' Equity
 (Unaudited)
 
 Additional
                        
                        
                        
                        
                        
                        
                        
                        
                        TotalCommon Stock
                        
                        
                        Paid-In
                        
                        
                        Accumulated
                        
                        
                        Treasury
                        
                        
                        Stockholders'Shares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Deficit
                        
                        
                        Stock
                        
                        
                        EquityBalance,
      December 31, 2008
                        
                        
                        16,730,529
                        
                        
                        $
                        17,740
                        
                        
                        $
                        44,321,215
                        
                        
                        $
                        (28,480,122
                        )
                        
                        $
                        (2,902,010
                        )
                        
                        $
                        12,956,823Stock
      grants
                        
                        
                        31,000
                        
                        
                        
                        30
                        
                        
                        
                        127,820
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        127,850Non-cash
      stock compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,677,498
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,677,498Net
      loss for the three months
                          ended
      March 31, 2009
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,787,756
                        )
                        
                        
                        -
                        
                        
                        
                        (5,787,756
                        )Balance,
      March 31, 2009
                        
                        
                        16,761,529
                        
                        
                        $
                        17,770
                        
                        
                        $
                        46,126,533
                        
                        
                        $
                        (34,267,878
                        )
                        
                        $
                        (2,902,010
                        )
                        
                        $
                        8,974,415
 
 See
notes to consolidated financial statements.
  4
 
 SOUTH
TEXAS OIL COMPANY
 Consolidated
Statements of Cash Flows
 (Unaudited)
 
 Three Months
                                
                                
                                Three MonthsEnded
                                
                                
                                EndedMarch 31, 2009
                                
                                
                                March 31, 2008Operating
      ActivitiesNet
      loss
                                
                                $
                                (5,787,756
                                )
                                
                                $
                                (3,362,344
                                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Derivative
      loss and revenue reduction
                                
                                
                                -
                                
                                
                                
                                1,485,000Depreciation,
      depletion and amortization
                                
                                
                                663,124
                                
                                
                                
                                1,084,367Debt
      issuance costs amortization
                                
                                
                                869,457
                                
                                
                                
                                635,793Amortization
      of deferred stock compensation
                                
                                
                                1,677,498
                                
                                
                                
                                229,778Amortization
      of debt discount
                                
                                
                                100,220
                                
                                
                                
                                106,950Compensatory
      common stock and option issuances
                                
                                
                                127,850
                                
                                
                                
                                -Accretion
      of discount on asset retirement obligation
                                
                                
                                18,939
                                
                                
                                
                                -Loss
      on sale of other property and equipment
                                
                                
                                5,628
                                
                                
                                
                                -Changes
      in operating assets and liabilities:Accounts
      receivable
                                
                                
                                1,689,935
                                
                                
                                
                                1,403,792Prepaid
      expenses and other
                                
                                
                                41,424
                                
                                
                                
                                (4,601
                                )Accounts
      payable and accrued liabilities
                                
                                
                                (344,511
                                )
                                
                                
                                (552,630
                                )Participant
      advances received
                                
                                
                                87,677
                                
                                
                                
                                -Net
      cash provided by (used in) operating activities
                                
                                
                                (850,515
                                )
                                
                                
                                1,026,105Investing
      ActivitiesPurchases
      and development of oil and gas properties
                                
                                
                                (718,165
                                )
                                
                                
                                (2,437,134
                                )Proceeds
      from disposition of other property and equipment
                                
                                
                                7,000
                                
                                
                                
                                -Purchase
      of other property and equipment
                                
                                
                                -
                                
                                
                                
                                -Net
      cash used in investing activities
                                
                                
                                (711,165
                                )
                                
                                
                                (2,437,134
                                )Financing
      ActivitiesProceeds
      from notes payable and long-term debt
                                
                                
                                -
                                
                                
                                
                                2,000,000Payments
      of notes payable and long-term debt
                                
                                
                                (221,836
                                )
                                
                                
                                (541,249
                                )Payments
      of related party notes payable
                                
                                
                                -
                                
                                
                                
                                (7,655
                                )Net
      cash provided by (used in) financing activities
                                
                                
                                (221,836
                                )
                                
                                
                                1,451,096Net
      Increase (Decrease) in Cash and Equivalents
                                
                                
                                (1,783,516
                                )
                                
                                
                                40,067Cash
      and equivalents at beginning of period
                                
                                
                                4,254,642
                                
                                
                                
                                2,186,428Cash
      and Equivalents at End of Period
                                
                                $
                                2,471,126
                                
                                
                                $
                                2,226,495
 
 See
notes to consolidated financial statements.
  5
 
 SOUTH
TEXAS OIL COMPANY
 Notes
to Consolidated Financial Statements
 March
31, 2009 (Unaudited)
  Note
1 – Basis of Presentation
 
 The
accompanying unaudited consolidated financial statements report interim
information for South Texas Oil Company, a Nevada corporation, and its wholly
owned subsidiaries Southern Texas Oil Company, a Texas corporation, STO
Operating Company, a Texas corporation, STO Drilling Company, a Texas
corporation, and STO Properties LLC, a Texas limited liability company.
References to “the Company” indicate South Texas Oil Company or South Texas Oil
Company and its wholly owned subsidiaries.
 
 These
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. The accounting policies followed by
the Company are described in Note 2 to the audited consolidated financial
statements for the year ended December 31, 2008. These financial statements
should be read in conjunction with the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008.
 
 Certain
reclassification entries have been reflected on the March 31, 2008 financial
statements to conform to the March 31, 2009 presentation.
 
 In the
opinion of management, all normal, recurring adjustments considered necessary
for the fair statement of the results for the interim period on a basis
consistent with the annual audited financial statements have been
included.
 
 Note
2 – Notes Payable and Long-Term Debt
 
 As of
March 31, 2009, the Company’s notes payable and long-term debt consisted of debt
outstanding under the Company’s credit facility with The Longview Fund, L.P.
(“Longview”) and Longview Marquis Master Fund, L.P. (“Marquis”) (the
“Longview/Marquis Facility”), the Marquis Senior Secured Debt, and various notes
payable related to certain purchases of oil and gas properties and other
property and equipment.
 
 Longview/Marquis
Facility
 
 As of
March 31, 2009, the Company had a $32.5 million credit facility with Longview
and Marquis with a total of $35.1 million
outstanding.    Borrowings under the facility accrue
interest at 12.5%. The junior notes payable to Longview and the senior notes
payable to Marquis mature on December 31, 2008.  In September 2008,
the notes payable to Longview under the facility were amended to provide for the
payment-in-kind, or adding to the principal amount of the notes, interest
accrued during the fourth quarter of 2008 through the January 2, 2009 scheduled
interest payment date.  The total outstanding under the facility as of
March 31, 2009 was comprised of $8,963,033 in senior notes payable to Marquis
and $26,132,400 in junior notes payable to Longview, which included $807,059 for
interest accrued on the facility during the fourth quarter of 2008 and through
January 2, 2009 that was added to the principal of the underlying notes in
accordance with the September 2008 amendment.
 
 The
Company originally obtained the credit facility in January
2007.  Certain terms of the facility were amended in September 2007,
in connection with which the Company agreed to grant to Longview a perpetual
overriding royalty interest in the oil and gas oil and gas production of certain
of the Company’s properties.   Also in connection with the
September 2007 amendment, the Company granted security and pledge agreements
that provided Longview with first priority security interests in substantially
all of the Company’s assets.  In April 2008, the credit facility was
amended and restated with Longview and Marquis in its entirety.  The
Company agreed to grant to Longview and Marquis certain mortgages in oil and gas
producing properties and a perpetual overriding royalty interest in the oil and
gas production of all of the Company’s current and future interests in the real
property then owned by the Company.
 
 Refer to
Note 7 describing subsequent events related to the debt outstanding under the
Longview/Marquis Facility.
  6
  SOUTH
TEXAS OIL COMPANY
 Notes
to Consolidated Financial Statements
 March
31, 2009 (Unaudited)
 
 Marquis
Senior Secured Debt
 
 On
September 19, 2008, the Company entered into a Securities Purchase Agreement
(the “Securities Purchase Agreement”) with Marquis, pursuant to which on such
date, among other things, the Company issued and sold to Marquis a senior
secured note in an original principal amount of $7,000,000 (the “Senior Secured
Note”), for gross proceeds of $6,750,000, prior to the Company’s payment of
expenses incurred by the Company and Marquis in connection with the transactions
under the Securities Purchase Agreement. The Senior Secured Note carries an
interest rate of 12.5% per annum payable quarterly in cash and matures in
September 2009. Upon the Company’s prepayment of all or any portion of the
Senior Secured Note or at maturity, Marquis has the option to convert up to 50%
of the principal (and interest relating thereto) to be paid by the Company on
such date of prepayment or maturity, into shares of the Company’s common stock
at a conversion rate of $4.00 per share (subject to adjustment for stock splits
and other events).
 
 The
Senior Secured Note is secured by a general security interest in all of the
tangible and intangible current and future assets owned or acquired by the
Company (including mortgages on the Company’s real property interests) which
have guaranteed the obligations of the Company under the Senior Secured Note and
other transaction documents.  Marquis’ secured position in this
transaction is senior to the rights of all other secured properties, including
the rights of Longview related to the Longview/Marquis credit facility described
above, except for the previously secured rights of Marquis in related to the
Longview/Marquis credit facility described above, which continued to rank pari
passu with the rights granted to Marquis in connection with the Securities
Purchase Agreement and the Senior Secured Note.
 
 Additionally,
the Company conveyed to Marquis a 1.0% perpetual overriding royalty interest in
the oil and gas production of all of the Company’s current and future interests
in the real property then owned by the Company. Pursuant to the terms of the
overriding royalty conveyance, the Company has the conditional option, beginning
on September 19, 2009 and terminating on September 19, 2010, to repurchase the
overriding royalty interests conveyed in exchange for a number of shares of the
Company’s common stock equal to the adjusted fair market value of the conveyed
overriding royalty interests, based upon an independent appraisal at the time
the election is made by the Company, divided by a 20-day average trading price
of the Company’s common stock at the time of repurchase, and subject to certain
conditions, including without limitation, that (i) the Company’s average prior
20-day trading volume is at least 125,000 shares, (ii) the prior 20-day average
price per share of its common stock is at least $3.00 per share, and (iii) the
shares to be exchanged are registered for public resale pursuant to an effective
registration statement.
 
 The notes
outstanding under the Longview/Marquis Facility and the Senior Secured Note are
subject to various restrictive covenants set forth in the respective related
securities purchase agreements, which covenants, among other things, limit the
incurrence of additional debt, investments, liens, dividends, prepayments of
indebtedness, asset divestitures, mergers and consolidations, transactions with
affiliates and other matters customarily restricted in such
agreements.  Further, these covenants require the maintenance of
certain average daily rates of barrels of oil equivalent production, measured on
a calendar quarterly basis.  On March 31, 2009, the Company was not in
compliance with the average daily production rate covenants.  Longview
and Marquis each have waived the production rate covenants as of the March 31,
2009 measurement date.  These waivers are limited to the March 31,
2009 measurement and do not affect the production rate covenants subsequent to
March 31, 2009.
 
 Other
Notes Payable
 
 The total
of the Company’s other notes payable and long-term debt at March 31, 2009 was
$2.0 million and comprised of amounts due to various parties as a result of oil
and gas and other property purchases. Repayment of these obligations is due over
a period from ranging from less than one year to greater than five years.
Effective annual interest rates for these obligations range from 4.9% to
12.25%.
  7
 
 SOUTH
TEXAS OIL COMPANY
 Notes
to Consolidated Financial Statements
 March
31, 2009 (Unaudited)
 
 A
component of other notes payable and long-term debt at March 31, 2009 includes a
principle balance of $378,743 payable to Granite Energy Inc. (“Granite”) related
to a transaction dated September 17, 2007, whereby the Company
purchased  a drilling rig and associated equipment pursuant to a
Purchase and Sale Agreement.  On February 26, 2009, Granite commenced
a lawsuit against the Company to recover the balance of the purchase price
allegedly owed by the Company to Granite.  The Company purchased the
assets for $1.3 million.  As of March 31, 2009, the Company had paid
an aggregate of $944,751 to Granite.  In February 2009, the Company
ceased making payments, owing to Granite’s failure to deliver title to the
assets, despite the Company’s repeated demands for the same.  The
Company and Granite have agreed to suspend the Company’s requirement to file an
answer to Granite’s lawsuit in favor of actively pursuing settlement
negotiations, which are ongoing.
 
 The
following table provides a schedule of estimated principal maturities during
each calendar year under all of the Company’s notes payable and long-term debt
as of March 31, 2009:
 
 As ofMarch 31, 20092009
                    
                    $
                    43,026,4022010
                    
                    
                    209,5362011
                    
                    
                    149,0982012
                    
                    
                    150,9302013
                    
                    
                    133,865Thereafter
                    
                    
                    908,502$
                    44,578,333
 
 The above
schedule of debt maturities includes $26,132,400 related to notes payable to
Longview maturing in 2009.
 
 Note
3 – Deferred Liability
 
 Settlement
Agreement
 
 On May
15, 2008, the Company settled a lawsuit and counter-lawsuit between Leexus Oil
& Gas, LLP, Mark Jaehne, and Bennie Jaehne regarding disputes arising under
a previously reported Agreement and Plan of Merger dated April 20, 2007 (the
“Merger Agreement”). The Merger Agreement called for the payment of $4.0 million
over time based on a percentage of the production of certain oil and gas
interests acquired under the Merger Agreement and issue of 2,000,000 shares of
the Company’s common stock to the selling shareholders of Leexus, 1,333,333
shares of which were delivered to the Jaehnes at closing.
 
 The
settlement agreement provided for the Company’s payment on the settlement date
of $2.0 million and future payments totaling $2.0 million, payable in four
future installments, which will extinguish all of the Company’s past, current
and future obligations due to the Jaehnes as selling shareholders under the
Merger Agreement. The settlement also provides for the return of 1,333,333
shares of the Company’s common stock previously issued to the Jaehnes, of which
900,000 shares were returned on the settlement date.  The first of the
four installments was paid during the fourth quarter of 2008, and 108,333
additional shares of the Company’s common stock became due to be returned to the
Company.  As of March 31, 2009, a total liability of $1.5 million is
included on the Company’s balance sheet as long-term debt, $1.0 million of which
is classified as current, and $500,000 of which is non-current.  The
schedule outlined in the settlement agreement provides for the Company’s
purchase of the remaining 325,000 shares of common stock in three remaining
installments during 2009 and 2010, the first installment being scheduled for
payment in the second quarter of 2009.
  8
  SOUTH
TEXAS OIL COMPANY
 Notes
to Consolidated Financial Statements
 March
31, 2009 (Unaudited)
 
 Note
4 – Stock Based Compensation
 
 The
Company has stock-based employee compensation plans as described in Note 7 to
the audited financial statements contained in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008. Total stock compensation expense
related to employee stock options was reported as part of the Company’s general
and administrative expenses, and was $1,662,684 and $229,778 for the first three
months of 2009 and 2008, respectively.
 
 Stock
Options:  In prior years, the Company issued stock options as
compensation to management, employees and directors of the Company pursuant to
the 2007 Stock Compensation
Plan.  Generally, these options had a five-year life and vested
over four years for management and employees, and one year for
directors.  Upon exercise, newly issued shares of common stock are
issued to the exercising party.  No options have been granted pursuant
to this plan since 2007.
 
 During
2008, the Company adopted the Equity Incentive Compensation
Plan to provide for the issuance of stock awards to Company employees,
officers, and consultants and non-employee directors.   Stock
options issued pursuant to this plan generally have a 10-year life and vest over
three years for management and employees and less than one year for non-employee
directors.  Upon exercise, newly issued shares of common stock are
issued to the exercising party.  Stock options were granted pursuant
to this plan in 2008 to employees, a consultant, and non-employee
director.  Additionally this plan allowed for the granting of
incentive stock options as compensation to the officers who joined the Company
in June 2008.  The vesting provisions for these incentive stock
options are based upon achievement of certain Company performance
goals.  During the first three months of 2009, certain of these
Company performance goals were reached, and the related portion of the stock
options granted vested to the interests of the officer grantees.
 
 As of
March 31, 2009, the Company had total outstanding options to purchase 2,025,501
shares of common stock at prices ranging from $0.47 to $9.45 per
share.  Of the total outstanding, 1,381,376 were exercisable at March
31, 2009 at prices ranging from $0.47 to $9.45 per share.
 
 Stock
Option Activity:
 
 WeightedWeighted
                        
                        
                        AverageAverage
                        
                        
                        Remaining
                        
                        
                        TotalNumber
                        
                        
                        Exercise
                        
                        
                        Contractual
                        
                        
                        IntrinsicOutstanding
                        
                        
                        Price
                        
                        
                        Term
                        
                        
                        Value(in
      years)2007 Stock Compensation
    Plan:Outstanding
      at December 31, 2008
                        
                        
                        245,500
                        
                        
                        $
                        9.45
                        
                        
                        
                        3.75
                        
                        
                        $
                        1,399,763Exercised
                        
                        
                        (-
                        )Outstanding,
      unvested at March 31, 2009
                        
                        
                        154,125
                        
                        
                        $
                        9.45
                        
                        
                        
                        3.50
                        
                        
                        $
                        895,201Outstanding,
      exercisable at March 31, 2009
                        
                        
                        91,375
                        
                        
                        $
                        9.45
                        
                        
                        
                        3.50
                        
                        
                        $
                        504,562Equity Incentive Compensation
      PlanOutstanding
      at December 31, 2008
                        
                        
                        530,000
                        
                        
                        $
                        0.47
                        
                        
                        
                        10.00
                        
                        
                        $
                        249,100Issued
                        
                        
                        1,250,001
                        
                        
                        $
                        2.00
                        
                        
                        
                        9.46
                        
                        
                        $
                        1,509,087Outstanding,
      unvested at March 31, 2009
                        
                        
                        490,000
                        
                        
                        $
                        0.47
                        
                        
                        
                        9.75
                        
                        
                        $
                        230,300Outstanding,
      exercisable at March 31, 2009
                        
                        
                        1,290,001
                        
                        
                        $
                        2.02
                        
                        
                        
                        9.76
                        
                        
                        $
                        1,527,886Company TotalOutstanding,
      unvested at March 31, 2009
                        
                        
                        644,125
                        
                        
                        $
                        2.62
                        
                        
                        
                        8.25
                        
                        
                        $
                        1,125,501Outstanding,
      exercisable at March 31, 2009
                        
                        
                        1,381,376
                        
                        
                        $
                        2.51
                        
                        
                        
                        9.35
                        
                        
                        $
                        2,032,448
  9
  SOUTH
TEXAS OIL COMPANY
 Notes
to Consolidated Financial Statements
 March
31, 2009 (Unaudited)
 
 Restricted
Stock:During 2008, the
Company adopted the granted Stock Award Rights under the Equity Incentive
Compensation Plan, to provide for the issuance of stock grants as compensation
to the officers who joined the Company in June 2008.  The Stock Awards
Rights provide for the granting of restricted shares of the Company’s common
stock at specified intervals and in amounts equal to specified values on the
issuance dates. During 2008, the first of three tranches of shares of common
stock were issued to the Company’s three new officers.
 
 In
accordance with Statement of Financial Accounting Standards 123R, the Company
measures the value of the stock based compensation granted to it employees by
use of a Black-Scholes valuation model in the case of stock options, and in the
case of stock grants, the value of the compensation is based on the number of
shares issued and the per share value of the Company’s stock on the date of
issuance. That value is recognized as stock compensation expense over the
expected life of the underlying options, in the case of stock options, and over
the period between the issuance of restricted shares and the lapse of the
restrictions in the case of stock grants. Total stock-based compensation expense
related to employee stock grants was reported as part of the Company’s general
and administrative expenses, and was $14,814 for the first three months of
2009.
 
 Restricted Stock
Activity:
 
 SharesEquity Incentive Compensation
      PlanUnvested
      restricted stock at December 31, 2008
                          
                          
                          774,792Vested
                          
                          
                          (774,492
                          )Unvested
      restricted stock at March 31, 2009
                          
                          
                          -
 
 Stock Used to
Acquire Goods or Services:During the first three months of
2009, the Company issued 31,000 shares of its common stock, with an aggregate
fair value of $127,850 as compensation for certain services provided to the
Company by third parties.
 
 Note 5 – Derivative
Contracts
 
 The
Company previously entered into a derivative instrument covering the period
January 1, 2008 to December 31, 2008.  For the first three months of
2008, 50% of the activity related to the instrument received hedge accounting
treatment and the remaining 50% received derivative accounting
treatment.  This resulted, for the first quarter of 2008, in a
$435,000 reduction to oil and gas sales revenue and a $1,050,000 derivative
loss.  All derivative contracts were terminated and balances settled
with the contract counter-party by December 31, 2008. The Company has not
engaged in derivative transactions during 2009.
 
 Note
6 – Related Parties
 
 The
Company is deemed to have a related party relationship with Longview because
Longview is the beneficial owner of an amount in excess of 10% of the Company’s
issued and outstanding common stock.  Refer to Note 2 – Long-Term Debt
for a description of the Company’s credit facility with Longview and the related
notes payable.  Interest accrued during the three months ended March
31, 2009 and 2008, by the Company on notes payable to Longview was $769,689 and
$369,130, respectively.
 
 The
Company is deemed to have a related party relationship with a third party who
operates and is a joint interest owner in the Company’s oil and gas properties
located in the DJ Basin in Colorado.  This party is the beneficial
owner of an amount in excess of 10% of the Company’s issued and outstanding
common stock.  The Company received approximately $26,795 and $84,723
in net oil and gas revenue distributions for the properties from the related
party during the first three months of 2009 and 2008,
respectively.  The Company paid to the related party approximately $0
and $20,871 for capital expenditures and lease operating expenses, respectively,
during the first three months of 2009, and approximately $10,169 and $5,497 for
capital expenditures and lease operating expense, respectively, in
2008.
  10
  SOUTH
TEXAS OIL COMPANY
 Notes
to Consolidated Financial Statements
 March
31, 2009 (Unaudited)
 
 During
the first quarter of 2008, the Company made payments of $7,655 on notes payable
to former executive officers of the Company.  These notes were no
longer outstanding at December 31, 2008.
 
 During
the first quarter of 2008, the Company leased for $750 per month approximately
four acres of land from a former executive officer of the Company to use for a
field office and to store certain vehicles and equipment belonging to the
Company.  Also during the same period, the Company paid $1,286 per
month for the use of equipment belonging to a former executive
officer.  Both of these arrangements were terminated during the second
and third quarters of 2008.
 
 Note
7 – Subsequent Event
 
 On
February 23, 2009, the Company announced a comprehensive debt restructuring and
related agreements with Longview.  The agreements with Longview
provide that Longview will restructure $26.1 million of debt (plus accrued
interest) through (i) the payment of $16.3 million in debt (plus accrued
interest) held by Longview in exchange for 1.6 million shares of the Company’s
Series A Convertible Preferred Stock and (ii) a debt/non-core asset exchange
between us and Longview valued at $9.8 million.
 
 Pursuant
to a securities exchange agreement, the Company will issue to Longview
approximately 1.6 million shares of Series A Convertible Preferred Stock in
exchange for the surrender and cancellation of approximately $16.3 million of
notes held by Longview. Each share of Series A Convertible Preferred Stock has a
stated value equal to $10.00 per share, has no coupon rate, does not pay
dividends, and has no voting rights. The shares of Series A Convertible
Preferred Stock are convertible into shares of our common stock at any time
subsequent to 90 days after the issuance of the shares at a conversion price of
$0.50 per share of common stock. Stockholders holding more than a majority of
the Company’s outstanding common stock (approximately 59.36%) have approved the
creation and issuance of the shares of Series A Preferred Stock to
Longview.
 
 The
Company also entered into an asset purchase and sale agreement with Longview to
sell the Company’s interest in its Colorado DJ Basin oil and gas properties and
one of its drilling rigs and associated assets to Longview for a combined total
of $9.8 million. Subject to the terms and conditions of the purchase and sale
agreement, on the closing date, these assets will be conveyed to Longview in
exchange for Longview’s discharge and satisfaction of $9.8 million in
debt.  The Colorado property disposition includes approximately
217,000 Barrels of Oil Equivalent (Boe) of proved reserves and an estimated 18
Boe per day of net production.
 
 On April
24, 2009, the Company filed a Definitive Information Statement on Schedule 14C
with the Securities and Exchange Commission (“SEC”).  In accordance
with Section 14 of the Securities Exchange Act of 1934, notice has been provided
to all of the Company’s stockholders.  The stockholder consent actions
are effective 20 days after the Definitive Information Statement on Schedule 14C
was first mailed to our stockholders, which mailing occurred on April 24,
2009.  The Company anticipates closing on the Series A Convertible
Preferred transaction during the week of May 18, 2009.
  11
 
 Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
 
 SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 This Quarterly Report on Form 10-Q
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
In some cases, forward-looking statements are identified by terms such as “may,”
“will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “projects,” “predicts,” “potential,” and similar
expressions intended to identify forward-looking statements. Such statements
include, without limitation, statements regarding:
 
 •
      fluctuations in oil or gas production or in oil or gas
    prices;
 •
      estimates of required capital
expenditures;
 •
      fluctuations in the cost of drilling, completion and oil production or
      other costs of production and
operations;
 •
      our inability to meet growth
projections;
 •
      our plans and expectations with respect to future acquisitions of oil and
      gas rights leases;
 •
      the expected benefits and results from our geophysical research and
      development efforts;
 •
      our belief that we will have sufficient liquidity to finance operations
      into early 2009;
 •
      the amount of cash necessary to operate our
  business;
 •
      our ability to raise additional capital when
  needed;
 •
      general economic conditions; and
 •
      the anticipated future financial performance and business operations of
      our company.
 
 These forward-looking statements are
only predictions and involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, levels of activity, performance, or
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such
forward-looking statements. Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this Report.  Except
as otherwise required by law, we expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement contained in this Report to reflect any change in our expectations or
any change in events, conditions, or circumstances on which any of our
forward-looking statements are based or to conform to actual
results.  Factors that could cause or contribute to differences in our
future financial and operating results include those discussed in the risk
factors set forth in our Annual Report on Form 10-KSB for the year ended
December 31, 2008, as well as those discussed elsewhere in this Report. We
qualify all of our forward-looking statements by these cautionary
statements.
 
 You should read this section in
combination with the section entitled Management’s Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
2008 included in our Annual Report on Form 10-K for the year ended
December 31, 2008.
 
 Overview
 When
referring to South Texas Oil Company (“South Texas,” the “Company,” “we,” “us,”
and “our”), the intent is to refer to South Texas and its consolidated
subsidiaries as a whole or on an individual basis, depending on the context in
which the statements are made.  The following discussion of our
financial condition and results of operations should be read in conjunction with
our consolidated financial statements and the notes thereto included in this
Form 10-Q.
 
 South Texas Oil Company is an
independent oil and natural gas company engaged in the acquisition, production,
exploration and development of oil and natural gas. Our management team has
extensive technical and operating expertise in all areas of our geographic
focus, which are primarily located in Texas, Louisiana, Colorado and the Gulf
Coast. Our producing properties are located in highly prolific fields with long
histories of oil and natural gas operations.
 
 We generate revenue primarily from our
working interests in producing oil and gas properties, the majority of which are
located in south and central Texas and a smaller acreage position located in
Colorado.  We have obtained capital for investment in producing oil
and gas properties primarily through the sale of our common stock to existing
stockholders, a $32.5 million credit facility and a $7.0 million senior secured
note financing.
  12
  Our
strategy is to focus on the acquisition and development of properties that have
proved oil gas reserves and to attempt to acquire interests in proven fields and
attempt to increase production by exploring other formations in the same fields
where others have obtained production. Our primary operational strategy includes
the operation of our own projects, which provides us substantial control over
drilling and production costs and in the timing and amount of capital
expenditures.  We believe that operating our properties in this manner
is cost-effective, as the range of expertise and services required varies by
project and time duration.
 
 Results
of Operations
 
 The
following table highlights the change for 2009 from the comparable period in
2008 for significant items from our Consolidated Statements of
Operations:
  Three Months Ended
                                        
                                        
                                        Change
                                        
                                        
                                        ChangeMarch 31,
                                        
                                        
                                        2009 vs.
                                        
                                        
                                        2009 vs.2009
                                        
                                        
                                        2008
                                        
                                        
                                        2008
                                        
                                        
                                        2008 (1)Oil
      and gas sales
                                        
                                        $
                                        612,594
                                        
                                        
                                        $
                                        1,877,635
                                        
                                        
                                        $
                                        (1,265,041
                                        )
                                        
                                        
                                        -67
                                        %Production
      expenses
                                        
                                        
                                        472,894
                                        
                                        
                                        
                                        708,265
                                        
                                        
                                        
                                        (253,371
                                        )
                                        
                                        
                                        -33
                                        %Production
      taxes
                                        
                                        
                                        29,147
                                        
                                        
                                        
                                        84,800
                                        
                                        
                                        
                                        (55,653
                                        )
                                        
                                        
                                        -66
                                        %General
      and administrative expenses
                                        
                                        
                                        2,729,576
                                        
                                        
                                        
                                        1,244,065
                                        
                                        
                                        
                                        1,485,511
                                        
                                        
                                        
                                        +119
                                        %Exploration
      expense
                                        
                                        
                                        232,799
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        232,799
                                        
                                        
                                        
                                        n/mDepreciation,
      depletion and amortization
                                        
                                        
                                        663,124
                                        
                                        
                                        
                                        1,084,367
                                        
                                        
                                        
                                        (421,243
                                        )
                                        
                                        
                                        -39
                                        %Loss
      from derivatives
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,050,000
                                        
                                        
                                        
                                        (1,050,000
                                        )
                                        
                                        
                                        -100
                                        %Interest
      expense
                                        
                                        
                                        1,405,079
                                        
                                        
                                        
                                        437,063
                                        
                                        
                                        
                                        968,016
                                        
                                        
                                        
                                        +221
                                        %Debt
      issuance costs amortization
                                        
                                        
                                        869,457
                                        
                                        
                                        
                                        635,793
                                        
                                        
                                        
                                        233,664
                                        
                                        
                                        
                                        +37
                                        %Net
      loss
                                        
                                        
                                        5,787,756
                                        
                                        
                                        
                                        3,362,344
                                        
                                        
                                        
                                        2,425,412
                                        
                                        
                                        
                                        +72
                                        %Net
      loss per common share
                                        
                                        
                                        0.35
                                        
                                        
                                        
                                        0.20
                                        
                                        
                                        
                                        0.15
                                        
                                        
                                        
                                        +75
                                        %
 
 (1)  “n/m”
indicates that the calculated percentage change is not meaningful since there
was no 2008 value to which the net change could be compared
 
 The
following table presents selected operating items and highlights the percentage
change from three months to three months for those items:
  Three
      Months Ended
                                        
                                        
                                        Change
                                        
                                        
                                        ChangeMarch
      31,
                                        
                                        
                                        2009
      vs.
                                        
                                        
                                        2009
      vs.2009
                                        
                                        
                                        2008
                                        
                                        
                                        2008
                                        
                                        
                                        2008Oil
      sales volumes, Bbl except % change
                                        
                                        
                                        13,445
                                        
                                        
                                        
                                        23,941
                                        
                                        
                                        
                                        (10,496
                                        )
                                        
                                        
                                        -44
                                        %Gas
      sales volumes, Mcf except % change
                                        
                                        
                                        34,660
                                        
                                        
                                        
                                        46,478
                                        
                                        
                                        
                                        (11,818
                                        )
                                        
                                        
                                        -25
                                        %Combined
      sales volumes, Boe except % change
                                        
                                        
                                        19,222
                                        
                                        
                                        
                                        31,687
                                        
                                        
                                        
                                        (12,465
                                        )
                                        
                                        
                                        -39
                                        %Average
      oil sales price per Bbl
                                        
                                        $
                                        33.02
                                        
                                        
                                        $
                                        68.45
                                        
                                        
                                        $
                                        -35.43
                                        
                                        
                                        
                                        -52
                                        %Average
      gas sales price per Mcf
                                        
                                        $
                                        4.87
                                        
                                        
                                        $
                                        5.14
                                        
                                        
                                        $
                                        -0.27
                                        
                                        
                                        
                                        -5
                                        %
  13
  Three
Months Ended March 31, 2009 Compared with Three Months Ended March 31,
2008
 
 Revenues
 Oil and
gas sales decreased 67% from $1,877,635 to $612,594 for the three months ended
March 31, 2008 and 2009, respectively, as a result of lower average realized
prices for oil and natural gas combined with decreased volumes during 2009.
Realized prices for oil and natural gas on an equivalent unit basis decreased
for 2009, compared to 2008, by approximately 52% and 5%, respectively, and had
an approximate combined $486,000 negative impact on revenues.  Revenue
from oil sales for the first quarter of 2008 include a $435,000 downward
adjustment for the effects of hedge accounting treatment given to derivative
contract transactions during that period.  This adjustment is also
reflected in the average oil price realized by the Company per barrel of oil
sold for the first quarter of 2008.
 
 The
combined 39% decrease in volumes had an approximate $779,000 million negative
impact on revenues.
 
 Production
Expenses
 The 33%
decrease in production expenses from $708,265 to $472,894 for the three months
ended March 31, 2008 and 2009, respectively, resulted mostly from the 39%
decrease in combined production volumes from our properties in the first quarter
of 2009.
 
 Production
Taxes
 The 66% decrease in production tax
expense is a direct result of the 67% decrease in oil and gas sales for the
first three months of 2009, compared with the first three months of
2008.
 
 General and
AdministrativeExpenses
 General
and administrative expenses were $2,729,576 for three months ended March 31,
2009 compared to $1,244,065 for the same period in 2008, an increase of 119%.
This increase resulted primarily from $1.678 million of non-cash stock
compensation expense associated with performance stock options that vested to
the interests of certain members our management during the first quarter of
2009, and stock options issued to employees and directors during the fourth
quarter of 2008. Stock compensation expense totaled $229,778 for the first three
months of 2008. Stock valued at fair market value of $127,850 was issued in
exchange to third parties during the first quarter of 2009 in exchange for
professional services.
 
 Additionally,
payroll and related employee expenses increased by approximately $319,000 for
the first three months of 2009, compared with the same period in
2008.  This increase reflects that additions that were made to both
management and staff at the end of the second quarter of 2008 and throughout the
third and fourth quarters of 2008.  During the majority of the first
half of 2008, we relied heavily on contracted personnel to perform many of the
management and administrative functions of the Company.  With the
addition of new management members in June 2008, those responsibilities were
largely shifted from third-party contracted personnel to the management and
staff of the Company.
 
 Depreciation,
Depletion and Amortization
 The 39%
decrease in DD&A to $663,124 for the three months ended March 31, 2009 from
$1,084,367 for the same period in 2008 is the net effect of a 39% decrease in
combined sales volumes.
 
 Loss
from Derivatives
 A net
loss from derivatives of $1.1 million was recognized during the three months
ended March 31, 2008, compared to $0 for the same period in
2009.  We entered into a derivative instrument covering the period
January 1, 2008 to December 31, 2008.  For the first three months of
2008, 50% of the activity related to the instrument received hedge accounting
treatment and the remaining 50% received derivative accounting
treatment.  This resulted in a $435,000 reduction to oil and gas sales
revenue and a $1,050,000 derivative loss.  All derivative contracts
were terminated and balances settled with the contract counter-party by December
31, 2008. We have not engaged in derivative transactions during
2009.
  14
  Interest
Expense
 Interest
expense recognized for the three months ended March 31, 2009 was $1,405,079
compared to $437,063 for the same period in 2008, an increase of 221%. This
increase is a result of an increase in debt outstanding under the Longview and
Marquis credit facility and the senior secured note issued to Marquis
during the third quarter of 2008 described in Note 2 to the financial
statements, combined with an increased interest rate on the notes outstanding
under the Longview and Marquis credit facility for the first quarter of 2009.
The average interest paid on the credit facility notes during the first quarter
of 2008 was 6.42%, compared with 12.5% for the first quarter of
2009.  Borrowings were higher during 2009 compared to 2008 because the
facility was used to finance capital spending, operating cash flow deficits and
losses incurred from derivative transactions during 2008.
 
 Debt
Issuance Costs Amortization
 Debt
issuance costs amortization increased 37% for the three months ended March 31,
2009 compared to the prior three months.  The $233,664 increase
reflects the effect of debt issuance costs incurred in the third quarter of 2008
in connection with senior secured notes we issued in September
2008.
 
 Net
Loss / Net Loss per Share
 We
reported a net loss for the three months ended March 31, 2009 of $5.8 million,
or $(0.35) per share.  This compares to a net loss for the three
months ended March 31, 2008, of $3.4 million, or $(0.20) per share.
 
 Liquidity
and Capital Resources
 
 We
require cash to fund our exploration and development activities and the
acquisition of oil and natural gas properties, to make payments required
pursuant to our long-term debt and other contractual obligations and fund our
working capital requirements.  At March 31, 2009, we had a working
capital deficit of $38.8 million, including $43.1 million currently due related
to long-term debt.  Our net working capital balance also included $2.5
million in cash, $1.4 million in accounts receivable and a total of $9.2 million
in accounts payable, other accrued liabilities and the current portion of
deferred liabilities.  If we are unable to pay, or otherwise resolve,
our accounts payable balances in a timely manner, the vendors to whom we owe
unpaid balances may cause liens to be filed against our
properties.  We may also suffer the refusal or withdrawal of trade
credit from vendors as a consequence of non-timely accounts payable
payment.  These factors could disrupt our ability to conduct
operations on our properties and affect our ability to initiate and/or complete
the capital expenditure activities budgeted for 2009.
 
 Historically
our revenues have not been sufficient to provide all of our cash needs, and we
have relied on borrowings from private investors to provide the cash needed to
meet both short and long-term liquidity requirements.    We
do not believe that our current cash balances and cash flows from operations
during 2009 will be sufficient to fund our cash requirements and we will need to
raise additional capital.  We intend to pursue potential debt and/or
equity financing and to evaluate other alternatives, such as joint ventures with
third parties or sales of interests in certain of our assets.  Due to
current capital and credit market conditions in which numerous financial
institutions have effectively restricted current liquidity within the capital
markets throughout the United States and the world, we cannot be certain that
funding will be available to us in required amounts or on acceptable
terms.  If we are not successful in obtaining sufficient funding or
completing an alternative transaction or transactions on a timely basis on terms
acceptable to us, we could be required to curtail our expenditures or
restructure our operations, and we would be unable to implement our capital
expenditure program, either of which could have a material adverse affect on our
business.
 
 Credit
Facility and Notes Payable
  Longview/Marquis
Facility
 As of March 31, 2009, we had a $32.5
million credit facility with Longview and Marquis with a total of $35.1 million
outstanding.  In September 2008, the notes payable to Longview under
the facility were amended to provide for the payment-in-kind, or adding to the
principal amount of the notes, interest accrued during the fourth quarter of
2008 through the January 2, 2009 scheduled interest payment date.  The
total outstanding under the facility as of March 31, 2009 was comprised of
$8,963,033 in senior notes payable to Marquis and $26,132,400 in junior notes
payable to Longview, which included $807,059 for interest accrued on the
facility during the fourth quarter of 2008 and through January 2, 2009 that was
added to the principal of the underlying notes in accordance with the September
2008 amendment. Borrowings under the facility accrue interest at 12.5%. The
junior notes payable to Longview and the senior notes payable to Marquis mature
on December 31, 2009.
  15
  We
originally obtained the credit facility in January 2007.  Certain
terms of the facility were amended in September 2007, in connection with which
we agreed to grant to Longview a perpetual overriding royalty interest in the
oil and gas oil and gas production of certain of our
properties.   Also in connection with the September 2007
amendment, we granted security and pledge agreements that provided Longview with
first priority security interests in substantially all of the Company’s
assets.  In April 2008, the credit facility was amended and restated
with Longview and Marquis in its entirety.  We agreed to grant to
Longview and Marquis certain mortgages in oil and gas producing properties and a
perpetual overriding royalty interest in the oil and gas production of all of
our current and future interests in the real property then owned by
us.
 
 Refer to Note 7 of the financial
statements describing subsequent events related to the debt outstanding under
the Longview/Marquis Facility.
 
 Marquis Senior Secured
Debt
 On September 19, 2008, we entered into
a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
Marquis, pursuant to which on such date, among other things, we issued and sold
to Marquis a senior secured note in an original principal amount of $7,000,000
(the “Senior Secured Note”), for gross proceeds of $6,750,000, prior to our
payment of expenses incurred by the Company and Marquis in connection with the
transactions under the Securities Purchase Agreement. The Senior Secured Note
carries an interest rate of 12.5% per annum payable quarterly in cash and
matures in September 2009. Upon our prepayment of all or any portion of the
Senior Secured Note or at maturity, Marquis has the option to convert up to 50%
of the principal (and interest relating thereto) to be paid by us on such date
of prepayment or maturity, into shares of our common stock at a conversion rate
of $4.00 per share (subject to adjustment for stock splits and other
events).
 
 The
Senior Secured Note is secured by a general security interest in all of the
tangible and intangible current and future assets owned or acquired by us and
its subsidiaries (including mortgages on our real property interests), which
have guaranteed our obligations under the Senior Secured Note and other
transaction documents. Marquis’ secured position in this transaction is senior
to the rights of all other secured parties, including the rights of Longview
under that certain securities purchase agreement, as amended (the “April 2008
Purchase Agreement”) dated as of April 1, 2008, among the Company, Marquis and
Longview, pursuant to which we has issued and sold secured notes in the
aggregate principal amount of approximately $34,284,098 (the “Existing Notes”),
except for the previously secured rights of Marquis, which continued to rank
pari passu with the rights granted to Marquis under the Senior Secured Note. In
conjunction with the transactions described in the Securities Purchase
Agreement, we entered into a September 2008 Waiver and Amendment with Marquis
and Longview, pursuant to which the parties amended and waived certain
provisions and covenants, including a financial covenant, contained in the
Existing Notes issued to Longview and the April 2008 Purchase Agreement that
conflicted with the terms and conditions of the Securities Purchase Agreement
and the transactions contemplated thereby.
 
 Additionally, we conveyed to Marquis a
1.0% perpetual overriding royalty interest in the oil and gas production of all
of our current and future interests in the real property then owned by us.
Pursuant to the terms of the overriding royalty conveyance, we have the
conditional option, beginning on September 19, 2009 and terminating on September
19, 2010, to repurchase the overriding royalty interests conveyed in exchange
for a number of shares of our common stock equal to the adjusted fair market
value of the conveyed overriding royalty interests, based upon an independent
appraisal at the time we make the election, divided by a 20-day average trading
price of our common stock at the time of repurchase, and subject to certain
conditions, including without limitation, that (i) our average prior 20-day
trading volume is at least 125,000 shares, (ii) the prior 20-day average price
per share of its common stock is at least $3.00 per share, and (iii) the shares
to be exchanged are registered for public resale pursuant to an effective
registration statement.
 
 The notes outstanding under the
Longview/Marquis Facility and the Senior Secured Note are subject to various
restrictive covenants set forth in the respective related securities purchase
agreements, which covenants, among other things, limit the incurrence of
additional debt, investments, liens, dividends, prepayments of indebtedness,
asset divestitures, mergers and consolidations, transactions with affiliates and
other matters customarily restricted in such agreements.  Further,
these covenants require the maintenance of certain average daily rates of
barrels of oil equivalent production, measured on a calendar quarterly
basis.  On March 31, 2009, we were not in compliance with the average
daily production rate covenants.  Longview and Marquis each have
waived the production rate covenants as of the March 31, 2009 measurement
date.  These waivers are limited to the March 31, 2009 measurement and
do not affect the production rate covenants subsequent to March 31,
2009.
 16
  Other Notes
Payable
 The total
of our other notes payable and long-term debt at March 31, 2009 was $2.039
million and comprised of amounts due to various parties as a result of oil and
gas and other property purchases. Repayment of these obligations is due over a
period ranging from less than one year to greater than five years. Effective
annual interest rates for these obligations range from 4.9% to
12.25%.
 
 Deferred
Liability
 
 Settlement
Agreement
 On May
15, 2008, we settled a lawsuit and counter-lawsuit between Leexus Oil & Gas,
LLP, Mark Jaehne, and Bennie Jaehne regarding disputes arising under a
previously reported Agreement and Plan of Merger dated April 20, 2007 (the
“Merger Agreement”). The Merger Agreement called for us to pay $4.0 million over
time based on a percentage of the production of certain oil and gas interests
acquired under the Merger Agreement and issue of 2,000,000 shares of our common
stock to the selling shareholders of Leexus, 1,333,333 shares of which were
delivered to the Jaehnes at closing.
 
 The
settlement agreement provided for our payment on the settlement date of $2.0
million and future payments totaling $2.0 million, payable in four future
installments, which will extinguish all of our past, current and future
obligations due to the Jaehnes as selling shareholders under the Merger
Agreement. The settlement also provides for the return of 1,333,333 shares of
our common stock previously issued to the Jaehnes, of which 900,000 shares were
returned on the settlement date.  The first of the four installments
was paid during the fourth quarter of 2008, and 108,333 additional shares of our
common stock was returned to us.  As of March 31, 2009, a total
liability of $1.5 million is included on our balance sheet as a deferred
liability, $1.0 million of which is classified as current, and $500,000 of which
is non-current.
 
 Sources
and Uses of Cash
 
 The
following table sets forth our sources and uses of cash for the three months
ended March 31, 2009 and 2009.
  Three
      Months Ended
                                              
                                              
                                              ChangeMarch
      31,
                                              
                                              
                                              2009
      vs.2009
                                              
                                              
                                              2008
                                              
                                              
                                              2008Net
      cash (used in) provided by operating activities
                                              
                                              $
                                              (850,515
                                              )
                                              
                                              $
                                              1,026,105
                                              
                                              
                                              $
                                              (1,876,620
                                              )Net
      cash used in investing activities
                                              
                                              
                                              (711,165
                                              )
                                              
                                              
                                              (2,437,134
                                              )
                                              
                                              
                                              1,725,969Net
      cash (used in) provided by financing activities
                                              
                                              
                                              (221,836
                                              )
                                              
                                              
                                              1,451,096
                                              
                                              
                                              
                                              (1,672,932
                                              )Net
      increase (decrease) in cash andcash
    equivalents
                                              
                                              $
                                              (1,783,516
                                              )
                                              
                                              $
                                              40,067
                                              
                                              
                                              $
                                              (1,823,583
                                              )
 
 Net cash (used in) provided by
operating activities decreased by $1.9 million for the first quarter of 2009
compared to the first quarter of 2008.  This decrease largely was
caused by the $2.4 million increase in net loss for the first quarter of 2009,
partially offset an increase in cash provided by operating activities
attributable to changes in net operating assets and liabilities.
 
 Net cash used in investing activities
decreased by $1.7 million for the first quarter of 2009, compared with the first
quarter of 2008.  This decrease reflects reduced lease acquisition and
drilling program during the first quarter of 2009 compared to the prior year due
to lower commodity prices.
 
 Net cash (used in) provided by
financing activities decreased by $1.7 million for the first quarter of 2009,
compared with the same period of the prior year.  We did not receive
any proceeds from the issuance of new debt in the first three months of
2009.  In the first quarter of 2008, approximately $1.5 million in
cash was provided by the issuance of new debt, net of repayments in the same
period.
  17
  New
Accounting Standards
  FASB Statement of Accounting
Standard No. 157, “Fair Value Measurement” (“SFAS 157”):  SFAS
157, issued in September 2006, defines fair value, provides guidance for using
fair value to measure assets and liabilities. It applies whenever other
standards require or permit assets or liabilities to be measured at fair value
but it does not expand the use of fair value in any new circumstances. In
November 2008, the effective date was deferred for all non-financial assets and
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis. The provisions of SFAS No. 157 that were not deferred are
effective for financial statements issued for fiscal three months beginning
after November 15, 2008. The adoption of SFAS No. 157, effective January 1,
2009, did not have a significant effect on our financial position or results of
operations.
 
 FASB Statement of Accounting
Standards No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”):SFAS 159, issued in February 2008,
allows entities the option to measure the eligible financial instruments at fair
value as of specified dates.  Such election, which may be applied on
an instrument by instrument basis, is typically irrevocable once
elected.  SFAS No. 159 is effective fiscal three months beginning
after November 15, 2008, and early application is allowed under certain
circumstances.  The adoption of SFAS No. 159, effective January 1,
2009, did not have a significant effect on our financial position or results of
operations.
  FASB Statement of Accounting
Standards No. 141 (R), “Business Combinations” (“SFAS 141
(R)”): SFAS No. 141(R) was issued in December 2008 to replace
SFAS 141.  SFAS 141 (R) establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquire and the goodwill acquired.  The Statement also
establishes disclosure requirements, which will enable users to evaluate the
nature and financial effects of the business combination.  SFAS 141
(R) is effective for fiscal three months beginning after December 15,
2009.  The adoption of SFAS 141 (R) will have an impact on accounting
for business combinations, but the effect is dependent upon acquisitions at the
time they occur.
  FASB Statement of Accounting
Standards No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”):SFAS 160, issued in December 2008, establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the non-controlling interest, changes in a parent’s ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated.  The Statement also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the non-controlling
owners.  SFAS 160 is effective for fiscal three months beginning after
December 15, 2009.  We do not currently have any non-controlling
interests and do not believe that the adoption of SFAS No. 160 will have an
effect on its financial position or results of operations.
  FASB Statement of Accounting
Standards No. 161, “Disclosures about Derivative Instruments and Hedging
Activities – an amendment of FASB Statement No. 133” (“SFAS
161”):SFAS 161, issued in March 2009, requires new and
expanded disclosures regarding hedging activities. These disclosures include,
but are not limited to, a tabular presentation of derivative data; financial
statement presentation of fair values on a gross basis, including those that
currently qualify for netting under FASB Interpretation No. 39; and specific
footnote narrative regarding how and why derivatives are used. The disclosures
are required in all interim and annual reports. SFAS No. 161 is effective for
fiscal and interim periods beginning after November 15, 2009.  The
adoption of SFAS No. 159, effective January 1, 2009, did not have a significant
effect on our financial position or results of operations
  FASB Statement of Accounting
Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles”
(“SFAS 162”):  SFAS 162, issued in May 2009, is intended to
improve financial reporting by identifying a consistent hierarchy for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles. SFAS
No. 162 is effective 60 days following the Security Exchange Commission's
approval of the Public Company Accounting Oversight Board Auditing amendments to
AU Section 411, The Meaning of "Present Fairly in Conformity with Generally
Accepted Accounting Principles."
  18
  Securities and Exchange Commission
(“SEC”) Release No. 33-8995, “Modernization of Oil and Gas
Reporting”:Issued March 31, 2009, SEC Release
No. 33-8995 revised disclosure requirements for oil and gas companies. In
addition to changing the definition and disclosure requirements for oil and gas
reserves, the new rules change the requirements for determining oil and gas
reserve quantities. These rules permit the use of new technologies to determine
proved reserves under certain criteria and allow companies to disclose their
probable and possible reserves. The new rules also require companies to report
the independence and qualifications of their reserves preparer or auditor and
file reports when a third party is relied upon to prepare reserves estimates or
conducts a reserves audit. The new rules also require that oil and gas reserves
be reported and the full cost ceiling limitation be calculated using a
twelve-month average price rather than period-end prices. The use of a
twelve-month average price could have an effect on our depletion rates for its
natural gas and crude oil properties. The pronouncement is effective January 1,
2010 and will be effective for annual reports on Form 10-K for fiscal years
ending after December 31, 2009, pending the potential alignment of certain
accounting standards by the FASB with the new rule.  The Company is
currently evaluating the impact of SEC Release No. 33-8995 on its consolidated
financial statements and related disclosures.
 
 FASB Staff Position 107-1(“FSP”) FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments”:The FSP, issued in April 2009, enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures, and is effective for interim and annual periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15,
2009.  The Company does not believe that the adoption of this FSP will
have a material effect on its financial statements.
  19
  Item
3. Quantitative and Qualitative Disclosures About Market Risk.
 
 Not
applicable.
 
 Item
4T. Controls and Procedures.
 
 Disclosure
Controls and Procedures
 
 We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in reports filed under the Securities Exchange Act of
1934 (“Exchange Act”) is recorded, processed, summarized and reported within the
specified time periods. Our Chief Executive Officer and our Chief Financial
Officer are responsible for maintaining our disclosure controls and procedures.
The controls and procedures established by us are designed to provide reasonable
assurance that information required to be disclosed by the issuer in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.
 
 As
required by Rule 13a-15 under the Exchange Act, our management, including, our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and procedures as of
March 31, 2009. Based on that evaluation, management concluded that as of March
31, 2009, and as of the date that the evaluation of the effectiveness of our
disclosure controls and procedures was completed, our disclosure controls and
procedures were effective to satisfy the objectives for which they are
intended.
 
 Changes
in Internal Control Over Financial Reporting
 
 There was
no change in our internal control over financial reporting during the period
ended March 31, 2009, that has affected materially, or is reasonably likely to
affect materially, our internal control over financial
reporting.
  20
 
 PART
II – OTHER INFORMATION
 
 Item
1.  Legal Proceedings.
  Granite
Lawsuit
 
 On February 26, 2009, Granite Energy
Inc. commenced a lawsuit against the Company in Bexar County, Texas, to recover
the balance of the purchase price allegedly owed by the Company to Granite for
our purchase of a certain drilling rig and associated equipment.  We
purchased the rig and equipment from Granite, pursuant to a Purchase and Sale
Agreement, dated September 17, 2007, for $1,300,000.  As of the March
31, 2009, we have paid an aggregate of $944,751 to Granite.  In
February 2009, we stopped making payments for the rig and equipment, owing to
Granite’s failure to deliver title to the assets, despite our repeated demands
for same.
 
 The parties have agreed to suspend our
requirement to file an answer to Granite’s lawsuit to actively pursue settlement
negotiations, which are ongoing.
 
 Item
1A.  Risk Factors.
 
 There have been no material changes
from the risk factors disclosed in Item 1A. Risk Factors of our annual report on
Form 10-K for the year ended December 31, 2008, other than the
following:
 
 The
proposed United States federal budget for fiscal year 2010 includes certain
provisions that, if passed as originally submitted, will have an adverse effect
on our financial position, results of operations, and cash flows.
  On February 26, 2009, the Office of
Management and Budget released a summary of the President’s proposed federal
budget for fiscal year 2010.  The proposed budget repeals many tax
incentives and deductions that are currently used by U.S. oil and gas companies
and imposes new taxes. The provisions include: elimination of the ability to
fully deduct intangible drilling costs in the year incurred; increases in the
taxation of foreign source income; levy of an excise tax on Gulf of Mexico oil
and gas production; repeal of the manufacturing tax deduction for oil and gas
companies; increase in the geological and geophysical amortization period for
independent producers; and implementation of a fee on non-producing leases
located on federal lands.
  Should some or all of these provisions
become law our taxes will increase, potentially significantly, which would have
a negative impact on our net income and cash flows. This could also reduce our
drilling activities. Since none of these proposals have yet to be voted on or
become law, we do not know the ultimate impact these proposed changes may have
on our business.
  21
  Item
2.    Unregistered Sales of Equity Securities and Use of
Proceeds.
 
 In the period ending March 31, 2009, we
issued an aggregate 31,000 shares of our common stock to three individuals for
services rendered to us under consulting agreements, in transactions not
involving a public offering, pursuant to Section 4(2) of the Securities Act of
1933.
 
 Item
3.    Defaults Upon Senior Securities.
 
 None.
 
 Item
4.    Submission of Matters to a Vote of Security
Holders.
 
 On March 5, 2009, we received written
consents from a majority of our stockholders holding or able to direct the vote
of 9,949,725 shares of our common stock, representing approximately 59.36% of
the then total issued and outstanding Common Stock, to take the following
stockholder actions by written consent:
 
 ·
              to
      approve the issuance of approximately 1.6 million shares of the Company’s
      newly designated Series A Convertible Preferred Stock, plus such
      additional shares as may result from interest accrued through the
      effective date of the Stockholder Consents (as defined below), to The
      Longview Fund, L.P., a California limited partnership (“Longview”), in
      exchange for the surrender and cancellation of approximately $16.3 million
      (plus accrued interest) of the Company’s secured debt held by Longview;
      and
 
 ·
              to
      amend the Company’s Articles of Incorporation to increase our authorized
      common stock, par value $0.001 per share, from 50,000,000 shares to
      200,000,000 shares.
 
 The stockholder consent actions are
effective 20 days after the Definitive Information Statement on Schedule 14C was
first mailed to our stockholders, which mailing occurred on April 24,
2009.  We anticipate closing on the Series A Convertible Preferred
transaction during the week of May 18, 2009.
 
 Item
5.    Other Information.
 
 None.
  22
  Item
6. Exhibits.
 
 31.1
                
                Principal
      Executive Officer Certification Pursuant to Item 601(b)(31) of Regulation
      S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
                
                Principal
      Financial Officer Certification Pursuant to Item 601(b)(31) of Regulation
      S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
                
                Principal
      Executive Officer Certification Pursuant to Item 601(b)(32) of Regulation
      S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
                
                Principal
      Financial Officer Certification Pursuant to Item 601(b)(32) of Regulation
      S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
  23
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
  SOUTH
      TEXAS OIL COMPANYDate: May
      15, 2009
                  By:
                  /s/  Sherry L.
      SpurlockSherry
      L. Spurlock
                    Executive
      Vice President and Chief Financial Officer (duly
                    authorized
      officer)
  24
  EXHIBIT
INDEX
 
 31.1
                
                Principal
      Executive Officer Certification Pursuant to Item 601(b)(31) of Regulation
      S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
                
                Principal
      Financial Officer Certification Pursuant to Item 601(b)(31) of Regulation
      S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
                
                Principal
      Executive Officer Certification Pursuant to Item 601(b)(32) of Regulation
      S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
                
                Principal
      Financial Officer Certification Pursuant to Item 601(b)(32) of Regulation
      S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
  25