##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from
                          to
 Commission file number: 001-33457
 Pinnacle Gas Resources, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    30-0182582(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)1 E. Alger Street 
Sheridan, WY
    
    82801(Address of principal executive offices)
    
    (Zip code)
 (307) 673-9710  (Registrants telephone number, including area code)
 
 þ o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ(Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



PINNACLE GAS RESOURCES, INC.
 Index to Form 10-Q
 PageCautionary Statement Concerning Forward-Looking Statements
    
    
    iPart
I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Overview
    
    
    18Critical Accounting Policies
    
    
    19Trends Affecting Our Business
    
    
    23Results of Operations
    
    
    23Liquidity and Capital Resources
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Commodity Price Risk
    
    
    28Item 4T. Controls and Procedures
    
    
    29Disclosure Controls and Procedures
    
    
    29Changes in Internal Control Over Financial Reporting
    
    
    29Part II. OTHER INFORMATION
    
    
    29Item 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32Letter AgreementCertification of President and Chief Executive Officer Pursuant to Section 302Certification of Senior Vice President, Chief Financial Officer and Secretary Pursuant to Section 302Certification of President and Chief Executive Officer Pursuant to Section 906Certification of Senior Vice President, Chief Financial Officer and Secretary Pursuant to Section 906




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##### Table of Contents



CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
  
    
    projections and estimates concerning the timing and success of specific projects;
    
    our financial position or operating results;
    
    our business strategy;
    
    our budgets;
    
    the amount, nature and timing of capital expenditures;
    
    the drilling of wells;
    
    the development of recently acquired natural gas and oil properties;
    
    the timing and amount of future production of natural gas and oil;
    
    our operating costs and other expenses;
    
    our estimated future net revenues from natural gas and oil reserves and the present
value thereof;
    
    our cash flow and anticipated liquidity; and
    
    our other plans and objectives for future operations.
  
    
    our ability to implement our business strategy;
    
    the extent of our success in discovering, developing and producing reserves, including
the risks inherent in exploration and development drilling, well completion and other
development activities;
    
    fluctuations in the commodity prices for natural gas and crude oil;
    
    engineering, mechanical or technological difficulties with operational equipment, in
well completions and workovers, and in drilling new wells;
    
    the effects of government regulation and permitting and other legal requirements;
    
    labor problems;
    
    environmental related problems;
 i




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##### Table of Contents




    
    the uncertainty inherent in estimating future natural gas and oil production or
reserves;
    
    production variances from expectations;
    
    the substantial capital expenditures required for construction of pipelines and the
drilling of wells and the related need to fund such capital requirements through commercial
banks and/or public securities markets;
    
    disruptions of, capacity constraints in or other limitations on our or others pipeline
systems;
    
    our ability to effectively market our production;
    
    land issues and the costs associated with perfecting title for natural gas rights in
some of our properties;
    
    our ability to develop and replace reserves;
    
    our dependence upon key personnel;
    
    the lack of liquidity of our equity securities;
    
    operating hazards attendant to the natural gas and oil business, including down-hole
drilling and completion risks that are generally not recoverable from third parties or
insurance;
    
    potential mechanical failure or under performance of significant wells;
    
    climatic conditions or natural disasters;
    
    acts of terrorism;
    
    the availability and cost of materials and equipment;
    
    delays in anticipated start-up dates;
    
    our ability to find and retain skilled personnel;
    
    the availability of capital;
    
    competition from, and the strength and financial resources of, our competitors;
    
    general economic conditions; and
    
    regional price differentials.
  ii




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##### Table of Contents



Part I.
FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PINNACLE GAS RESOURCES, INC.
Balance Sheets
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)
    
    
    (audited)(in thousands, exceptshare andper share data)AssetsCurrent assetsCash and cash equivalents
    
    $
    3,774
    
    
    $
    8,151ReceivablesAccrued gas sales
    
    
    4,097
    
    
    
    3,062Joint interest receivables, net of $100 allowance for doubtful accounts
    
    
    7,482
    
    
    
    6,040Derivative instruments
    
    
    
    
    
    
    556Inventory of material for drilling and completion
    
    
    123
    
    
    
    174Prepaid expenses
    
    
    1,877
    
    
    
    1,322Total current assets
    
    
    17,353
    
    
    
    19,305Property and equipment, at cost, net of accumulated depreciation
    
    
    2,193
    
    
    
    2,226Oil and gas properties, using full cost accounting, net of accumulated depletion and
impairmentProved
    
    
    38,425
    
    
    
    33,965Unproved
    
    
    90,000
    
    
    
    88,820Inventory of material for drilling and completion
    
    
    352
    
    
    
    505Deposits
    
    
    20
    
    
    
    20Restricted certificates of deposit
    
    
    1,752
    
    
    
    1,752Total assets
    
    $
    150,095
    
    
    $
    146,593Liabilities and Stockholders EquityCurrent liabilitiesLong term debt-current portion
    
    $
    23
    
    
    $
    23Derivative instruments, current
    
    
    3,606
    
    
    
    Trade accounts payable
    
    
    11,157
    
    
    
    7,767Revenue distribution payable
    
    
    8,077
    
    
    
    6,534Drilling prepayments from joint interest owners
    
    
    28
    
    
    
    28Asset retirement obligations, current
    
    
    372
    
    
    
    363Accrued liabilities
    
    
    1,556
    
    
    
    2,241Total current liabilities
    
    
    24,819
    
    
    
    16,956Asset retirement obligations, non-current
    
    
    2,554
    
    
    
    2,404Derivative instruments, non-current
    
    
    317
    
    
    
    Production taxes
    
    
    1,258
    
    
    
    633Long term debt, non-current
    
    
    757
    
    
    
    763Total liabilities
    
    
    29,705
    
    
    
    20,756ContingenciesSeries A Redeemable Preferred stock, $0.01 par value; 25,000,000 authorized, 0 shares
issued and outstanding at March 31, 2008 and December 31, 2007, respectively
    
    
    
    
    
    
    Stockholders equityCommon stock, $0.01 par value; 100,000,000 authorized and 29,000,101 and
29,019,751 shares issued and outstanding at March 31, 2008 and December 31, 2007,
respectively
    
    
    289
    
    
    
    289Additional paid-in capital
    
    
    149,902
    
    
    
    149,701Accumulated deficit
    
    
    (29,801
    )
    
    
    (24,153
    )Total stockholders equity
    
    
    120,390
    
    
    
    125,837Total liabilities and stockholders equity
    
    $
    150,095
    
    
    $
    146,593
  1




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Statements of Operations
(unaudited)
 For the Three Months EndedMarch 31,2008
    
    
    2007(in thousands, except share andper share data)RevenuesGas sales
    
    $
    5,661
    
    
    $
    3,654Total revenues
    
    
    5,661
    
    
    
    3,654Cost of revenues and expensesLease operating expenses
    
    
    2,050
    
    
    
    917Production taxes
    
    
    660
    
    
    
    401Marketing and transportation
    
    
    1,077
    
    
    
    786General and administrative, net
    
    
    1,373
    
    
    
    1,107Depreciation, depletion, amortization and accretion
    
    
    1,728
    
    
    
    1,485Impairment of oil and gas properties
    
    
    
    
    
    
    17,003Total cost of revenues and expenses
    
    
    6,888
    
    
    
    21,669Operating loss
    
    
    (1,227
    )
    
    
    (18,045
    )Other income (expense)Loss on derivatives
    
    
    (4,572
    )
    
    
    (199
    )Interest income
    
    
    65
    
    
    
    48Other income
    
    
    101
    
    
    
    110Interest expense
    
    
    (15
    )
    
    
    (64
    )Total other income (expense)
    
    
    (4,421
    )
    
    
    (105
    )Net loss before income taxes
    
    
    (5,648
    )
    
    
    (18,150
    )Income taxes
    
    
    
    
    
    
    Net loss attributable to common stockholders
    
    $
    (5,648
    )
    
    $
    (18,150
    )Basic and diluted net loss per share
    
    $
    (0.19
    )
    
    $
    (0.72
    )Weighted average shares outstanding   basic and
diluted
    
    
    29,015,899
    
    
    
    25,151,179
  2




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Statements of Cash Flows
(in thousands)
(unaudited)
 For the Three MonthsendedMarch 31,2008
    
    
    2007Cash flows from operating activitiesNet loss
    
    $
    (5,648
    )
    
    $
    (18,150
    )Adjustments
to reconcile net loss to net cash provided by (used in) operating
activitiesImpairment of oil and gas properties
    
    
    
    
    
    
    17,003Depreciation, depletion, amortization and accretion
    
    
    1,728
    
    
    
    1,485Loss on derivatives
    
    
    4,572
    
    
    
    199Stock-based compensation
    
    
    205
    
    
    
    160Changes in assets and liabilities(Increase) decrease in receivables
    
    
    (2,477
    )
    
    
    2,323Decrease in inventory of material for drilling and completion
    
    
    51
    
    
    
    Increase in prepaid expenses
    
    
    (555
    )
    
    
    (105
    )Increase
(decrease) in trade accounts payable, accrued
liabilities and production taxes
    
    
    1,385
    
    
    
    (9,277
    )Increase in revenue distribution payable
    
    
    1,543
    
    
    
    673Decrease in drilling prepayments
    
    
    
    
    
    
    (33
    )Net cash provided by (used in) operating activities
    
    
    804
    
    
    
    (5,722
    )Cash flows from investing activitiesCapital expenditures  exploration and production
    
    
    (5,026
    )
    
    
    (2,221
    )Capital expenditures  property and equipment
    
    
    (205
    )
    
    
    (230
    )Purchase of restricted certificate of deposit
    
    
    
    
    
    
    (5
    )Decrease in inventory held for exploration and development
    
    
    153
    
    
    
    84Deposits
    
    
    
    
    
    
    (9
    )Realized gain/(loss) on derivatives
    
    
    (93
    )
    
    
    437Net cash used in investing activities
    
    
    (5,171
    )
    
    
    (1,944
    )Cash flows from financing activitiesPrincipal payments on note payable
    
    
    (6
    )
    
    
    (6
    )Proceeds from long-term debt
    
    
    
    
    
    
    4,500Issuance costs related to common stock
    
    
    (4
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (10
    )
    
    
    4,494Net decrease in cash and cash equivalents
    
    
    (4,377
    )
    
    
    (3,172
    )Cash and cash equivalents at beginning of quarter
    
    
    8,151
    
    
    
    4,762Cash and cash equivalents at end of quarter
    
    $
    3,774
    
    
    $
    1,590Noncash investing and financing activitiesCapital expenditures included in trade accounts payable
    
    $
    9,145
    
    
    $
    3,940Asset retirement obligation included in oil and gas properties
    
    
    101
    
    
    
    69Accrued offering costs
    
    
    
    
    
    
    419Inventory used in oil and gas properties
    
    
    
    
    
    
    116Supplemental cash flow informationCash payments for interest, net of amount capitalized
    
    $
    15
    
    
    $
    64
  3




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Statements of Redeemable Preferred Stock and Stockholders Equity
(in thousands, except for share data)
 Stockholders EquityRedeemable
    
    
    
    
    
    Warrants
    
    
    AdditionalPreferred Stock
    
    
    Common Stock
    
    
    and
    
    
    Paid-In
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Options
    
    
    Capital
    
    
    Deficit
    
    
    Total(in thousands except share amounts)Balance at December 31, 2007
    
    
    
    
    
    $
    
    
    
    
    29,019,751
    
    
    $
    289
    
    
    
    
    
    
    $
    149,701
    
    
    $
    (24,153
    )
    
    $
    125,837Forfeiture of restricted shares
    
    
    
    
    
    
    
    
    
    
    (19,650
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Offering costs related to the
issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    205Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,648
    )
    
    
    (5,648
    )Balance at March 31, 2008
(unaudited)
    
    
    
    
    
    
    
    
    
    
    29,000,101
    
    
    $
    289
    
    
    
    
    
    
    $
    149,902
    
    
    $
    (29,801
    )
    
    $
    120,390
  4




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Notes to Financial Statements
(Unaudited)
 Note 1  Organization and Nature of Operations
   Note 2  Basis of Presentation
  www.pinnaclegas.com
 Use of Estimates
  5




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Note
2  Basis of Presentation  continued
 Oil and Gas Properties
    6




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Note 2  Basis of Presentation  continued
 Per Share Information
   Income Taxes
      7




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Note 2  Basis of Presentation  continued
 Recent Accounting Pronouncements
     8




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Note 2  Basis of Presentation  continued
 Disclosures about Derivative Instruments and Hedging
Activities
 Note 3  Asset Retirement Obligations
    For the ThreeMonths EndedMarch 31,2008
    
    

2007Beginning balance asset retirement obligations
    
    $
    2,767
    

    
    $
    2,321Additional obligation added during the period
    
    
    101
    
    
    
    69Accretion expense
    
    
    58
    
    
    
    48Ending balance of asset retirement obligations
    
    $
    2,926
    
    
    $
    2,438
 9




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Note 4  Restricted Assets and Deposits
 Certificates of deposit.
 Deposits.
 Note 5  Derivatives
   10




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Note 5
 Derivatives  continued
  Fixed PriceMMbtu Per
    
    Range
    
    TimeProduct and Type of Hedging Contract
    
    Day
    
    CIG Index Price
    
    PeriodMarch 31, 2008 (unaudited)Natural GasSwap
    
    
    2,500
    
    
    
    $6.63
    
    
    
    02/08-12/08Natural GasCollar
    
    
    2,000
    
    
    $
    6.50  $7.50
    
    
    
    01/09-12/09Natural GasSwap
    
    
    1,500
    
    
    $
    7.44
    
    
    
    03/08-12/08Natural GasSwap
    
    
    2,500
    
    
    
    $7.17
    
    
    
    01/09-12/09Natural GasCollar
    
    
    3,000
    
    
    $
    6.50  $8.20
    
    
    
    01/08-12/08March 31, 2007 (unaudited)Natural GasCollar
    
    
    1,000
    
    
    $
    5.00  $5.20
    
    
    
    10/04-09/07Natural GasCollar
    
    
    1,000
    
    
    $
    6.50  $10.50
    
    
    
    09/06-12/07Natural GasCollar
    
    
    3,000
    
    
    $
    7.00  $9.05
    
    
    
    01/07-12/07
   Note 6  Stock Based Compensation
 Options under Employee Option Plans
    Year 1
    
    
    20
    %Year 2
    
    
    30
    %Year 3
    
    
    50
    %100
    %
 11




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Note 6  Stock Based Compensation  continued
 Stock-Based Compensation
   WeightedWeighted Average
    
    
    AverageNumber of
    
    
    Exercise Price
    
    
    Remaining
    
    
    AggregateShares
    
    
    Per Share
    
    
    Contractual Life
    
    
    Intrinsic valueOutstanding, December 31, 2007
    
    
    871,000
    
    
    $
    6.56Canceled or forfeited
    
    
    (121,000
    )
    
    
    7.37Outstanding, March 31, 2008 (unaudited)
    
    
    750,000
    
    
    $
    6.42
    
    
    
    4.23
    
    
    $
    Exercisable, March 31, 2008 (unaudited)
    
    
    448,500
    
    
    $
    5.14
    
    
    
    3.66
    
    
    $
    
  Options Outstanding
    
    Options ExercisableWeightedNumber of
    
    Average
    
    
    
    
    
    Weightedshares
    
    Remaining
    
    Number
    
    Average
    
    Fair ValueExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercisable
    
    Exercise Price
    
    Determination$4.00
    
    
    137,500
    
    
    2.5 years
    
    
    137,500
    
    
    $
    4.00
    
    
    Black-Scholes(minimum value)$4.80
    
    
    282,500
    
    
    4.0 years
    
    
    216,250
    
    
    $
    4.80
    
    
    Black-Scholes(minimum value)$5.20
    
    
    112,500
    
    
    4.8 years
    
    
    56,250
    
    
    $
    5.20
    
    
    Black-Scholes$8.40
    
    
    25,000
    
    
    6.2 years
    
    
    
    
    
    $
    8.40
    
    
    Black-Scholes$11.00
    
    
    192,500
    
    
    5.2 years
    
    
    38,500
    
    
    $
    11.00
    
    
    Black-Scholes750,000
    
    
    
    
    
    
    
    448,500
 Restricted Stock
   12




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Note 6  Stock Based Compensation  continued
  Weighted-AverageGrant-DateShares
    
    
    Fair ValueNon-vested at December 31,2007
    
    
    147,540
    
    
    $
    8.57Forfeited
    
    
    (10,560
    )
    
    $
    7.45Vested
    
    
    (17,000
    )
    
    $
    11.00Non-vested at March 31, 2008 (unaudited)
    
    
    119,880
    
    
    $
    8.14
  Note 7  Long-Term Debt
 Credit Facility
    
    
    incur liens;
    
    incur debt;
    
    make investments in other persons;
    
    declare dividends or redeem or repurchase stock;
    
    engage in mergers, acquisitions, consolidations and asset sales or amend the
Companys organizational documents;
    
    enter into certain hedging arrangements;
    
    amend material contracts; and
    
    enter into related party transactions.
  13




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Note 7  Long-Term Debt  continued
 .
 Office Building Loan
  Note 8  Equity
 Common Stock
  Preferred Stock.
 14




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Note 8
 Equity  continued
  Warrants.
 Note 9  Fair Value Measurements
  
    
    Level 1  Quoted prices in active markets for identical assets
orliabilities
    
    Level 2 Quoted prices in active markets for similar assets and
liabilities, quoted prices for identical or similar instruments in markets that are
not active, and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
    
    Level 3  Significant inputs to the valuation model are unobservable.
  Level 1
    
    
    Level 2
    
    
    Level 3LiabilitiesOil and Gas derivative instruments
    
    $
    
    
    
    $
    3,923
    
    
    $
    Total
    
    $
    
    
    
    $
    3,923
    
    
    $
    
  15




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Note 9
 Fair Value Measurements  continued
   Note 10  Contingencies
     16




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Note 10  Contingencies  continued
  Note 11  Recent Developments
   ****
 17




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The discussion and analysis that follows should be read together with the accompanying
financial statements and notes related thereto that are included elsewhere in this quarterly report
on Form 10-Q . It includes forward looking statements that may reflect our estimates, beliefs,
plans and expected performance. The forward looking statements are based upon events, risks and
uncertainties that may be outside our control. Our actual results could differ significantly from
those discussed in these forward looking statements. Factors that could cause or contribute to
these differences include, but are not limited to, market prices for natural gas and oil,
regulatory changes, estimates of proved reserves, economic conditions, competitive conditions,
development success rates, capital expenditures and other uncertainties, as well as those factors
discussed below and elsewhere in this quarterly report on Form 10-Q and in our annual report on
Form 10-K for the year ended December 31, 2007, including in Risk Factors and Cautionary
Statement Concerning Forward Looking Statements, all of which are difficult to predict. As a
result of these assumptions, risks and uncertainties, the forward looking matters discussed may not
occur.
 
 Overview
     18




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Critical Accounting Policies
  
    
    Reserve evaluation and determination.
    
    Estimates of the timing and cost of our future drilling activity.
    
    Estimates of the fair valuation of hedges in place.
    
    Estimates of timing and cost of asset retirement obligations.
    
    Estimates of the expense and timing of exercise of stock options.
    
    Accruals of operating costs, capital expenditures and revenue.
    
    Estimates for litigation.
 Oil and Gas Properties
     19




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Gas Sales
  Asset Retirement Obligations
 Accounting for the Asset Retirement Obligations
    Three Months Ended March 31,2008
    
    
    2007Beginning balance of asset retirement obligations
    
    $
    2,767
    
    
    $
    2,321Additional obligation added during the period
    
    
    101
    
    
    
    69Accretion expense
    
    
    58
    
    
    
    48Ending balance of asset retirement obligations
    
    $
    2,926
    
    
    $
    2,438
 Inventory
  20




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Property and Equipment
  Long-Lived Assets
  General and Administrative Expenses
  Income Taxes
 Accounting for Income Taxes
 Accounting for Uncertainty in Income
Taxes
    21




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Derivatives
 Accounting for Derivative Instruments and Hedging
Activities
  Stock-Based Compensation
 Share-Based Payments
 Accounting for
Stock Issued to Employees Accounting
for Stock-Based Compensation
 Accounts Receivable
  Transportation Costs
 Accounting
for Shipping and Handling Fees and Costs
 Legal Estimates
 Accounting for Contingencies
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Per Share Information
  New Accounting Pronouncements
  
 Trends Affecting Our Business
    
 Results of Operations
  23




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Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 Gas sales volume.
  Gas sales revenue.
  Derivatives.
  Lease operating expenses.
  Production taxes.
  24




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##### Table of Contents



Marketing and transportation.
  General and administrative expenses, net.
  Depreciation, depletion, amortization and accretion.
  Impairment.
  
 Liquidity and Capital Resources
  25




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##### Table of Contents



Credit Facility
       
    
    incur liens;
    
    incur debt;
    
    make investments in other persons;
    
    declare dividends or redeem or repurchase stock;
    
    engage in mergers, acquisitions, consolidations and asset sales or amend our
organizational documents;
    
    enter into certain hedging arrangements;
    
    amend material contracts; and
    
    enter into related party transactions.
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##### Table of Contents



Office
Building Loan
  Capital Expenditure Budget
   Cash Flow from Operating Activities
   27




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##### Table of Contents



Cash Flow from Investing Activities
  Cash Flow from Financing Activities
   Contractual Obligations
   Total
    
    
    2008
    
    
    2009-2010
    
    
    2011-2012
    
    
    Thereafter(In thousands)Derivative instruments
    
    $
    3,923
    
    
    $
    2,565
    
    
    $
    1,358
    
    
    
    
    
    
    
    Notes payable in connection with the
mortgage
    
    
    780
    
    
    
    17
    
    
    
    51
    
    
    
    58
    
    
    
    654Asset retirement obligations
    
    
    2,926
    
    
    
    351
    
    
    
    544
    
    
    
    857
    
    
    
    1,174Non-current production and property taxes
    
    
    1,258
    
    
    
    
    
    
    
    1,258
    
    
    
    
    
    
    
    Total
    
    $
    8,887
    
    
    $
    2,933
    
    
    $
    3,211
    
    
    $
    915
    
    
    $
    1,828
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Commodity Price Risk
  28




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Year Ending
    
    Year EndingDecember 31, 2008
    
    December 31, 2009(Unaudited)
    
    (Unaudited)Natural Gas Collars:Contract volumes (MMBtu)Floor
    
    
    825,000
    
    
    
    730,000Ceiling
    
    
    825,000
    
    
    
    730,000Weighted-average fixed price per MMBtu(1)Floor
    
    $
    6.50
    
    
    $
    6.50Ceiling
    
    $
    8.20
    
    
    $
    7.50Fixed-price sales(2)
    
    $
    8.20
    
    
    $
    7.50Fair value, net (thousands)(3)
    
    $
    (1,033
    )
    
    $
    (798
    )Natural Gas Swaps:Contract
volumes (MMBtu)
    
    
    1,100,000
    
    
    
    912,500Weighted-average fixed price sales per MMBtu(1)
    
    $
    6.93
    
    
    $
    7.17Fair value, net (thousands)(3)
    
    $
    (1,532
    )
    
    $
    (560
    )Total Natural Gas Contracts:Contract volumes (MMBtu)
    
    
    1,925,000
    
    
    
    1,642,500Fixed-price sales(2)
    
    $
    7.48
    
    
    $
    7.32Fair value, net (thousands)(3)
    
    $
    (2,565
    )
    
    $
    (1,358
    )
 
 (1)
    
    Volumes hedged using the CIG index price published in the first issue of Inside FERCs Gas
Market Report for each calendar month of the derivative transaction.(2)
    
    Assumes ceiling prices for natural gas collar volumes.(3)
    
    Fair value based on CIG index price in effect for each month as of March 31, 2008. 
 ITEM 4T. CONTROLS AND PROCEDURES
 
 Disclosure Controls and Procedures
  
 Changes in Internal Control Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
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ITEM 1A. RISK FACTORS
  We may be unable to complete the merger with Quest prior to the termination of the merger
agreement.
  The volatility of natural gas and oil prices could have a material adverse effect on our business.
  
    
    the domestic and foreign supply of natural gas and oil;
    
    the activities of the Organization of Petroleum Exporting Countries and state-owned oil
companies relating to oil price and production controls;
    
    overall domestic and global economic and political conditions;
    
    the consumption pattern of industrial consumers, electricity generators and residential
users;
    
    weather conditions;
    
    natural disasters;
    
    acts of terrorism;
    
    political stability in the Middle East and elsewhere;
    
    domestic and foreign governmental regulations;
    
    the price and quantity of foreign imports; and
    
    the price and availability of alternative fuels.
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##### Table of Contents



Our credit facility imposes restrictions on us that may affect our ability to successfully
operate our business.
  
    
    incur indebtedness;
    
    create liens
    
    sell our assets or consolidate or merge with or into other companies;
    
    make investments and other restricted payments, including dividends; and
    
    engage in transactions with affiliates.
 
  Certain of Pinnacles undeveloped leasehold acreage is subject to leases that may expire in
the near future.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  31




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibit No.
    
    
    
    Description2.1
    
    
    
    Amended and Restated Agreement and Plan of Merger,
dated as of February 6, 2008, among Quest Resource
Corporation, Pinnacle Gas Resources, Inc. and Quest
MergerSub, Inc. (incorporated herein by reference to
Exhibit 2.1 to the Current Report on Form 8-K (File
No. 000-17371) filed by Quest Resource Corporation on
February 6, 2008).3.1
    
    
    
    Second Amended and Restated Certificate of
Incorporation of Pinnacle Gas Resources, Inc.
(incorporated herein by reference to Exhibit 3.1 to
the Registration Statement on Form S-1 (File No.
333-133983) filed by Pinnacle Gas Resources, Inc. on
May 10, 2006).3.2
    
    
    
    Amended and Restated Bylaws of Pinnacle Gas
Resources, Inc. (incorporated herein by reference to
Exhibit 3.2 to the Registration Statement on Form S-1
(File No. 333-133983) filed by Pinnacle Gas
Resources, Inc. on May 10, 2006).4.1
    
    
    
    Amended and Restated Securityholders Agreement, dated
February 16, 2006 (incorporated herein by reference
to Exhibit 4.1 to the Registration Statement on Form
S-1 (File No. 333-133983) filed by Pinnacle Gas
Resources, Inc. on May 10, 2006).4.2
    
    
    
    Registration Rights Agreement, dated April 11, 2006
(incorporated herein by reference to Exhibit 4.2 to
the Registration Statement on Form S-1 (File No.
333-133983) filed by Pinnacle Gas Resources, Inc. on
May 10, 2006).*10.1
    
    
    
    Letter Agreement by and between Pinnacle Gas
Resources, Inc. and the Royal Bank of Scotland,
executed as of April 10, 2008, regarding the credit
facility dated as of February 12, 2007.*31.1
    
    
    
    Certification of President and Chief Executive
Officer of Pinnacle Gas Resources, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    
    
    Certification of Senior Vice President, Chief
Financial Officer and Secretary of Pinnacle Gas
Resources, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*32.1
    
    
    
    Certification of President and Chief Executive
Officer of Pinnacle Gas Resources, Inc. pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    
    
    Certification of Senior Vice President, Chief
Financial Officer and Secretary of Pinnacle Gas
Resources, Inc. pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith 32




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SIGNATURES
  PINNACLE GAS RESOURCES, INC.By:
    /s/ Peter G. SchoonmakerName:
    Peter G. SchoonmakerTitle:
    President, Chief Executive Officer
and Director
(Principal Executive Officer)Date: May 15, 2008By:
    /s/ Ronald T. BarnesName:
    Ronald T. BarnesTitle:
    Senior Vice President, Chief Financial
Officer
and Secretary
(Principal Financial Officer and
Principal Accounting Officer)Date: May 15, 2008