e10qsb
U.S. Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006.
OR
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o |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-51152
PetroHunter Energy Corporation
(formerly
Digital Ecosystems Corp., a Nevada corporation)
(Exact name of small business issuer as specified in its charter)
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Maryland
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98-0431245 |
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(State or jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
1875 Lawrence Street, Suite 1400, Denver, CO 80202
(Address of principal executive offices)
(303) 572-8900
(Issuers telephone number)
Check whether the issuer (i) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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.
Yes þ No o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date:
The total shares of $.001 Par Value Common Stock outstanding at August 16, 2006 was
218,687,334.
Transitional Small Business Disclosure Format (Check One) Yes o No þ
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The accompanying unaudited financial statements have been prepared in accordance with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B, and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial position, results of
operations, cash flows, and stockholders equity in conformity with accounting principles generally
accepted in the United States of America. In the opinion of management, all adjustments considered
necessary for a fair presentation of the results of operations and financial position have been
included and all such adjustments are of a normal recurring nature. Operating results for the nine
months ended June 30, 2006 are not necessarily indicative of the results that can be expected for
the year ending September 30, 2006.
As used in this Quarterly Report, the terms we, us and our mean PetroHunter Energy
Corporation and its subsidiary unless otherwise indicated. All dollar amounts in this Quarterly Report are in U.S.
dollars unless otherwise stated.
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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Consolidated Balance Sheets
June 30, 2006 and September 30, 2005
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F-2 |
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Consolidated
Statements of Operations for the Three and Nine Months ended June 30, 2006 and
Period from Inception (June 20, 2005) to June 30, 2006
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F-3 |
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Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2006 and
Period from Inception (June 20, 2005) to June 30, 2006
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F-4 |
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Notes to Consolidated Financial Statements
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F-5 to F-18 |
F-1
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, |
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September 30, |
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2006 |
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2005 |
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(unaudited) |
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(audited) |
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ASSETS |
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Current
Assets |
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Cash |
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$ |
22,662,280 |
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$ |
1,250,242 |
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Subscriptions receivable |
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2,077,000 |
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Prepaid property development costs related |
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1,336,000 |
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Other |
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108,660 |
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7,699 |
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Total
Current Assets |
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26,183,940 |
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1,257,941 |
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Property
and equipment |
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371,066 |
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Unevaluated oil and gas properties, at cost, full cost method of accounting |
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28,004,090 |
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7,231,443 |
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Restricted cash |
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30,000 |
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Deferred financing costs |
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10,563 |
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Total
Assets |
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$ |
54,589,096 |
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$ |
8,499,947 |
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LIABILITIES
AND STOCKHOLDERS EQUITY (DEFICIT) |
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Current
Liabilities |
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Accounts payable and accrued expenses |
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$ |
1,743,558 |
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$ |
475,107 |
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Accrued interest payable |
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1,025,276 |
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23,029 |
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Due to shareholder |
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648,421 |
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Contracts payable-oil and gas properties |
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5,512,500 |
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Notes payable |
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423,342 |
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Convertible notes payable |
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3,037,000 |
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Total
Current Liabilities |
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3,192,176 |
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9,696,057 |
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Asset
retirement obligation |
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50,895 |
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Commitments
and contingencies |
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Stockholders
Equity |
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Preferred stock, $.001 par value |
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Authorized 1,000,000 shares |
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Issued none |
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Common stock, $.001 par value |
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Authorized 500,000,000 shares |
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Issued and outstanding 218,687,334 (2006) and 100,000,000 (2005)shares |
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218,687 |
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100,000 |
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Capital in excess of par value |
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61,803,718 |
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822,710 |
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Deficit accumulated during the development stage |
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(10,676,380 |
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(2,118,820 |
) |
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Total
Stockholders Equity (Deficit) |
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51,346,025 |
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(1,196,110 |
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Total
Liabilities and Stockholders Equity (Deficit) |
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$ |
54,589,096 |
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$ |
8,499,947 |
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The accompanying notes are an integral part of these consolidated financial statements.
F-2
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months |
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Nine Months |
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Inception (June 20, 2005) to |
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ended June 30, |
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Ended June |
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June 30, |
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2006 |
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30, 2006 |
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2006 |
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Revenue |
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$ |
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$ |
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$ |
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Costs and
expenses |
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General and administrative |
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1,934,930 |
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3,810,783 |
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$ |
5,046,574 |
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Property development costs-related |
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1,245,000 |
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2,765,000 |
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3,625,000 |
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3,179,930 |
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6,575,783 |
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8,671,574 |
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Other income (expense) |
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Interest expense |
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(1,295,118 |
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(1,981,777 |
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(2,004,806 |
) |
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Net loss |
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$ |
(4,475,048 |
) |
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$ |
(8,557,560 |
) |
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$ |
(10,676,380 |
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Net loss per common share basic
and diluted |
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$ |
(.03 |
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$ |
(.07 |
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Weighted
average number of common
shares outstanding basic and
diluted |
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165,526,118 |
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122,774,060 |
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The accompanying notes are an integral part of these consolidated financial statements.
F-3
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months |
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Inception |
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Ended |
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(June 20, 2005) to |
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June 30, 2006 |
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June 30, 2006 |
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Cash flows from operating activities |
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Net loss |
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$ |
(8,557,560 |
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$ |
(10,676,380 |
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Adjustments to reconcile net loss to net cash used by operating activities |
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Stock for expenditures advanced |
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100,000 |
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Stock based compensation |
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1,353,090 |
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2,175,800 |
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Financing costs |
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942,562 |
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932,000 |
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Changes in assets and liabilities |
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Prepaids and other |
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(1,414,952 |
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(1,422,651 |
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Accounts payable and accrued expenses |
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1,142,374 |
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1,486,166 |
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Due to shareholder |
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(648,421 |
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Net cash used by operating activities |
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(7,182,907 |
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(7,405,065 |
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Cash flows from investing activities |
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Additions to oil and gas properties |
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(20,731,982 |
) |
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(22,296,582 |
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Office equipment |
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(371,066 |
) |
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(371,066 |
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Restricted cash |
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(30,000 |
) |
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(30,000 |
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Net cash used in investing activities |
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(21,133,048 |
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(22,697,648 |
) |
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Cash flows from financing activities |
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Proceeds from sale of common stock |
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35,442,500 |
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35,442,500 |
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Cash received upon recapitalization and merger |
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20,949 |
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20,949 |
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Proceeds from issuance of convertible notes |
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16,080,167 |
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19,117,167 |
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Offering costs |
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(1,815,623 |
) |
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(1,815,623 |
) |
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Net cash provided by financing activities |
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49,727,993 |
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52,764,993 |
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Net increase in cash |
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21,412,038 |
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22,662,280 |
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Cash and cash equivalents, beginning of period |
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1,250,242 |
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Cash and cash equivalents, end of period |
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$ |
22,662,280 |
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$ |
22,662,280 |
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Supplemental schedule of cash flow information |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes |
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$ |
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$ |
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Supplemental disclosures of non-cash investing and financing activities |
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Stock issued for expenditures advanced |
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$ |
100,000 |
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$ |
100,000 |
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Contracts for oil and gas properties |
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$ |
6,261,460 |
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$ |
12,772,754 |
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Common stock for debt |
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$ |
21,194,167 |
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$ |
21,194,167 |
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Common stock for offering costs |
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$ |
2,424,500 |
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$ |
2,424,500 |
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The accompanying notes are an integral part of these consolidated financial statements.
F-4
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION
PetroHunter Energy Corporation, formerly known as Digital Ecosystems Corp., (Digital) was
incorporated on February 21, 2002 under the laws of the State of Nevada. On February 10,
2006, Digital entered into a Share Exchange Agreement (the Agreement) with GSL Energy
Corporation (GSL) and certain shareholders of GSL
pursuant to which Digital acquired more than 85% of the issued and outstanding shares of common stock of GSL, in exchange for shares of
Digitals common stock. On May 12, 2006, the parties to the Agreement completed the share
exchange, and Digital changed its business to the business of GSL. Subsequent to the closing
of the Agreement, Digital acquired all the remaining outstanding stock of GSL, and effective
August 14, 2006, Digital changed its name from Digital Ecosystems Corp. to PetroHunter Energy
Corporation (PetroHunter). (Unless otherwise specified, GSL and PetroHunter are collectively
referred to herein as the Company).
GSL was incorporated under the laws of the State of Maryland on June 20, 2005 for the purpose
of acquiring, exploring and developing oil and gas properties. GSL is considered a
development stage company as defined by Statement of Financial Accounting Standards (SFAS)
No. 7, and its principal activities since inception have been raising capital through the
sale of common stock and convertible notes and the acquisition of oil and gas properties in the
Western United States and Australia.
As a result of the Agreement, GSL became a wholly owned subsidiary of PetroHunter. Since
this transaction resulted in the former shareholders of GSL acquiring control of PetroHunter,
for financial reporting purposes the business combination was accounted for as an additional
capitalization of PetroHunter (a reverse acquisition with GSL as the accounting acquirer).
In accounting for this transaction:
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GSL was deemed to be the purchaser and parent company for financial reporting
purposes. Accordingly, its net assets were included in the consolidated balance sheet
at their historical book value; and |
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ii. |
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Control of the net assets and business of PetroHunter was acquired effective May
12, 2006 for no consideration. |
The fair value of the Digital assets acquired and liabilities assumed pursuant to the
transaction with GSL are as follows:
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Net cash acquired |
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$ |
20,949 |
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Current assets |
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22,009 |
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Liabilities assumed |
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(449,396 |
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Fair Value
of 28,700,000 Digital Shares |
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$ |
(406,438 |
) |
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F-5
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements included herein were prepared from the records of the
Company in accordance with generally accepted accounting principles in the United States
applicable to interim financial statements and reflect all adjustments which are, in the
opinion of management, necessary to provide a fair statement of the results of operations and financial position for the interim
periods. Such financial statements conform to the presentation reflected in the Companys
Form 10-KSB filed with the Securities and Exchange Commission for the year ended March 31,
2006. The current interim period reported herein should be read in conjunction with the
Companys Form 10-KSB for the year ended March 31, 2006 and Form 8-K filed May 12, 2006.
The results of operations for the nine months ended June 30, 2006 are not necessarily
indicative of the results that may be expected for the full fiscal year ending September 30,
2006.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include PetroHunter for the period from
May 12, 2006 to June 30, 2006, and its wholly owned subsidiary, GSL, for the nine months
ended June 30, 2006. For the year ended September 30, 2005, the consolidated financial
statements are those of GSL for the entire year. There is no comparable nine month period
ended June 30, 2005, as the Company did not commence initial operations until July 2005. All
significant intercompany transactions have been eliminated upon consolidation.
LIQUIDITY
The Company had not commenced principal operations nor earned revenue as of June 30, 2006,
and is considered a development stage company. During the period from inception to ended June
30, 2006, the Company incurred a cumulative net loss of $10,676,380. The Company, in order to
fund its planned exploration and development of oil and gas properties, will require
significant additional funding. The Company has sold approximately $56.6 million of
convertible notes and common stock through June 30, 2006, and management believes that the
Company will be successful in raising additional funding to have sufficient capital to meet
its obligations for its planned operations.
OIL AND GAS PROPERTIES
The Company utilizes the full cost method of accounting for oil and gas activities. Under
this method, subject to a limitation based on estimated value, all costs associated with
property acquisition, exploration and development, including costs of unsuccessful
exploration, are capitalized within a cost center. No gain or loss is recognized upon the
sale or abandonment of undeveloped or producing oil and gas properties unless the sale
represents a significant portion of oil and gas properties and the
gain significantly alters
the relationship between capitalized costs and proved oil and gas reserves of the cost
center. Depreciation, depletion and amortization of oil and gas properties is computed on the
units of production method based on proved reserves. Amortizable costs include estimates of
future development costs of proved undeveloped reserves.
F-6
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Capitalized costs of oil and gas properties may not exceed an amount equal to the present
value, discounted at 10%, of the estimated future net cash flows from proved oil and gas
reserves plus the cost, or estimated fair market value, if lower, of unproved properties.
Should capitalized costs exceed this ceiling, an impairment is recognized. The present value
of estimated future net cash flows is computed by applying year end prices of oil and natural
gas to estimated future production of proved oil and gas reserves as of year end, less
estimated future expenditures to be incurred in developing and producing the proved reserves
and assuming continuation of existing economic conditions. As of June 30, 2006,
the Company has no proved reserves and all oil and gas property costs are considered to be
unevaluated and are recorded at the lower of cost or fair market value.
ASSET RETIREMENT OBLIGATION
The Company applies SFAS 143, Accounting for Asset Retirement Obligations, which addresses
financial accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This statement requires
companies to record the present value of obligations associated with the retirement of
tangible long-lived assets in the period in which it is incurred. The liability is
capitalized as part of the related long-lived assets carrying amount. Over time, accretion
of the liability is recognized as an operating expense and the capitalized cost is
depreciated over the expected useful life of the related asset. Asset retirement obligations
(ARO) relate primarily to the plugging, dismantlement, removal, site reclamation and
similar activities of its oil and gas properties. At June 30, 2006, the Company had recorded
an ARO of $50,895 for its initial wells under progress.
REVENUE RECOGNITION
The Company will recognize oil and gas revenues from its interests in producing wells as oil
and gas is produced and sold from these wells.
IMPAIRMENT
The Company applies SFAS 144, Accounting for the Impairment and Disposal of Long-Lived
Assets, which requires that long-lived assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Oil and gas properties accounted for using the full cost method of
accounting, the method utilized by the Company, are excluded from this requirement, but will continue to be subject to the ceiling test limitations.
F-7
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
INCOME TAXES
The Company has adopted the provisions of SFAS 109, Accounting for Income Taxes. SFAS 109
requires recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Temporary differences between the time of reporting certain items for financial and tax
reporting purposes consist primarily of exploration and development costs on oil and gas
properties, and stock based compensation of options granted.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The Companys financial statements are based on a number of significant estimates, including
oil and gas reserve quantities which are the basis for the calculation of depreciation,
depletion and impairment of oil and gas properties, and timing and costs associated with its
retirement obligations.
The oil and gas industry is subject, by its nature, to environmental hazards and clean-up
costs. At this time, management knows of no substantial costs from environmental accidents or
events for which the Company may be currently liable. In addition, the Companys oil and gas
business makes it vulnerable to changes in wellhead prices of crude oil and natural gas. Such
prices have been volatile in the past and can be expected to be volatile in the future. By
definition, proved reserves are based on current oil and gas prices and estimated reserves.
Price declines reduce the estimated quantity of proved reserves and increase annual
amortization expense (which is based on proved reserves).
LOSS PER COMMON SHARE
Basic (loss) per share is based on the weighted average number of common shares outstanding
during the period. Diluted (loss) per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or converted into common stock. Convertible
equity instruments such as stock options and convertible debentures are excluded from the
computation of diluted loss per share, as the effect of the assumed exercises would be
antidilutive.
F-8
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
SHARE BASED COMPENSATION
The Company has followed Accounting Principles Board (APB) Opinion No. 25,Accounting for
Stock Issued to Employees, and related interpretations, through December 31, 2005 which
resulted in the accounting for grants of awards to employees at their intrinsic value in
the consolidated financial statements. Additionally, the Company has recognized
compensation expense in the financial statement for awards granted to non-employees
which must be re-measured each period under the mark-to-market. The Company previously
adopted the provisions of FAS No. 123, Accounting for Stock-Based Compensation, as amended
by FAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure,
through disclosure only.
On January 1, 2006, the Company adopted FAS No. 123(R), Accounting for Stock-Based
Compensation, using the modified prospective method, which results in the provisions
of FAS 123(R) being applied to the consolidated financial statements on a going-forward
basis. Prior periods have not been restated. FAS 123(R) requires companies to recognize
share-based payments to employees as compensation expense on a fair value method. Under
the fair value recognition provisions of FAS 123(R), stock-based compensation cost is
measured at the grant date based on the fair value of the award and is recognized as expense
over the service period, which generally represents the vesting period. The expense
recognized over the service period is required to include an estimate of the awards that will
be forfeited. Previously, no such forfeitures have occurred. The Company is assuming no
forfeitures going forward based on the Companys historical forfeiture experience. The fair
value of stock options is calculated using the Black-Scholes option-pricing model. Had
compensation cost for the Companys stock-based compensation plans been determined based on
the fair value at the grant dates for awards under the plan consistent with the method
prescribed in SFAS 123R for the entire nine month period ended June 30, 2006, the Companys
net loss and net loss per share for the period would have been adjusted to the pro-forma
amounts indicated below.
|
|
|
|
|
Net loss as reported |
|
$ |
(8,557,560 |
) |
Add stock based compensation included in reported loss |
|
|
1,353,090 |
|
Deduct stock based compensation expense determined under the
fair value method |
|
|
(1,448,018 |
) |
|
|
|
|
Pro-forma net loss |
|
$ |
(8,652,488 |
) |
|
|
|
|
Net loss per share |
|
|
|
|
As reported |
|
$ |
(.07 |
) |
|
|
|
|
Pro-forma |
|
$ |
(.07 |
) |
|
|
|
|
F-9
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
As of June 30, 2006, options to purchase an aggregate of 19,000,000 shares of the Companys
common stock were outstanding. These options were granted on August 10, 2005, to the
Companys officers, directors and consultants. Twenty percent of each of the options granted
was exercisable immediately upon grant, twenty percent of each option
became exercisable on August 10, 2006, and twenty percent of
each option becomes exercisable
on August 10th of 2007, 2008 and 2009. Each option has an exercise price of
$0.50 per share, and each option expires and terminates, if not exercised sooner, on August
10, 2010. Stock-based employee compensation of $189,856 and stock-based non-employee
compensation costs of $1,163,234 before tax, were charged to operations as compensation
expense for the nine months ended June 30, 2006.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers as cash equivalents all highly
liquid investments with a maturity of three months or less at the time of purchase.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk
consist of cash. The Company maintains cash accounts at one financial institution. The
Company periodically evaluates the credit worthiness of financial institutions, and maintains
cash accounts only in large high quality financial institutions, thereby minimizing exposure
for deposits in excess of federally insured amounts. On occasion, the Company may have cash
in banks in excess of federally insured amounts. The Company believes that credit risk
associated with cash is remote.
FAIR VALUE
The carrying amount reported in the balance sheet for cash, accounts payable and accrued
liabilities approximates fair value because of the immediate or short-term maturity of these
financial instruments.
Based upon the borrowing rates currently available to the Company for loans with similar
terms and average maturities, the fair value of convertible notes approximates their carrying
value.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133
and 140. SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and
Hedging
F-10
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, and also resolves issues addressed in SFAS No.
133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets. SFAS No. 155 was issued to eliminate the exemption from
applying SFAS No. 133 to interests in securitized financial assets so that similar
instruments are accounted for in a similar fashion, regardless of the instruments form. The
Company does not believe that its financial position, results of operations or cash flows
will be impacted by SFAS No. 155 as the Company does not currently hold any hybrid financial
instruments.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes. The interpretation clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Specifically, the pronouncement
prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
The interpretation also provides guidance on the related derecognition, classification,
interest and penalties, accounting for interim periods, disclosure and transition of
uncertain tax positions. The interpretation is effective for fiscal years beginning after
December 15, 2006. The adoption of FIN 48 is expected to have an immaterial impact on the
Companys consolidated financial position, results of operations or cash flows.
NOTE 3 AGREEMENT WITH MAB RESOURCES LLC
Effective July 1, 2005, the Company entered into a Management and Development Agreement (the
Development Agreement) with MAB Resources LLC (MAB). MAB is a Delaware limited liability
company controlled by the largest shareholder of the Company at June 30, 2006. MAB is in the
business of oil and gas exploration and development. MAB has acquired various oil and gas
properties and related assets through several purchase and sale agreements and lease
development agreements (collectively, the MAB/Third-Party Agreements).
Commencing shortly after its formation, the Company entered into a series of lease
acquisition agreements (the Acquisition Agreements) and the Development Agreement with MAB,
under which MAB has assigned an undivided 50% working interest in the oil and gas properties
which MAB obtained under the MAB/Third-Party Agreements. Under the Acquisition Agreements and
the Development Agreement, MAB has the continuing obligation to assign to the Company an
undivided 50% working interest in additional properties which MAB acquires (including leases,
concessions, permits and related oil and gas interests and assets) throughout the world,
subject to reservation of a specified overriding royalty and subject to specified obligations
of the Company certain of which are described below.
All of the MAB/Third-Party Agreements establish one or more areas of mutual interest
(AMIs). In the course of negotiating each MAB/Third-Party Agreement, MAB secured each
selling partys obligation
F-11
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
to obtain substantial additional acreage and/or oil and gas leases
(including producing properties) within each AMI and to convey to MAB 100% of the working
interest in each lease and production asset obtained by seller. Under the Acquisition
Agreements and the Development Agreement, the Company has a continuing right to acquire an
undivided 50% working interest in all such properties.
The Development Agreement sets forth: (a) MABs obligation to assign to the Company a minimum
50% undivided interest in any and all oil and gas assets which MAB acquires from third
parties in the future; and (b) MABs and the Companys long-term relationship regarding the
ownership and operation of all jointly-owned properties. Each of the Properties acquired is
covered by a property-specific Acquisition Agreement that is consistent with the terms of the
Development Agreement.
Each Acquisition Agreement and the Development Agreement include the following material
terms:
|
1. |
|
Ownership: MAB and the Company each own an undivided 50% working interest
in all oil and gas leases, production facilities, and related assets (collectively, the
Properties). |
|
|
2. |
|
Operator: The Company is named as Operator, and has appointed a related
controlled entity, MAB Operating Company LLC, as sub-operator. The Company and MAB will
sign a joint operating agreement, governing all operations. |
|
|
3. |
|
Costs and Revenues: Each party pays its proportionate share of costs and
receives its proportionate share of revenues, subject to the Company bearing the
following burdens: |
|
(a) |
|
MAB Overriding Royalty Interest: Each assignment of
Properties from MAB to the Company reserves an overriding royalty equivalent to
3% of 8/8ths (proportionately reduced to 1.5% of the Companys undivided 50%
working interest in the Properties) (the MAB Override), payable out of
production and sales. |
|
|
(b) |
|
Project Costs: Each Acquisition Agreement provides that the
Company shall pay 100% of the cost of acquisitions and operations (Project
Costs) up to a specified amount, after which time each party shall pay its
proportionate 50% share of such costs. The maximum specified amount of Project
Costs of which the Company must pay 100%, under the Development Agreement for
Properties acquired in the future, is $100 million. There is no before payout
or after payout in the traditional sense of a carried interest because the
Companys obligation to expend the specified amount of Project Costs and MABs
receipt of its 50% share of revenues apply without regard to whether payout has
occurred. Therefore, the Companys payment of all Project Costs up to such
specified amount might occur before actual payout, or might occur
after actual payout, depending on each project and set of Properties. |
F-12
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
|
(c) |
|
Project Development Costs: Under the Development Agreement,
the Company pays to MAB monthly Project Development Costs representing a
specified portion of MABs carried Project Costs. The total amount incurred to
MAB by the Company will be deducted from MABs portion of the Project Costs
carried by the Company. |
|
4. |
|
Rights and Obligations: MAB conveys to the Company an undivided 50%
working interest in all rights and benefits under each Acquisition Agreement (such as
additional Assets acquired under AMIs), and the Company assumes its share of all duties
and obligations under each Acquisition Agreement (such as drilling and development
obligations). |
NOTE 4 OIL AND GAS PROPERTIES
The Company has entered into the following Exploration and Development Agreements (EDA)
pursuant to the Development Agreement with MAB.
West Rozel Project
In June 2005, the Company entered into an EDA with MAB for the West Rozel Project, under
which the Company has paid $1,250,000 to the assignor and paid reimbursement of estimated
costs incurred by the assignor of approximately $180,000. The Company is obligated to pay
MAB monthly property development costs in the amount of $200,000, commencing June 2005, and
the first $50 million of project costs.
Buckskin Mesa Project
Effective November 1, 2005, the Company entered into an EDA with MAB for the Buckskin Mesa
Project, under which the Company has paid $5,362,500 to the assignor and $1,961,460 in
Federal Lease payments for Federal leases acquired by the assignor on November 10, 2005. As
consideration for extending the final payment due on closing, the Company agreed to pay a monthly extension fee
of $200,000 for each 30-day period commencing January 6, 2006 of which all were paid as of
June 30, 2006. The Company is obligated to pay MAB monthly project property development
costs of $20,000, commencing July 1, 2005, and the first $50 million of project costs. The
Company charges to operations all property development costs incurred to MAB under the
related EDAs.
Piceance II Project
Effective December 1, 2005, the Company entered into an EDA with MAB for the Piceance II
Project, under which the Company will pay up to $4,000,000 to the
assignor (of which $3,898,793 has
been paid) and has issued $1 million of the Companys Common Stock. The Company is obligated
to pay MAB monthly project development costs of $20,000 per month, commencing November 1,
2005, and the first $50 million of project costs.
F-13
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Beetaloo Project
Effective December 10, 2005, the Company entered into an EDA with MAB for the Beetaloo
Project representing exploration permits in the Northern Territory, Australia. Under the
terms of the EDA, the Company has paid $1,000,000 to the assignor and
has funded the $3 million seismic
work commitment. The Company is obligated to pay monthly project development costs of
$100,000 per month, commencing March 1, 2006, and the first $100 million of project costs.
Fiddler Creek Project
Effective January 13, 2006, the Company entered into an EDA with MAB for the Fiddler Creek
(Montana) Project, under which the Company paid $2,000,000, consisting of $300,000 cash to
the assignor and the issuance of $1.7 million (3.4 million
shares at $0.50 per share) of the Companys Common Stock as
a finders fee to a third party.
The Company is obligated to pay MAB monthly project development costs of $20,000 per month,
commencing April 1, 2006, and the first $100 million of project costs.
South Bronco Project
Effective July 1, 2006, the Company entered into an EDA with MAB related to the south Bronco
properties in the Piceance Basin, Colorado, under which the Company receives an undivided 50%
working interest in the properties and commits to drill four exploration wells. The Company
also is obligated to pay MAB monthly project development costs of $20,000, commencing July 1,
2006, and to pay the first $50 million of project costs.
Bear Creek Project
Effective May 1, 2006, the Company entered into an EDA with MAB related to the Bear Creek
prospect in Montana, under which the Company receives an undivided 50% working interest in
the properties and has issued $1.2 million (2.4 million
shares at $0.50 per share) of the Companys Common Stock as a finders fee to a third party.
The Company also is obligated to pay MAB monthly project development costs of $50,000
commencing May 1, 2006, and to pay the first $50 million of project costs.
Buckskin Mesa II Project
Effective August 1, 2006, the Company entered into an EDA with MAB related to the Buckskin
Mesa Project in the Piceance Basin, Colorado, under which the Company receives an undivided
50% working interest in the properties for $765,000. The Company has a contingent liability
up to a maximum of an additional $1.1 million payable to a third party for bonus payments
related to title curative work on the properties. The Company is also obligated to pay MAB
monthly project development costs of $20,000, commencing August 1, 2006 and to pay the first
$50 million of project costs.
F-14
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
The Companys exploration projects continue to be evaluated, and management believes that the
carrying costs of these projects are recoverable. Should the company be unsuccessful in its
exploration activities, the carrying cost of these prospects will be charged to operations.
The Company charges to operations all property development costs incurred to MAB under the
related EDAs.
NOTE 5 CONVERTIBLE NOTES
During the nine months ended June 30, 2006 the Company completed the sale of $21,194,167
convertible promissory notes to accredited investors pursuant to a private placement
memorandum. The notes pay interest at the rate of 14% per annum and are due one year from
closing of the placement. At the option of a Note holder, the principal may be converted into
the Companys common stock at a rate of one share for each $0.50 of debt (the Conversion
Price). Each Note may be converted by the Company, in its sole discretion, into the
Companys common stock at the Conversion Price anytime after the earlier to occur of (i) the
Company raising at least $5,000,000 in funds, including the proceeds received under the
Placement; or (ii) the consummation of a consolidation of the Company with a reporting
company under the Securities Exchange Act of 1934, whose stock is publicly traded, provided
that the stockholders of the Company immediately prior to the consolidation own at least 80%
of the post-consolidation entity. Each Note holder will receive at least 60 days interest at
14% per annum so that if this mandatory conversion occurs less than 60 days after the date of
a Convertible Note, the holder still will receive payment for a minimum of 60 days interest.
Upon completion of the share exchange between PetroHunter and GSL, the notes were converted
to 42,388,344 shares of common stock. As of June 30, 2006, the Company had subscriptions
receivable of $2,077,000, which was subsequently received.
Prior
to the merger with GSL on May 12, 2006, Digital entered into five separate loan
agreements, aggregating $400,000, due one year from issuance, commencing October 11, 2006.
The loans bear interest at 12% per annum, are unsecured, and are convertible at the option of
the lender at a price per share equal to the closing price of the Companys common shares on
the OTC.BB market on the day preceding notice from the lender of its intent to convert the
loan.
NOTE 6 COMMON STOCK
During the period from June 20, 2005 (inception) to September 30, 2005, the Company issued
100,000,000 shares of its common stock, at $.001 per share, to its founder for previous
advances for expenditures made on behalf of the Company in the amount of $100,000.
F-15
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
During the nine months ended June 30, 2006, the Company issued 118,687,334 shares of its
common stock as follows:
|
|
|
8,800,000 shares, valued at $.50 per share, as partial consideration for the
acquisition of oil and gas properties |
|
|
|
|
1,864,000 shares valued at $.50 per share, as partial
consideration for finders fees on the sale of convertible debt |
|
|
|
|
42,388,334, at $.50 per share, for conversion of convertible debt (Note 5) |
|
|
|
|
28,700,000 shares pursuant to the share exchange agreement with GSL (Note 1) |
|
|
|
|
35,442,500 shares pursuant to the sale of units at $1.00 per unit to accredited
investors pursuant to a private placement memorandum. Each unit consists of one
share of common stock and a warrant to purchase one share of common share for a
period of 5 years at $1.00 per share. |
|
|
|
|
1,492,500 shares valued at $1.00 per share, as partial
consideration for finders fees on the sale of $1.00 units |
NOTE 7 STOCK OPTION PLAN
The Company adopted the 2005 Stock Option Plan (the Plan), as amended. Under the Plan,
stock options may be granted at an exercise price not less than the fair market value of the
Companys common stock at the date of grant. Options may be granted to key employees and
other persons who contribute to the success of the Company. The Company has reserved
20,000,000 shares of common stock for the plan. At June 30, 2006, options to purchase
1,000,000 shares were available to be granted pursuant to the stock option plan.
A summary of option activity under the Plan as of June 30, 2006 and changes during the nine
months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Avg |
|
|
|
|
|
|
|
|
|
|
Avg |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Options outstanding October 1, 2005 |
|
|
19,000,000 |
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
Granted during period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Exercised during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding June 30, 2006 |
|
|
19,000,000 |
|
|
$ |
0.50 |
|
|
|
4.12 |
|
|
$ |
17,480,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
6,650,000 |
|
|
$ |
0.50 |
|
|
|
4.12 |
|
|
$ |
6,110,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
There have been no options exercised under the terms of the Plan.
A summary of the status of the Companys nonvested options as of June 30, 2006 and changes
during the nine months then ended is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number of |
|
Avg Fair |
|
|
Shares |
|
Value |
Nonvested Options |
|
|
|
|
|
|
|
|
Nonvested October 1, 2005 |
|
|
15,200,000 |
|
|
$ |
0.32 |
|
Granted during period |
|
|
|
|
|
|
|
|
Exercised during period |
|
|
|
|
|
|
|
|
Vested during period |
|
|
(2,850,000 |
) |
|
$ |
0.51 |
|
Forfeited during period |
|
|
|
|
|
|
|
|
Expired during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested June 30, 2006 |
|
|
12,350,000 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006 there is $11,348,422 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Plan. That cost is
expected to be recognized over a weighted-average period of 3.1 years. The total fair value
of shares vested during the nine months ended June 30, 2006 was $1,353,090.
The
fair value of the options was calculated using the following weighted
average assumptions: expected dividend yield zero; expected
volatility rate 71.88%; risk free interest rate 4.88%; and term 3.75
years.
NOTE 8 RELATED PARTY TRANSACTIONS
The Company incurred consulting fees related to services provided by its officers in the
aggregate amount of $484,150 during the nine months ended June 30, 2006.
During the nine months ended June 30, 2006 the Company incurred $2,765,000 in property
development costs to MAB under the Development Agreement between MAB and the Company. At
June 30, 2006, MAB was prepaid $1,336,000 for property development costs by the Company.
NOTE 9 COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
Oil and gas producing activities are subject to extensive environmental laws and regulations.
These laws, which are constantly changing, regulate the discharge of materials into the
environment and may require the Company to remove or mitigate the environmental effects of
the disposal or release of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and that have no
future economic benefit are expensed. Liabilities for expenditures of a noncapital nature are
recorded when environmental assessment and/or remediation is probable, and the costs can be
reasonably estimated.
F-17
PETROHUNTER ENERGY CORPORATION
(formerly Digital Ecosystems Corp.)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
CONTINGENCIES
The Company may from time to time be involved in various claims, lawsuits, disputes with
third parties, actions involving allegations of discrimination, or breach of contract
incidental to the operations of its business. The Company is not currently involved in any
such incidental litigation which it believes could have a materially adverse effect on its
financial condition or results of operations.
COMMITMENTS
The Company has incurred the following commitments for its oil and gas properties in
conjunction with the Development Agreement with MAB:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
|
|
Project Costs |
|
|
Development |
|
|
Development |
|
|
|
(million) |
|
|
Agreement |
|
|
Costs (Monthly) |
|
As of
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
West Rozel |
|
$ |
50 |
|
|
$ |
1,430,000 |
|
|
$ |
200,000 |
|
Buckskin Mesa |
|
|
50 |
|
|
|
4,262,500 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buckskin Mesa |
|
|
|
|
|
|
|
|
|
|
|
|
Federal Leases |
|
|
|
|
|
|
1,961,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Piceance II |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
50 |
|
|
|
4,000,000 |
|
|
|
20,000 |
|
Stock |
|
|
|
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beetaloo |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
100 |
|
|
|
1,000,000 |
|
|
|
100,000 |
|
Seismic |
|
|
|
|
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiddler Creek |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
100 |
|
|
|
300,000 |
|
|
|
20,000 |
|
Cash or Stock |
|
|
|
|
|
|
1,700,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Bronco |
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Commitment |
|
|
50 |
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bear Creek |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes |
|
|
50 |
|
|
|
1,200,000 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450 |
|
|
|
19,853,960 |
|
|
|
430,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent
to June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Buckskin Mesa II |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
50 |
|
|
|
1,865,000 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
500 |
|
|
$ |
21,718,960 |
|
|
$ |
450,000 |
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2006, the Company had paid all outstanding
commitments under the Development Agreement with MAB.
F-18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report constitute forward-looking statements.
These statements, identified by words such as plan, anticipate, believe, estimate,
should, expect and similar expressions include our expectations and objectives regarding our
future financial position, operating results and business strategy. These statements reflect the
current views of management with respect to future events and are subject to risks, uncertainties
and other factors that may cause our actual results, performance or achievements, or industry
results, to be materially different from those described in the forward-looking statements. Such
risks and uncertainties include those set forth under the caption Managements Discussion and
Analysis or Plan of Operation and elsewhere in this Quarterly Report. We do not intend to update
the forward-looking information to reflect actual results or changes in the factors affecting such
forward-looking information. We advise you to carefully review the reports and documents we file
from time to time with the Securities and Exchange Commission (the SEC), particularly our Annual
Reports on Form 10-KSB and our Current Reports on Form 8-K.
Description of Business and Properties
PetroHunter Energy Corporation (PetroHunter), formerly known as Digital Ecosystems Corp.
(Digital), through the operations of its wholly owned subsidiary GSL Energy Corporation (GSL),
is a global oil and gas exploration and production company with primary assets consisting of an
undivided 50% working interest in oil and gas leases and related interests in various oil and
natural gas prospects, including approximately 17,000 net mineral acres in the Piceance Basin of
Colorado and seven million gross acres (3.5 million net acres) in the Northern Territory of
Australia (collectively, PetroHunter and GSL are referred to herein as the Company). In two of
its principal areas of operation, the Company is obligated to pay the first $50 million of costs
incurred by its joint venture partner, and in its other areas of operation, the Company is
obligated to pay the first $25 million of costs incurred by its joint venture partner. The
Companys joint venture partner in these projects is MAB Resources LLC, a Delaware limited
liability company that is controlled by Marc A. Bruner, who is the largest stockholder of the
Company. GSL was formed in June 2005 as a Maryland corporation, and on May 12, 2006 GSL completed
a stock exchange by which its stockholders received more than 85% of Digitals outstanding stock,
and GSLs business became the business of Digital. Subsequent to May 2006, Digital acquired all
the remaining outstanding stock of GSL, and effective August 14, 2006, Digital changed its name
from Digital Ecosystems Corp. to PetroHunter Energy Corporation.
HEAVY OIL PROPERTIES
Great Salt Lake Utah. Pursuant to an Exploration Agreement effective as of June 1,
2005 (the Utah Agreement) between MAB Resources and the Company, MAB Resources has assigned to
the Company an undivided 50% leasehold and working interest and related real and personal property
in oil and gas leases currently owned or under contract covering 173,851 acres in the northern area
of the Great Salt Lake in Utah (the Utah Leases). The Utah Leases allow for the exploration,
development and production of hydrocarbons in the areas under the Utah Leases.
In exchange for this undivided 50% leasehold interest, the Company will pay for the first
$50,000,000 in costs paid or incurred in connection with or in respect to the acquisition,
development and operations related to
1
the Utah Leases, including for wells and associated or
related facilities. The effect of the Companys obligation
to pay for the first $50,000,000 of costs (Project Costs) is that MAB Resources owns a
carried interest equivalent to $25,000,000. A portion of this carried interest is paid in the
form of advances by the Company to MAB Resources in the amount of $200,000 each month as a project
development costs. The advances commenced June 1, 2005. The total amount of such advances are
deducted from the Companys $25,000,000 carried interest obligation. After $50,000,000 in costs
have been paid or incurred by the Company, the Company and MAB Resources will each pay for their
respective 50% proportionate share all further costs paid or incurred in connection with or in
respect to the development and operation of the Utah Leases. In addition, MAB Resources will
retain a three percent overriding royalty interest of the gross proceeds of all sales of
hydrocarbons on the Utah Leases or on lands pooled or unitized therewith.
Pursuant to the terms of the Utah Leases, one well must be drilled prior to the expiration
date of the primary term under each Utah Lease. The primary terms of two of the Utah Leases end in
June 2008, and the primary term of the third Utah Lease ends in May 2009. MAB Resources and the
Company plan to drill at least one test well on each of the Utah Leases prior to the end of each
respective primary term. Subsequent drilling and development, as well as any applications to
extend the term of one or more of the Utah Leases, will be determined as MAB Resources and the
Company evaluate the results of the first test well and as they further analyze the results of the
seismic surveys.
Montana Heavy Oil. MAB Resources has entered into an agreement to obtain an interest
in up to 15,000 net mineral acres in Carbon, Stillwater, and Yellowstone Counties in Montana (the
Montana Agreement). MAB Resources is required to pay an independent third party a finders fee
of $2,000,000, plus an amount equal to $1.00 per barrel sold of liquid hydrocarbons. MAB will
assign an undivided 50% of the acquired interests to the Company, subject to an agreement similar
to the terms of the Utah Agreement and the Colorado Agreement. The Company is obligated to pay MAB
Resources monthly project development costs of $20,000 per month commencing April 1, 2006, and the
first $100 million of project costs. The total amount of such advances are deducted from the
Companys carried interest obligation.
PICEANCE BASIN, COLORADO, PROPERTIES
Buckskin Mesa. MAB Resources has acquired a 100% working interest, with a net revenue
interest of 80%, in certain oil and gas leases covering at least 16,000 net mineral acres located
in the Piceance Basin in Colorado (the Colorado Leases). MAB Resources has paid $7.6 million for
the Colorado Leases. MAB Resources is acquiring the Colorado Leases for a cost of between $300 and
$500 per net mineral acre. MAB Resources is obligated to drill one well during the first 12 months
and four additional wells during the second 12 months on the Piceance Basin acreage.
MAB Resources and the Company have entered into an Exploration Agreement (the Colorado
Agreement) under which the Company will receive a 50% working interest in the Colorado Leases and
is obligated to pay 100% of the first $50 million of the costs and expenses incurred by MAB
Resources and the Company in connection with acquisition, drilling and development of the Colorado
Leases, on terms similar to the Utah Agreement. However, under the Colorado Agreement, the monthly
advance payments to MAB Resources as a project development costs are $20,000 and commence July 1,
2005. The total amount of such advances are deducted from the Companys carried interest
obligation. Thereafter, each party will be responsible for its proportionate interest. In
addition, MAB Resources will retain a three percent overriding royalty interest of the gross
proceeds of all sales of hydrocarbons on the Colorado Leases or lands pooled or unitized therewith.
2
The Company is presently reviewing both 3D and 2D seismic to determine optimum drill sites for
a planned fall drilling program that will continue into 2007. A rig is available for this drilling
program.
Piceance II Colorado. MAB Resources obtained an interest in approximately 1,000
net mineral acres in Garfield County, Colorado, together with a right to acquire up to an
additional 1,500 acres, which the third-party sellers are obligated to obtain, and which MAB
Resource is obligated to purchase. MAB Resources will pay $4,000 per net mineral acre.
MAB Resources will assign an undivided 50% of the acquired interests to the Company, subject
to an agreement similar to the terms of the Utah Agreement and the Colorado Agreement, and the
agreement related to the Australian permits, and the Company will pay for the first $50 million in
costs and expenses incurred in connection with the drilling and development on this acreage. Under
the Piceance II agreement, MAB receives an advance of $20,000 a month, commencing November 1, 2005
as a project development costs. The total amount of such advances are deducted from the Companys
carried interest obligation.
The Company has commenced drilling operations as part of an eight well program from two pads
at one of the Piceance II drill sites and participated in the
drilling and completion of another well at a different location. As of August 7, 2006, four wells had been drilled from the
first pad and the rig was being moved to the second pad. The Company and its joint venture partner
are targeting November 2006 to complete the eight wells. This eight well program is part of the
Companys overall 25-well drilling program in the approximately 1,000 acre Piceance II project.
AUSTRALIA PROPERTIES
Northern Territory Australia. MAB Resources has obtained four exploration licenses
(the Exploration Licenses) covering seven million net mineral acres in the Northern Territory of
Australia, for a purchase price of $1 million and a seismic
commitment of $3 million. To date, the Company has funded
$4 million in exploration and
development costs which will be expended in connection with the seismic program in Beetaloo
Basin. MAB Resources will assign an undivided 50% working interest in the Exploration Licenses to
the Company, subject to an agreement similar to the Utah Agreement and Colorado Agreement. the
Company has agreed to pay for the first $100 million in costs paid or incurred in connection with
or in respect to the acquisition and development of the Exploration Licenses, and the related
production licenses that are likely to be issued to MAB Resources and the Company if hydrocarbons
are discovered during the initial exploration phase under the permits. The terms of this carried
interest are similar to the previously described agreements between MAB Resources and the Company.
However the monthly advance payments to MAB Resources as a project development costs are $100,000
and commenced March 1, 2006. The total amount of these advances are deducted from the Company
carried interest obligation. In addition, MAB Resources will retain a three percent overriding
royalty interest of the gross proceeds of all sales of hydrocarbons on the permits and related
licenses.
A 600 kilometer (360 mile) 2D seismic data collection program commenced in June in the
Beetaloo Basin on the Exploration Licenses. This activity is being conducted as part of the
license requirements for holding the seven million net acre property. The Company recently applied
for an additional 750,000 net acres. The seismic program is designed to provide data that will
help the Company identify drill sites for an eight-well drilling program that it is targeted for
2007.
The Company believes that the Beetaloo Basin is an under-explored frontier basin that appears
to have indications of commercial potential in one or more multiple
conventional and unconventional oil and gas
formations. The basin is
located approximately 500 kilometers south of Darwin, and infrastructure in the form of
national highways, railroad, and a gas pipeline are located in
various portions of the acreage.
3
DEVELOPMENT AGREEMENT
In addition to the agreements discussed above with MAB Resources, the Company has entered into
a Management and Development Agreement with MAB Resources whereby the Company has the right to
obtain and receive MAB Resources knowledge and operating expertise, which includes the expertise
of MAB Resources oil and gas personnel.
Plan of Operation
Our plan of operations is to form three primary business units and manage the assets under
these units.
|
1. |
|
Unconventional natural gas exploration in Colorado, |
|
|
2. |
|
Heavy crude exploration and processing in Montana and Utah, |
|
|
3. |
|
Exploration of oil and gas fields in Australia. |
The development of our Colorado properties will include:
|
|
|
Drilling of wells in our 1,000 acre holdings in Piceance Basin. We expect
to complete approximately 8 wells and have gas production by the end of the 2006
calendar year. |
|
|
|
|
Exploration of our 16,000 acre lease near Buckskin Mesa/Powell Park
discovery wells in the northern Piceance Basin. Our plan is to reprocess 2D and 3D
seismic data. Based on results of this analysis, we anticipate a five well exploration
program will be commenced in calendar year 2006. These wells will be to an estimated
depth of 10,000 to 12,000 feet, to test the Williams Fork, Cameo and Ft. Union
formations. |
Associated with the development of our Colorado properties, we anticipate that, over the next
twelve months, we will incur the following costs;
|
|
|
$15,000,000 to $30,000,000 in connection with the Piceance II project, to
include seismic, drilling, completion and production facilities. |
|
|
|
|
$15,000,000 to $28,000,000 in connection with the Buckskin Mesa project, to
include seismic, and drilling. |
The development of our heavy oil prospects in Montana and Utah will include:
|
|
|
The development of 15,000 acres of prime heavy oil acreage in Montana. |
|
|
|
|
The development of 173,000 acres owned or under contract in the Great Salt Lake. |
4
We anticipate that, over the next twelve months, we will incur the following costs related to
our heavy oil prospects in Montana and Utah:
|
|
|
$7,000,000 to $12,500,000 to add land in Montana in areas where we have
already completed acquisitions |
|
|
|
|
$8,000,000 to $15,000,000 in connection with the Fiddler Creek project, to
include drilling, completion and production facilities |
|
|
|
|
$5,000,000 to $10,000,000 in connection with the Great Salt Lake project,
to include project design, project equipment procurement, site infrastructure
development and initial drilling? |
In
Australia we plan to explore and develop portions of the 7,000,000
acres of the project area in northwestern
Australia (Beetaloo Basin). During 2006, we plan to reprocess over 700 kilometers of seismic data
and field development of 600 kilometers of 2D seismic. We anticipate that, over the next twelve
months, we will incur $3,000,000 to $6,000,000 in costs related to seismic reprocessing and field
acquisition of seismic.
The Company has not commenced principal operations or earned revenue as of June 30, 2006, and
the Company is considered a development stage company. In order to fund its planned exploration
and development of oil and gas properties, the Company will require significant additional funding,
in addition to the funds raised under private placement offerings completed by the Company. The
Company has no commitments for this financing and there is no assurance that the Company will be
able to obtain the necessary amount.
Management believes that the Company will have sufficient capital to meet its obligations
during the remainder of the current fiscal year. We expect that we will require additional funding
for anticipated costs of our projects subsequent to 2006 and that the additional funding will be in
the form of equity financing from the sale of our common stock. However, we cannot provide any
assurance that we will be able to raise sufficient funding from the sale of our common stock to
fund our projects, and other working capital requirements. We believe that debt financing will not
be an alternative for our exploration program. We do not have any arrangements in place for any
future equity financing.
ITEM 3. CONTROLS AND PROCEDURES.
Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, our management carried out an evaluation,
under the supervision and with the participation of our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this
evaluation, our principal executive officer and principal financial
officer have concluded that our
disclosure controls and procedures are, as of the date covered by this Quarterly Report, effective
to ensure that the information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC rules and forms.
Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of our internal controls during our last fiscal quarter, our
principal executive officer and principal financial officer have determined that there have been no
changes to our internal
controls over financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
5
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 12, 2006, the Company entered into
an Amendment No. 5 (the Amendment) to the Share Exchange Agreement dated February 10, 2006 (as
amended, the Agreement), by and between the Company, GSL Energy Corporation, a Maryland corporation
(GSL), MABio Materials Corporation, a Maryland corporation, MAB Resources LLC, a Delaware
corporation, and the shareholders of GSL named therein. Pursuant to this Agreement, unregistered
shares of equity securities were issued. The terms of this transaction are set forth in the
Companys Form 8-K/A filed on May 12, 2006.
Item 6. Exhibits
Exhibit Index
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
2.1
|
|
Amendment No. 5 to the Share Exchange Agreement dated February 10, 2006.(2) |
|
|
|
3.1
|
|
Articles of Incorporation for PetroHunter Energy Corporation(1) |
|
|
|
3.2
|
|
Bylaws of PetroHunter Energy Corporation(1) |
|
|
|
4.1
|
|
Form of Share Certificate.(3) |
|
|
|
31.1
|
|
Rule 13a-14(a) Certifications of the Companys Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of the Companys Chief Financial Officer |
|
|
|
32.1
|
|
Certification of the Companys Chief Executive Officer 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 the Companys Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
Notes
|
|
|
|
(1) |
|
Incorporated by reference from the Companys Definitive Schedule 14C, filed on July 17, 2006. |
|
(2) |
|
Incorporated by reference from the Companys Form 8-K/A
filed on May 19, 2006. |
|
(3) |
|
Filed with the SEC as an exhibit to our Registration Statement on Form SB-2 originally filed on September 16, 2004, as amended. |
6
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant has caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
Signatures |
|
Title |
|
Date |
|
|
|
|
|
/s/ Kelly Nelson
|
|
Chief Executive Officer
|
|
August 21, 2006 |
|
|
|
|
|
/s/ Carmen Lotito
|
|
Chief Financial Officer
|
|
August 21, 2006 |
|
|
|
|
|
7
Exhibit Index
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
2.1
|
|
Amendment No. 5 to the Share
Exchange Agreement dated February 10, 2006.(2) |
|
|
|
3.1
|
|
Articles of Incorporation for PetroHunter Energy Corporation(1) |
|
|
|
3.2
|
|
Bylaws of PetroHunter Energy Corporation(1) |
|
|
|
4.1
|
|
Form of Share Certificate.(3) |
|
|
|
31.1
|
|
Rule 13a-14(a) Certifications of the Companys Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of the Companys Chief Financial Officer |
|
|
|
32.1
|
|
Certification of the Companys Chief Executive Officer 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 the Companys Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
Notes
|
|
|
|
(1) |
|
Incorporated by reference from the Companys Definitive Schedule 14C, filed on July 17, 2006. |
|
(2) |
|
Incorporated by reference from the Companys Form 8-K/A
filed on May 19, 2006. |
|
(3) |
|
Filed with the SEC as an exhibit to our Registration Statement on Form SB-2 originally filed on September 16, 2004, as amended. |
8