Item 2 - Managements Discussion and Analysis or
Plan of Operation
References to Company, we
or us refer to Petrocorp Inc., unless the context requires otherwise.
Forward Looking Statements
The
following is provided to supplement, and should be read in conjunction with,
our financial statements and the accompanying notes included in our Form 10-K as
of December 31, 2010. This report contains forward-looking statements and
information relating to us that is based on the beliefs of our management as
well as assumptions made by, and information currently available to, our
management. When used in this report, the words anticipate, believe,
estimate, expect, intend, plan and similar expressions, as they relate
to us or our management, are intended to identify forward-looking statements.
These statements reflect managements current view of us concerning future
events and are subject to certain risks, uncertainties and assumptions,
including among many others:
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the
quality of our properties with regard to, among other things, the existence
of reserves in economic quantities;
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uncertainties
about the estimates of reserves;
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our
ability to increase our production and oil and natural gas income through
exploration and development;
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the
number of well locations to be drilled and the time frame within which they
will be drilled;
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the
timing and extent of changes in commodity prices for natural gas and crude
oil;
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domestic
demand for oil and natural gas;
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drilling
and operating risks;
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the
availability of equipment, such as drilling rigs and transportation
pipelines;
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changes
in our drilling plans and related budgets;
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the
adequacy of our capital resources and liquidity including, but not limited
to, access to additional borrowing capacity; and
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risks
and uncertainties described in the Risk Factors section or elsewhere in our
Annual Report on Form 10-K.
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Should
one or more of these risks or uncertainties materialize or should the
underlying assumptions prove incorrect, actual outcomes and results could
differ materially from those indicated in the forward-looking statements.
Any
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such statement
is made or to reflect the occurrence of unanticipated events. New factors
emerge from time to time and it is not possible for management to predict all
of such factors, nor can it assess the impact of each factor on the business or
the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
Business
Overview
Petrocorp Inc. was incorporated on June
19, 2006 under the laws of the State of Delaware. Prior to September 2007, the
Companys business model provided telephonic conferencing services to
businesses, organizations and individuals in North America.
During
2009 the Company changed its emphasis from an international oil and gas company
primarily to a US focused company because of world economic conditions and lack
of debt/capital financing. The Company disposed of its foreign oil and gas
leases/permits in two separate transactions. The Company completed an
extensive review of its Alaska and Oklahoma oil and gas leases, operations and
recorded a $900,865 impairment charge in 2010 as compared to $639,813 in 2009.
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Our office is located at 1065 Dobbs Ferry
Road, White Plains, NY 10607 and our telephone number is (914) 674-4373.
Plan
of Operation
We are a US exploration stage Company engaged in the acquisition,
exploration and production, if warranted, development of prospective oil and
gas properties. We plan to conduct exploration work on each of our current and
future properties in order to ascertain whether any of them possess
commercially exploitable quantities of oil and gas reserves. The Company
currently has lease holdings on the North Slope of Alaska and oil and gas production
in Oklahoma.
Alaska
On October 25, 2007, Union Energy (Alaska) LLC (UEA), our
subsidiary, was the winning bidder for tracts 254, 258 and 259 in the North
Slope Areawide 2007 Competitive Oil and Gas Lease Sale. The leases, covering
14,680 net acres, were issued on August 1, 2008, with a term of seven years and
subject to
a 12.5% royalty interest in
favor of the State of Alaska. These tracts are
contiguous and the Company believes, based upon current available geological
data and maps from the public domain, to contain the Kavik gas field,
discovered in 1969, which has been evaluated in detail by the U.S. Department
of the Interior, U.S Geological Survey ("USGS").
On February 27, 2008, UEA was the winning bidder for tracts 922,
923, 927, 988, 989, 990, 991, 992 and 925 in the State of Alaska North Slope
Foothills Areawide 2008 Competitive Oil and Gas Lease Sale. The leases,
covering 9,600 net acres, were issued on September 1, 2008, with a term of 10
years and subject to
a 12.5% royalty
interest in favor of the State of Alaska. These
tracts are contiguous and the Company believes, based upon current available
geological data and maps from the public domain, to contain the East Kurupa gas field, discovered by Texaco in 1976. The USGS has been studying the
potential for unconventional over-pressured, continuous gas deposits in the
Colville basin that contains the Kurupa anticline and is now interpreting the East Kurupa well to have encountered a thick section of over-pressured gas in Brookian
strata.
Furthermore, any gas recovered from our Alaska leases will not be
salable unless or until a proposed North Slope gas pipeline is completed.
Oklahoma
On
August 12, 2008, the Company acquired from its President, James Fitzsimons, a
50% working interest (41.25% net revenue interest) in the Snake Creek prospect,
a 3,200 gross (3,022 net) acre gas development project located in northern
Okmulgee County. The Company reimbursed Mr. Fitzsimons for his historic costs
(acreage and drilling) by issuing a secured, non-interest bearing note, payable
on demand for $210,917 and assumed responsibility for all further costs.
On
November 30, 2008, the Company acquired from Mr. Fitzsimons, a 100% working
interest (81.25% net revenue interest) in the Spanish Peak prospect, a 2,041
gross (900 net) acre gas development project located in Okmulgee County,
Oklahoma. The Company reimbursed Mr. Fitzsimons for his historic costs
(acreage) by issuing a secured, non-interest bearing note, payable on demand
for $173,141 and assumed responsibility for all further costs.
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On
March 31, 2009, the Company purchased 171 oil and gas lease interests totaling
3,827 gross (2,666 net) acres in Okfuskee and Okmulgee Counties, Oklahoma from CH4 Energy, Inc., a company controlled by Soladino Investments SA at a cost
of $583,823. The Company reimbursed Soladino for its historic costs (acreage)
by issuing a secured, non-interest bearing note, payable on demand for $583,823
and assumed responsibility for all further costs.
The Oklahoma leases are in areas which the Company believes are
promising for oil and gas production although the Company does not make any
representations as to future profitable production, if any.
Results
of Operations
For the quarter ended March 31, 2011,
we had revenues of $34,795, oil and gas operating costs of $16,660 and incurred
a loss of $60,083, as compared to revenues of $30,910, operating costs of $22,560
and a loss of $82,046 in 2010.
During
the 2011 quarter, the Company paid compensation to its President of $30,000
which was recorded as a capital contribution by the Company and professional
fees of $25,500, which related primarily to the development of the Companys
business plan and costs associated with being a public company, as compared to
$31,500 for the 2010 quarter. Also during the 2011 quarter, the Company paid
general and administrative expenses of $963, as compared to $6,782 for the 2010
quarter. Interest expense of $14,250 was computed on the majority stockholder
loans at an implied rate of 6% and this amount was recorded as a capital
contribution by the Company during the quarter.
Liquidity
and Capital Resources
Our
Company's principal cash requirements are for exploration expenses which we
anticipate will rise as we proceed to determine the feasibility of developing
our current or future property interests. As of March 31, 2011, we had cash of
$29,750 and negative working capital of $945,798. Our net cash provided by
financing activities from June 19, 2006 (inception) to March 31, 2011 was $2,416,992.
At
March 31, 2011, the Company has $949,950 in notes (four) payable to Soladino
Investments SA. The notes are secured by
the Companys oil and gas leases, are non interest bearing and payable upon
demand.
We
anticipate that additional funding will be provided in the form of equity
financing from the sale of our common stock or loans from our majority
stockholder. We cannot provide investors with any assurance that additional
funds will be raised. Currently, we do not have any arrangements in place for
future equity financings.
Critical Accounting Policies
Financial Reporting Release No. 60 of the SEC encourages
all companies to include a discussion of critical accounting policies or
methods used in the preparation of the financial statements. There are no
current revenue generating activities that give rise to significant assumptions
or estimates. Our most critical accounting policies relate to the accounting
and disclosure of related party transactions. Our financial statements filed as
part of our December 31, 2010 Annual Report on Form 10-K include a summary of
the significant accounting policies and methods used in the preparation of our
financial statements.
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Off-Balance
Sheet Arrangements
We
have never entered into any off-balance sheet financing arrangements and have
not formed any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.
Item
3. - Quantitative and Qualitative Disclosures About Market Risk
The
information called for by this item is not required as we are a smaller
reporting company.
Item
4T. - Controls and Procedures
Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 (the
Exchange Act) require public companies to maintain disclosure controls and
procedures, which are defined as controls and other procedures that are
designed to ensure that information required to be disclosed by the issuer in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuer's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
We conducted an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of March 31, 2011. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that as of March 31, 2011, our disclosure controls and procedures
were not effective at the reasonable assurance level due to the material
weaknesses described below.
In light of the material weaknesses described below, we performed
additional analysis and other post-closing procedures to ensure our financial
statements were prepared in accordance with generally accepted accounting
principles. Accordingly, we believe that the financial statements
included in this report fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of
the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2)
or combination of control deficiencies that result in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Management has
identified the following two material weaknesses which have caused management
to conclude that, as of March 31, 2011, our disclosure controls and procedures
were not effective at the reasonable assurance level:
1. We do not
have written documentation of our internal control policies and
procedures. Written documentation of key internal controls over
financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act
which is applicable to us for the quarter ending March 31, 2011. Management
evaluated the impact of our failure to have written documentation of our
internal controls and procedures on our assessment of our disclosure controls
and procedures and has concluded that the control deficiency that resulted represented
a material weakness.
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2. We do not
have sufficient segregation of duties within accounting functions, which is a
basic internal control. Due to our size and nature, segregation of
all conflicting duties may not always be possible and may not be economically
feasible. However, to the extent possible, the initiation of
transactions, the custody of assets and the recording of transactions should be
performed by separate individuals. Management evaluated the impact
of our failure to have segregation of duties on our assessment of our
disclosure controls and procedures and has concluded that the control
deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed
additional analyses and other procedures to ensure that the financial
statements included herein fairly present, in all material respects, our
financial position, results of operations and cash flows for the periods
presented.
Management's
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Exchange Act as a process designed by, or under the supervision of,
the issuers principal executive and principal financial officers and effected
by the issuers board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America and
includes those policies and procedures that:
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Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets
of the issuer;
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the issuer; and
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the issuers
assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control
systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Because of the inherent
limitations of internal control, there is a risk that material misstatements
may not be prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though not eliminate,
this risk.
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As of the end of our most recent quarter, management assessed the
effectiveness of our internal control over financial reporting based on the
criteria for effective internal control over financial reporting established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") and SEC guidance on
conducting such assessments. Based on that evaluation, they
concluded that, as of March 31, 2011, such internal control over financial
reporting was not effective. This was due to deficiencies that existed
in the design or operation of our internal control over financial reporting
that adversely affected our internal controls and that may be considered to be
material weaknesses.
The matters involving internal control over financial reporting
that our management considered to be material weaknesses under the standards of
the Public Company Accounting Oversight Board were: (1) lack of a functioning
audit committee due to a lack of a majority of independent members and a lack
of a majority of outside directors on our board of directors, resulting in
ineffective oversight in the establishment and monitoring of required internal
controls and procedures; and (2) inadequate segregation of duties consistent
with control objectives of having segregation of the initiation of
transactions, the recording of transactions and the custody of
assets. The aforementioned material weaknesses were identified by
our Chief Financial Officer in connection with the review of our financial
statements as of March 31, 2011.
Management believes that the material weaknesses set forth in
items (1) and (2) above did not have an effect on our financial results.
However, management believes that the lack of a functioning audit committee and
the lack of a majority of outside directors on our board of directors results
in ineffective oversight in the establishment and monitoring of required
internal controls and procedures, which could result in a material misstatement
in our financial statements in future periods.
This quarterly report does not include an attestation report of
the Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the SEC that permit the Company to provide only the
management's report in this annual report.
Management's
Remediation Initiatives
In an effort to remediate the identified material weaknesses and
other deficiencies and enhance our internal controls, we have initiated, or
plan to initiate, the following series of measures:
We will increase our personnel resources and technical accounting
expertise within the accounting function when funds are available to us. First,
we will create a position to segregate duties consistent with control
objectives of having separate individuals perform (i) the initiation of
transactions, (ii) the recording of transactions and (iii) the custody of
assets. Second, we will create a senior position to focus on financial
reporting and standardizing and documenting our accounting procedures with the
goal of increasing the effectiveness of the internal controls in preventing and
detecting misstatements of accounting information. Third, we plan to appoint
one or more outside directors to our board of directors who shall be appointed
to an audit committee resulting in a fully functioning audit committee who will
undertake the oversight in the establishment and monitoring of required
internal controls and procedures such as reviewing and approving estimates and
assumptions made by management when funds are available to us. We anticipate
the costs of implementing these remediation initiatives will be approximately $37,500
to $75,000 a year in increased salaries, legal and accounting expenses.
Management believes that the appointment of one or more outside
directors, who shall be appointed to a fully functioning audit committee, will
remedy the lack of a functioning audit committee and a lack of a majority of
outside directors on our Board.
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We anticipate that these initiatives will be at least partially,
if not fully, implemented by December 31, 2011.
PART II
OTHER INFORMATION
Item 1
- Legal
Proceedings
The
Company is not currently a party to any legal proceedings.
Item 2 -
Unregistered Sales of Equity Securities and
Use of Proceeds
None
Item 3
- Defaults Upon
Senior Securities
None
Item 4
- Submission of
Matters to a Vote of Security Holders
None
Item 5
- Other Information
None
Item 6
- Exhibits
The
following documents are filed as part of this Report.
Exhibit Number
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Exhibit Description
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31.1
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended. **
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31.2
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended. **
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32.1
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Certificate
(Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002) of Principal Financial Officer. **
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32.2
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Certificate
(Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002) of Principal Financial Officer. **
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** Filed herewith
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SIGNATURE
In accordance with the requirements of the Securities
Exchange Act of 1934, as amended, the registrant caused this Report on Form
10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
PETROCORP INC.
Date:
May 16, 2011
By:
/s/ James Fitzsimons
James Fitzsimons
CEO and President