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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
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x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
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OR
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o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from __________ to
___________
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Commission
File Number 333-141993
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PETROCORP INC.
(Name of small
business issuer in its charter)
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Delaware
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20-5134664
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1065 Dobbs Ferry Road
White Plains, New York 10607
(Address of principal
executive offices)
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(914) 674-4373
(Issuer's telephone
number, including area code)
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Indicate by check mark whether
the issuer (1) 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
x
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company filer. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated Filer
o
Smaller reporting company
x
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 22,680,000 shares of
common stock, par value $.0001 per share, as of October 31, 2011.
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1
PETROCORP INC.
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REPORT ON FORM 10-Q
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Page
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PART I
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FINANCIAL INFORMATION
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3
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Item 1
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Financial Statements
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3
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Item 2
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Management’s Discussion and
Analysis or Plan of Operation
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8
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Item 3
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Quantitative and
Qualitative Disclosures About Market Risk
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11
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Item 4T
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Controls and Procedures
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11
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PART II
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OTHER INFORMATION
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14
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Item 1
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-
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Legal Proceedings
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14
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Item 2
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Unregistered Sales of
Equity Securities and Use of Proceeds
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14
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Item 3
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Defaults Upon Senior
Securities
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14
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Item 4
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Submission of Matters to a
Vote of Security Holders
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14
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Item 5
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-
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Other Information
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14
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Item 6
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Exhibits
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14
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2
PART I –
FINANCIAL INFORMATION
Item 1 – Financial Statements
PETROCORP INC.
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(An Exploration Stage Company)
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Consolidated Balance Sheets
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September 30,
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December 31,
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2011
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2010
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(Unaudited)
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ASSETS
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Current assets:
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Cash
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$
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9,350
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$
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29,404
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Revenue
receivables
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-
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2,958
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Receivable from
sale of oil and gas properties
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95,295
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-
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Total
current assets
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104,645
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32,362
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Oil and gas properties
(successful efforts method):
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Unproved
acreage
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203,014
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327,500
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Less
depletion, depreciation and amortization
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(71,250)
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(56,250)
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131,764
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271,250
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Total assets
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$
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236,409
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$
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303,612
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current liabilities:
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Accrued
expenses
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$
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32,858
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$
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17,377
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Notes
payable to majority stockholder
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1,024,950
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949,950
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Total
current liabilities
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1,057,808
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967,327
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Stockholders’ deficit:
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Preferred
stock; $.0001 par value; 1,000,000 shares
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authorized;
none issued or outstanding
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-
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Common
stock; $.0001 par value; 100,000,000 shares
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authorized;
22,680,000 shares issued and outstanding
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2,268
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2,268
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Additional
paid-in capital
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2,413,295
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2,279,259
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Deficit
accumulated during the exploration stage
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(3,236,962)
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(2,945,242)
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(821,399)
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(663,715)
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Total liabilities and
stockholders’ deficit
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$
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236,409
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$
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303,612
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See accompanying notes to the consolidated
financial statements.
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3
PETROCORP INC
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(An Exploration Stage Company)
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Consolidated Statements of Operations (Unaudited)
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June 19, 2006
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(inception) to
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Three Months Ended September 30,
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Nine Months Ended September 30,
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September 30,
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2011
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2010
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2011
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2010
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2011
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Revenues
earned during the exploration stage
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$
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24,632
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$
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25,527
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$
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79,293
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$
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87,296
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$
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283,703
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Cost
of revenues earned during the exploration stage:
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Oil
and gas operating costs
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15,109
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17,857
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50,773
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55,487
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228,849
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Exploration
costs
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36,700
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50,674
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36,700
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67,037
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206,074
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Depletion,
depreciation and amortization
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5,000
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7,500
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15,000
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22,500
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71,250
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Production
taxes
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1,773
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1,837
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5,708
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6,284
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20,424
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58,582
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77,868
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108,181
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151,308
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526,597
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Gross profit (loss)
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(33,950)
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(52,341)
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(28,888)
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(64,012)
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(242,894)
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Operating expenses:
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Salary
- president and majority stockholder
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30,000
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30,000
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90,000
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90,000
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450,000
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Professional
fees - CFO and secretary
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25,500
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25,500
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76,500
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76,500
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381,206
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Professional
fees - audit and reviews
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2,500
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2,500
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17,500
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21,000
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83,000
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Professional
fees - foreign
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150,342
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General
and administrative expenses
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2,209
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(8,146)
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5,606
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6,671
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141,453
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Impairment
charges
|
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29,191
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29,191
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1,586,798
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89,400
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49,854
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218,797
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194,171
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2,792,799
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Loss
from operations
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(123,350)
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(102,195)
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(247,685)
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(258,183)
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(3,035,693)
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Other
(income) expenses:
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Gain
from sale of marketable securities
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(10,030)
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(10,030)
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Interest
income
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(1)
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(1)
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(1)
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(2,448)
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Interest
expense
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|
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|
359
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Interest
expense - related parties
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15,287
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13,073
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44,036
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45,008
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211,788
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|
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15,286
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|
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13,073
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|
|
44,035
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|
34,977
|
|
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199,669
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Loss
before income taxes
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(138,636)
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(115,268)
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(291,720)
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(293,160)
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(3,235,362)
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Income
tax provision
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-
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-
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-
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-
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1,600
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Net
loss
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$
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(138,636)
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|
$
|
(115,268)
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$
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(291,720)
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|
$
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(293,160)
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$
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(3,236,962)
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Net
loss per common share - basic and diluted
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$
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(0.01)
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$
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(0.01)
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$
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(0.01)
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$
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(0.01)
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Weighted average common
shares outstanding -
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basic
and diluted
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22,680,000
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22,680,000
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22,680,000
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22,680,000
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See accompanying notes to the consolidated
financial statements.
4
PETROCORP INC.
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(An Exploration Stage Company)
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Consolidated Statements of Cash Flows (Unaudited)
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|
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June 19, 2006
|
|
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|
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(inception) to
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Nine Months Ended September 30,
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September 30,
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2011
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2010
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2011
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Cash flows from operating
activities:
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Net
loss
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|
$
|
(291,720)
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|
$
|
(293,160)
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|
$
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(3,236,962)
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Adjustments
to reconcile net loss to net cash
|
|
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|
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used in operating activities:
|
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|
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Depletion,
depreciation and amortization
|
|
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|
15,000
|
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|
22,500
|
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|
72,321
|
Impairment
charges
|
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|
29,191
|
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|
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|
1,586,798
|
Salary
contribution
|
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|
90,000
|
|
|
90,000
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|
450,000
|
Interest
contribution
|
|
|
|
44,036
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|
45,008
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|
211,788
|
Changes
in operating assets and liabilities:
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Revenue
receivables
|
|
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|
2,958
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|
18,373
|
|
|
-
|
Receivable from sale of oil and gas properties
|
|
|
|
(95,295)
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|
|
|
|
|
(95,259)
|
Accrued
expenses
|
|
|
|
15,481
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|
|
(3,110)
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|
|
32,858
|
Net
cash used in operating activities
|
|
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|
(190,349)
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|
|
(120,389)
|
|
|
(978,456)
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|
|
|
|
|
|
|
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Cash flows from investing
activities:
|
|
|
|
|
|
|
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|
Proceeds
from sale of marketable securities
|
|
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|
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5,000
|
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|
5,000
|
Acquisition
of oil and gas properties
|
|
|
|
|
|
|
|
|
|
(1,682,996)
|
Proceeds
from sale of oil and gas properties
|
|
|
|
95,295
|
|
|
|
|
|
191,846
|
Purchase
of equipment
|
|
|
|
|
|
|
|
|
|
(18,000)
|
Net
cash provided by (used in) investing activities
|
|
|
|
95,295
|
|
|
5,000
|
|
|
(1,504,150)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable to majority stockholder
|
|
|
|
75,000
|
|
|
93,975
|
|
|
1,024,892
|
Repayment
of notes payable to majority stockholder
|
|
|
|
|
|
|
|
|
|
(90,000)
|
Proceeds
from sale of common stock
|
|
|
|
|
|
|
|
|
|
1,557,100
|
Net
cash provided by financing activities
|
|
|
|
75,000
|
|
|
93,975
|
|
|
2,491,992
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
|
(20,054)
|
|
|
(21,414)
|
|
|
9,386
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
|
29,404
|
|
|
38,510
|
|
|
-
|
Cash at end of period
|
|
|
$
|
9,350
|
|
$
|
17,096
|
|
$
|
9,386
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
359
|
Income
taxes paid
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and
financing activities:
|
|
|
|
|
|
|
|
|
|
|
Receivable from sale of oil and gas properties
|
|
|
$
|
95,295
|
|
$
|
-
|
|
$
|
95,295
|
Forgiveness
of debt by a stockholder
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,000
|
Salary
contribution
|
|
|
$
|
90,000
|
|
$
|
90,000
|
|
$
|
450,000
|
Interest
contribution
|
|
|
$
|
44,036
|
|
$
|
45,008
|
|
$
|
211,788
|
Exchange
of $294,000 of marketable securities with a cost basis
|
|
|
|
|
|
|
|
|
|
of
$245,000 to Soladino Investments SA, an entity owned by
|
|
|
|
|
|
|
|
|
|
|
our
president for cancellation of $294,000 of notes
|
|
|
$
|
-
|
|
$
|
245,000
|
|
$
|
245,000
|
Acquisition
of unproved oil and gas properties from
|
|
|
|
|
|
|
|
|
|
|
the
majority stockholder for notes
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
967,881
|
Sale
of $448,876 of oil and gas properties to
|
|
|
|
|
|
|
|
|
|
|
Soladino
Investments SA for cancellation of
|
|
|
|
|
|
|
|
|
|
|
$500,000
of notes and cash payment of $96,551
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(500,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated
financial statements.
5
PETROCORP INC.
(An Exploration Stage Company)
September 30, 2011 and 2010
Notes to the
Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited interim
consolidated financial statements have been prepared in accordance with the
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article
8 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals considered necessary
for a fair presentation, have been included. Operating results for the three and
nine months ended September 30, 2011 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2011.
These financial statements should be read in conjunction
with the financial statements of the Company for the year ended December 31, 2010
and notes thereto contained in
the Annual Report on Form 10-K of the
Company as filed with the United States Securities and Exchange Commission (the
“SEC”) on April 15, 2011
.
Reclassifications
Certain amounts in the prior period consolidated financial
statements have been reclassified to conform with the current period
presentation. These reclassifications had no effect on reported
losses.
2. Exploration Stage Company
The Company is an exploration stage company
as defined by
section 915-10-20 of the
FASB Accounting Standards Codification
. Although the
Company has recognized some nominal amount of revenue since inception, the Company
is devoting substantially all of its efforts on establishing the business and
its planned principal operations have not yet commenced. The Company has no
declared oil and gas reserves. All losses since inception have been considered
part of the Company’s exploration stage activities.
3.
Sale of Oil and Gas Assets
On
August 29, 2011, the Company’s subsidiary, Union Energy (Alaska), LLC (“Union”), sold
an 81.25% net revenue interest in its East Kurupa Gas Field Prospect Leases to
Auxillium Alaska, Inc. (“Auxilium”) for $95,295 and payment of the current
years delay rentals. The $95,295 is due November 27, 2011 or the leases revert
back to Union. Union retains a 6.25% overriding royalty interest.
6
PETROCORP INC.
(An Exploration Stage Company)
September 30, 2011 and 2010
Notes to the
Consolidated Financial Statements (Unaudited)
4.
Related Party Transactions
Soladino
Investments SA (“Soladino”) loaned the Company $50,000 in
May 2011 and $25,000 in July or $75,000 in aggregate. The notes are secured, payable on demand and non-interest
bearing. At September 30, 2011, the Company has $1,024,950 in secured,
non-interest bearing notes (six), payable on demand with its majority
stockholder, Soladino.
During
the nine months ended September 30, 2011 and 2010, the Company recorded interest
expense of $44,036 and $45,008 respectively. Interest is computed at an
implied rate of 6% and these amounts were recorded as a capital contributions by
the stockholder to the Company.
The Company was provided management services by its president, Mr. Fitzsimons at
no cost. The Company recorded the $90,000 for the estimated value over the
respective nine month periods as compensation expense and credited the same as a
capital contribution, each for the nine months ended
September 30, 2011 and 2010.
5.
Subsequent Events
The Company has evaluated all events
that occurred after the balance sheet date through the date when the financial
statements were issued to determine if they must be reported. Management of
the Company has determined that there are no reportable subsequent events to be
disclosed.
7
Item 2 – Management’s 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 management’s current view of us concerning future
events and are subject to certain risks, uncertainties and assumptions,
including among many others:
|
●
|
the
quality of our properties with regard to, among other things, the existence
of reserves in economic quantities;
|
|
●
|
uncertainties
about the estimates of reserves;
|
|
●
|
our
ability to increase our production and oil and natural gas income through
exploration and development;
|
|
●
|
the
number of well locations to be drilled and the time frame within which they
will be drilled;
|
|
●
|
the
timing and extent of changes in commodity prices for natural gas and crude
oil;
|
|
●
|
domestic
demand for oil and natural gas;
|
|
●
|
drilling
and operating risks;
|
|
●
|
the
availability of equipment, such as drilling rigs and transportation
pipelines;
|
|
●
|
changes
in our drilling plans and related budgets;
|
|
●
|
the
adequacy of our capital resources and liquidity including, but not limited
to, access to additional borrowing capacity; and
|
|
●
|
risks
and uncertainties described in the Risk Factors section or elsewhere in our
Annual Report on Form 10-K.
|
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.
8
Business
Overview
Petrocorp Inc. was incorporated on June
19, 2006 under the laws of the State of Delaware. Prior to September 2007, the
Company’s 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.
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").
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.
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.
9
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
Three
Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
For the quarter ended September
30, 2011, we had revenues of $24,632, oil and gas operating costs of $15,109
and incurred a loss of $138,636, as compared to revenues of $25,527, operating
costs of $17,857 and a loss of $115,268 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 $28,000, which related primarily to the
development of the Company’s business plan and costs associated with being a
public company, as compared to $28,000 for the 2010 quarter. Also during the
2011 quarter, the Company paid general and administrative expenses of $2,209, as
compared to $(8,146) for the 2010 quarter. Interest expense of $15,287 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.
Nine
Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
During
the nine months ended September 30, 2010, we incurred a net loss of $291,720
compared to a net loss of $293,160 for the 2010 period. During the nine months
ended September 30, 2011, the Company paid compensation and professional fees
of $184,000, which related primarily to the development of the Company’s
business plan and costs associated with being a public company, as compared to
$187,500 for the 2010 period. Also during the nine months ended September 30,
2011, the Company paid general and administrative expenses of $5,606, as
compared to $6,671 for the 2010 period. During the nine months ended September
30, 2011 interest expense of $44,036 was computed on the officer/stockholder
loans at an implied rate of 6% and this amount was recorded as a capital
contribution by the Company during the period.
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 September 30, 2011, we had
cash of $9,350 and negative working capital of $953,163. Our net cash provided
by financing activities from June 19, 2006 (inception) to September 30, 2011
was $2,419,992.
At
September 30, 2011, the Company has $1,024,950 in notes (six) payable to
Soladino Investments SA. The notes are
secured by the Company’s 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.
10
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.
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 June 30, 2011. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that as of September 30, 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.
11
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 September 30, 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 September 30, 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.
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 issuer’s principal executive and principal financial officers and effected
by the issuer’s 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:
|
●
●
●
|
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.
|
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.
12
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 September 30, 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 September 30, 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.
13
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.
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
|
Exhibit Description
|
31.1
|
Certification of Chief Executive
Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended. **
|
31.2
|
Certification of Chief Financial
Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended. **
|
32.1
|
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. **
|
32.2
|
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. **
|
** Filed herewith
14
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:
November 16, 2011
By:
/s/ James Fitzsimons
James Fitzsimons
CEO and President
15