17

---

 

19

---

 

(Formerly Fuel Centers, Inc.)

 (A Development Stage Company)

Statement of Changes in Stockholders’ Equity

 

April 9, 2001 through December 31, 2004

 

 

																	Deficit
																	Accumulated
								Additional			Stock						During
		Common Stock						Paid-In			Issuance			Accumulated			Development
		Shares			Amount			Capital			Obligation			Deficit			Stage			Total
								(as restated)
Balance, April 9, 2001		---			$                ---			$                ---			$                —			$                 ---			---			$                ---
Issuance of common stock			6,005,000			6,005			18,145			—			---	)		---			24,150
Expenses paid by officer			—			—			6,419			—			—			—			6,419
Net loss/comprehensive loss			—			—			—			—			(20,467	)		---			(20,467	)
Balance, December 31, 2001			6,005,000		$	6,005		$	24,564		$	—		$	(20,467	)		---		$	10,102
Expenses paid by officer			—			—			22,936			—			—			—			22,936
Issuance of forward common stock split			6,545,450			6,545			(6,545	)		—			---			---			—
Net loss/comprehensive loss			—			—			—			—			(21,319	)		---			(21,319	)
Balance, December 31, 2002			12,550,450		$	12,550		$	40,955		$	—		$	(41,786	)		---		$	11,719
Expenses paid by officer			—			—			2,420			—			—			—			2,420
Issuance of forward common stock split			75,302,700			75,303			(43,375	)		—			(31,928	)		---			—
Net loss/comprehensive loss			—			—			—			—			(123,475	)		---			(123,475	)
Balance, December 31, 2003			87,853,150		$	87,853		$	—		$	—		$	(197,189	)		---		$	(109,336	)
Retire shares held by former Management			(52,610,000	)		(52,610	)		25,610			—			—			—			(27,000	)
Issue shares in exchange for oil and gas interests (as restated)			3,500,000			3,500			6,401,500			—			—			—			6,405,000
Private placement			2,750,000			2,750			2,672,342			—			—			—			2,675,092
Issue shares as fee for January 5, 2004 transactions			250,000			250			457,250			—			—			—			457,500
Obligation to issue 200,000 shares with acquisition of oil and gas interests												194,000			—			—			194,000
Obligation to issue 200,000 shares to financial advisers			—			—			—			168,500			—			—			168,500
Net loss/comprehensive loss			—			—			—			—			—			(3,760,308	)		(3,760,308	)
Balance, December 31, 2004			41,743,150		$	41,743		$	9,556,702		$	362,500		$	(197,189	)		(3,760,308	)	$	6,003,448

See accompanying notes.

20

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(Formerly Fuel Centers, Inc.)

(A Development Stage Company)

 

Notes to Financial Statements

December 31, 2004 and 2003

 

Note 1 - Nature Of Operations And Significant Accounting Policies

 

Nature of Operations - Fellows Energy Ltd., formerly Fuel Centers, Inc. is engaged in the exploration, extraction, processing and reclamation of coalbed methane, natural gas, and oil projects within the Western United States. We incorporated in the state of Nevada on April 9, 2001 as Fuel Centers, Inc. On November 12, 2003, we changed our name to Fellows Energy Ltd. Our principal offices are in Broomfield, Colorado.

 

Cash Equivalents - We consider all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents. At December 31, 2004 and 2003, we had no cash equivalents.

 

Fair Value of Financial Instruments - The carrying amount of our financial instruments, which includes cash and accounts payable, approximate their fair value due to the short period to maturity of these instruments.

 

Restricted Cash - Restricted cash is cash balances held in the form of bank certificates of deposit. At December 31, 2004, $135,000 of restricted cash was deposited with custodians to secure reclamation of oil and gas property. At December 31, 2003, we had no restricted cash.

 

Revenue Recognition - we record revenue when title passes, delivery occurs to our customers and the customer assumes the risks and rewards of ownership, when the price is fixed and determinable, and when collectibility is reasonably assured.

 

Income Tax - We recognize deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. We provide a valuation allowance for deferred tax assets when we consider realization of such assets to be less likely than not.

 

Net Loss per Common Share - We have adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share. Statement 128 requires the reporting of basic and diluted earnings/loss per share. We calculate basic loss per share by dividing net loss by the weighted average number of outstanding common shares during the period.

 

Comprehensive Loss - We apply Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Statement 130 establishes standards for the reporting and display of comprehensive income or loss, requiring its components to be reported in a financial statement. For the years ended December 31, 2004 and 2003, our only component of comprehensive income or loss was the net loss reported in the operations statement.

 

Use of Estimates - Accounting principles generally accepted in the United States require us 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 the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.

 

Concentration of Credit Risk - Financial instruments that potentially subject us to concentration of credit risk consist of cash. At December 31, 2004, we had $49,028 in cash in excess of federally insured limits.

 

Oil and Gas Activity - We follow the successful-efforts method of accounting for oil and gas property. Under this method of accounting, we capitalize all property acquisition cost and cost of exploratory and development wells when incurred, pending determination of whether the well has found proved reserves. If an exploratory well does not find proved reserves, we charge to expense the cost of drilling the well. We include exploratory dry hole cost in cash flow from investing activities within the cash flow statement. We capitalize the cost of development wells whether productive or nonproductive. We had no exploratory well cost that had been suspended for one year or more as of December 31, 2004.

 

We expense as incurred geological and geophysical cost and the cost of carrying and retaining unproved property. We will provide depletion, depreciation and amortization (DD&A) of capitalized cost of proved oil and gas property on a field-by-field basis using the units-of-production method based upon proved reserves. In computing DD&A we will take into consideration restoration, dismantlement and abandonment cost and the anticipated proceeds from equipment salvage. When applicable, we will apply the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which provides guidance on accounting for dismantlement and abandonment cost.

22

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Fellows Energy Ltd.

(Formerly Fuel Centers, Inc.)

(A Development Stage Company)

 

Notes to Financial Statements

December 31, 2004 and 2003

 

We review our long-lived assets for impairment when events or changes in circumstances indicate that an impairment may have occurred. In the impairment test we compare the expected undiscounted future net revenue on a field-by-field basis with the related net capitalized cost at the end of each period. We will calculate expected future cash flow on all proved reserves using a 15% discount rate and escalated prices. Should the net capitalized cost exceed the undiscounted future net revenue of a property, we will write down the cost of the property to fair value, which we will determine using discounted future net revenue. We will provide an impairment allowance on a property-by-property basis when we determine that the unproved property will not be developed.

Impairment of Unproved (Non-Producing) Properties

Unproved properties are assessed periodically to determine whether or not they have been impaired. We will provide an impairment allowance on unproved property at any time we determine that a property will not be developed. At December 31, 2004, we were making sufficient progress on assessing our acquired properties and considered them all still economically and operationally viable, in accordance with FAS 19 and 144. In determining that there was no impairment of the unproved properties, we considered such factors our commitment of project personnel and cost being incurred to develop as well as the existence of our active negotiations with Thomasson and other venture partners, among others. In addition, the Company had no unproved properties that were surrendered or abandoned during the year ended December 31, 2004 that may have also given rise to and impairment charge.

 

Sales of Producing and Nonproducing Property - We will account for the sale of a partial interest in a proved property as normal retirement. We will recognize no gain or loss as long as this treatment does not significantly affect the unit-of-production depletion rate. We will recognize a gain or loss for all other sales of producing properties and include the gain or loss in the results of operations.

 

We will account for the sale of a partial interest in an unproved property as a recovery of cost when substantial uncertainty exists as to recovery of the cost applicable to the interest retained. We will recognize a gain on the sale to the extent that the sales price exceeds the carrying amount of the unproved property. We will recognize a gain or loss for all other sales of nonproducing properties and include the gain or loss in the results of operations.

 

Stock Options - On October 9, 2003, we adopted an incentive stock option plan, pursuant to which shares of our common stock are reserved for issuance to satisfy the exercise of options. The purpose of the incentive stock option plan is to attract and retain qualified and competent officers, employees and directors. The plan authorizes up to 2,000,000 shares of authorized common stock to be purchased pursuant to the exercise of options. Our stockholders approved the plan on November 10, 2003. On September 15, 2004, we granted an option for 200,000 shares to our CEO, 150,000 shares to our vice president and 125,000 shares to an employee. These options are exercisable at $0.80 per share, the price of our stock on the grant date. The options vested 50% on the grant date and vest 50% on September 15, 2005.

 

We account for stock options to employees in accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations. Pursuant to APB No. 25, we record no compensation expense to employees on the date of grant because in issuing the grants we set the exercise price of the underlying stock at or above the market value of the stock on the date of the grant. Stock options granted to consultants are accounted for under the fair value method, in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.

 

Statement 123 and Statement 148, Accounting for Stock-Based Compensation Transition and Disclosure, require disclosure of pro forma information regarding net income and earnings per share. The Statements require that the information be determined as if we had accounted for employee stock options under the fair value method of the statements. We estimate the fair value of the options we grant at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the year ended December 31, 2004: a risk-free interest rate of 3%; no expected dividend; a volatility factor of 30.4%; and a maturity date of ten years.

 

For purposes of pro forma disclosures, we amortize to expense the estimated fair value of the options over the options’ vesting period. We issued no options in 2003. Our pro forma information 2004 is:

 

23

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Fellows Energy Ltd.

(Formerly Fuel Centers, Inc.)

(A Development Stage Company)

 

Notes to Financial Statements

December 31, 2004 and 2003

 

 

			Year Ended December 31, 2004
Net loss as reported		$	(3,760,308	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards			(102,200	)
Pro forma net loss		$	(3,862,508	)
Basic and diluted loss per share—as reported		$	(0.09	)
Pro forma basic and diluted loss per share		$	(0.09	)

 

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions, are fully transferable, and are not subject to trading restrictions or blackout periods. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, it is our opinion that the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

 

We have not adopted any of the early transition methods provided for in Statement No. 148. In December 2004 the Financial Accounting Standards Board issued Statement No. 123 (Revised 2004), Share-Based Payment. This statement requires companies to recognize the fair value of stock options and other stock-based compensation as expense for reporting periods beginning in July 2005. For awards issued prior to the effective date, the standard requires companies to utilize prior valuation models of fair value and recognize as expense the remaining unvested portion of the awards over the remaining vesting periods. The adoption of this statement is not expected to have a material impact on the Company’s operating results, financial position or cash flow.

 

Note 2 - Going concern

 

As shown in the accompanying financial statements, we have incurred significant operating losses since inception and previously incurred a loss on our discontinued automotive fuel business. As of December 31, 2004, we have limited financial resources until such time that we are able to generate positive cash flow from operations. These factors raise substantial doubt about our ability to continue as a going concern. Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to locate profitable mineral properties, generate revenue from our planned business operations, and control exploration cost. Management plans to fund its future operation by obtaining additional financing and commencing commercial production. However, there is no assurance that we will be able to obtain additional financing from investors or private lenders.

 

Note 3 - Convertible Note Payable

 

On September 9, 2003, we received $350,000 for issuance of a convertible note payable to a third party investor. The principal is due and payable on March 9, 2005 together with interest at the rate of 8% per year. The note also contains a conversion feature that gives the holder the right to convert all or any portion of the principal indebtedness into shares of common stock on or before its due date. On March 3, 2005, the note holder notified us that they were exercising their right to convert the entire $350,000 note at a conversion rate of $0.1429 per share, or 2,449,265 shares.

 

24

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Fellows Energy Ltd.

(Formerly Fuel Centers, Inc.)

(A Development Stage Company)

 

Notes to Financial Statements

December 31, 2004 and 2003

 

Note 4 - Debenture

 

In June 2004 we issued a two-year convertible debenture with a conversion price of $1.25 per share of common stock, subject to anti-dilution adjustments, in a private placement to two purchasers. The convertible debenture is secured by our assets and is due in June 2006. In connection with the issuance, we also issued warrants to purchase up to 400,000 shares of common stock at $1.50 per share. The warrants are exercisable for two years following conversion of the convertible debenture at an exercise price of $1.50. The offering resulted in gross proceeds to us, prior to the deduction of fees and cost, of approximately $1,000,000. We used the proceeds from the offering for working capital and general corporate purposes.

 

The conversion price of the convertible debenture and the exercise price of the warrants are subject to customary anti-dilution rights. In addition, if we issue common stock at a price less than the conversion price of the convertible debenture, then the conversion price will be reduced to the lower price. Under such circumstances, the exercise price of the warrants will be adjusted to the same price as the conversion price. As part of the placement, we agreed to provide piggyback registration rights to register for resale all of the shares of common stock issuable upon conversion of the debenture and upon exercise of the warrants.

 

We issued the above securities utilizing an exemption from registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act and Regulation D promulgated under the Securities Act based on the representations of the Purchaser that it was an “accredited investor” (as defined under Rule 501 of Regulation D) and that it was purchasing the securities without a present view toward a distribution of the securities. In addition, we conducted no general solicitation in connection with the sale of the securities.

 

Note 5 - Note Payable - In November 2004 we entered into a joint venture agreement with an unrelated company in which the company received a 50% interest in certain of our properties in exchange for a $2,000,000 commitment for exploration and drilling on the properties. In addition, the company loaned us $1,500,000, 50% of which was due on January 31, 2005 and we have repaid with interest and 50% of which is payable on April 30, 2005, with interest at 18%. This note is secured by all of our assets.

 

Note 6 - Common Stock

 

In November 2003 our Board of Directors approved a seven-to-one stock split of our issued and outstanding common stock, which was done with a dividend of six shares for each share of common stock outstanding as of the record date. The dividend was payable on November 17, 2003, for shareholders of record on November 14, 2003. The common stock continues to be $.001 par value.

 

In November 2003 we amended the Articles of Incorporation to change our name from Fuel Centers, Inc. to Fellows Energy Ltd. The amendment also ratified an increase in the authorized number of shares of our $.001 par value common stock from 50,000,000 to 100,000,000 shares and an increase in the number of preferred shares from 5,000,000 to 25,000,000.

 

In January 2004 we acquired interest in certain oil and gas leases of the Johns Valley, Utah projects and the rights to acquire interest in the Weston County, Carter Creek, Deer Creek and the Gordon Creek Projects, as well as to enter into the Exploration Services Funding Agreement with Thomasson Partner Associates, Inc. of Denver, Colorado, owned by Diamond Oil and Gas Corporation, in exchange for 3,500,000 shares of common stock. Initially, the transaction was deemed to have value of $1,050,000 based on the $0.30 stock price at the time the agreement was negotiated. Since determining that there were conditions precedent to close this transaction, we have restated the valuation of these assets and interests to properly account for them under the guidance of EITF 98-16.  The transaction is deemed to have value of $6,405,000 under this guidance, at the stock price of $1.83. For related discussion see Note 12.

 

In January 2004 we completed a private placement of $2,750,000, less related offering cost, pursuant to which we issued 2,750,000 shares of common stock at $1.00 per share.

 

In connection with the transactions which closed on January 5, 2004, we incurred an obligation to a financial adviser to issue 250,000 shares of common stock as a fee, which we issued later in 2004. We valued the shares as of January 5, 2004, and recorded the value of $457,500 as financial consultation expense.

 

In August 2004 we entered into an agreement with a financial consultant in which we are obligated to issue the consultant 50,000 shares of common stock. In February 2005 we extended the agreement and are obligated to issue the consultant an additional 50,000 shares of common stock.

 

In October 2004, in connection with the acquisition of oil & gas leases, we incurred an obligation to issue 200,000 shares of common stock.

 

In December 2004 we entered into an agreement with a financial consultant in which we are obligated to issue the consultant 150,000 shares of common stock.

 

 

There were no conditions for issuance associated with the above third and fourth quarter share issuance obligations, although all are restricted under rule 144. The breakdown of the above third and fourth quarter share issuance obligations were valued using the respective dates obligations were incurred and their corresponding share prices, as follows:

 

 

Date		Stock Price			# of Shares			Share Valuation
8/1/04		$	.97			50,000		$	48,500
10/11/04		$	.97			200,000		$	194,000
12/1/04		$	.80			150,000		$	120,000
Totals						400,000		$	362,500

 

 

 

25

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Fellows Energy Ltd.

(Formerly Fuel Centers, Inc.)

(A Development  Stage Company)

 

Notes to Financial Statements

December 31, 2004 and 2003

 

Note 7 - Related Party Transactions

 

In 2003 we occupied office space provided by our former officer. Accordingly, we allocated occupancy cost to the Company based on the square foot percentage assumed multiplied by the former officer’s total monthly cost. This is shown in the accompanying operations statement for 2003 and is considered an additional capital contribution by the former officer.

 

On January 5, 2004, we acquired interests in certain oil and gas leases of the Johns Valley, Utah project and the rights to acquire interests in the Weston County, Carter Creek, Deer Creek and Gordon Creek Projects, as well as to enter into the Exploration Services Funding Agreement with Thomasson Partner Associates, Inc. of Denver, Colorado, owned by Diamond Oil & Gas Corporation, in exchange for 3,500,000 shares of common stock. The transaction was deemed to have a value of $1.05 million.

 

We acquired the option to earn a 70% working interest in 25,201 acres of oil and gas leases from Diamond, a corporation controlled by our CEO. As a result, we appointed new management while accepting the resignation of our former management and redeemed 52,610,000 shares of common stock owned by the outgoing and former management in exchange for approximately $27,000.

 

Over the period May through October 2004 we borrowed $741,000 on an unsecured 8% demand note payable to an entity controlled by our CEO. In December 2004 we paid $684,621 of principal on the note plus $25,681 of interest. The December 31, 2004 balance on the note was $56,379.

 

Note 8 - Income Tax

 

At December 31, 2004, we have available for federal income tax purposes a net operating loss carryforward of approximately $3,300,000, expiring at various times through 2024 that may be used to offset future taxable income. Therefore, we have provided no provision for income tax.

 

In addition, we have deferred tax assets of approximately $1,120,000 at December 31, 2004. We have not recorded a benefit from our net operating loss carryforward because realization of the benefit is uncertain and, therefore, a valuation allowance of $(1,120,000) has been provided for the deferred tax assets. The following table reports our carryforwards and the related deferred tax assets by year through December 31, 2004:

 

 

Year			NOL carryforward			Deferred tax asset
2001		$	10,241		$	3,481
2002			21,560			7,330
2003			122,915			41,791
2004			3,138,118			1,066,960
Less: valuation allowance			—			(1,119,562	)
Totals:		$	3,292,834		$	—

 

26

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Fellows Energy Ltd.

(Formerly Fuel Centers, Inc.)

(A Development Stage Company)

 

Notes to Financial Statements

December 31, 2004 and 2003

 

Note 9 - Commitments and contingencies

 

With our Exploration Services Funding Agreement with Thomasson, as amended, we are committed to paying Thomasson an $800,000 fee in 2005 for the first right to review and purchase up to a 100% interest in oil and natural gas exploration projects they develop as well as fees for any projects that we acquire from Thomasson. Under the agreement, in 2005 Thomasson will present to us an average of eight projects per year with an area of interest of 10,000 to 80,000 acres per project with a reasonable potential of at least 200 billion cubic feet of natural gas reserves or 20 million barrels of oil reserves. After viewing a formal presentation regarding a project, we have a period of thirty days in which we have the option to acquire the project. We are not obligated to acquire any project. The agreement continues year to year until either party gives 90 days written notice of termination.

 

Johns Valley Project, Utah. In early 2004 we acquired an agreement with Johns Valley Limited Partnership whereby we have the option to earn 70% working interest in 25,201 acres of Utah oil and gas leases. In order to maintain the option in good standing, we had an obligation to spend the following sums in exploration drilling on or before the dates specified to better characterize the coal and coalbed methane potential: (1) June 15, 2004, $1,200,000; (2) January 20, 2005, $1,000,000; and, (3) January 20, 2006, $800,000. In connection with the above commitment for 2004, as of June 30, 2004, we advanced $241,000 in the form of a loan bearing 10% interest to the Johns Valley Limited Partnership. As a result, and in lieu of repayment, our $1.2 million 2004 work commitment was reduced to $718,000 to be spent by October 31, 2004. By that date we had actually spent $550,000. Due to permitting delays and other operating parameters in the field, we have entered into negotiations to restructure the timing and amounts of our work commitments as provided for under the option assignment agreement. We have no current payment commitments or obligations pending the renegotiation.

 

Operating Lease - We have a one year operating lease through January 2006 for use of our office facilities with an option to renew at market rate. The rent is $1,681 per month. Aggregate minimum rental payments are $20,172 in 2005.

 

We were sued in the Sixth Judicial District Court, Garfield County, Utah on November 10, 2004, by Midway Perforating and Drilling in a complaint alleging nonpayment of charges connected with drilling the Johns Valley 10-33C2 well in Garfield County, UT. The complaint seeks damages of $100,000 and costs of $10,000. We filed our Answer and Counterclaim on January 19, 2005. We believe we have a strong defense and counterclaim in that the plaintiff failed to follow our instructions to use appropriate equipment for controlling deviation of the wellbore, and that such failure caused significant deviation of the wellbore, causing the well to be unusable. The suit is in its early stages. Although we believe we have a strong defense and counterclaim, we cannot predict the final outcome of the suit.

 

 

Note 10 - Discontinued Operations

Fuel Centers, Inc. 

In December 2003, the Company disposed of its subsidiary, Fuel Centers, Inc., which was engaged in the automotive fuel and supercenter operations. At December 31, 2003, the Company recorded a loss on discontinuance in the statement of operations of $123,475.

 

Note 11 - Subsequent Events

 

In February 2005 we agreed to sell the Circus project for $1.98 million to an unrelated third party. We have received half of the proceeds from the sale. The buyer has committed to pay the other half upon completion of routine title work on the property. We acquired the leases in October, 2004, for $451,000 and thus realized a $1,493,000 gain on the sale. We are using the proceeds from the sale to pay down the $1.5 million November 2004 note and for working capital.

 

In February 2005 we extended our agreement with a financial consultant and are obligated to issue an additional 50,000 shares as well as a monthly fee of $7,500 for three months through April 2005.

 

In March 2005 we agreed, subject to customary closing conditions, with Quaneco to acquire a 12.5% working interest in the Kirby and Castle Rock Coal Bed Natural Gas projects for $3,850,000 in cash and one million shares of restricted common stock. Under the terms of the agreement, we will participate in a 48 well drilling program during 2005 on the Kirby project that will extend out from an existing 16 well pilot program of previously drilled wells. We will have ownership in the previously drilled wells, which are currently being dewatered and are expected to commence production in the near future. The other working interest owners in the Kirby project include Quaneco (25.0%), Pinnacle Gas Resources (50%) and Galaxy Energy Corporation (12.5%).

 

 

In April 2005, we issued shares valued at $362,500 to comply with our obligation of issuance. The shares issued were as follows:

 

Date		Stock Price			# of Shares			Share Valuation
8/1/04		$	.97			50,000		$	48,500
10/11/04		$	.97			200,000		$	194,000
12/1/04		$	.80			150,000		$	120,000
Totals						400,000		$	362,500

 

 

Note 12 - Restatement

 

The accompanying consolidated financial statements as of December 31, 2004 have been restated. The restatement reflects the correction of an error in the acquisition cost of certain oil and gas property in exchange for 3,500,000 shares of the Company’s common stock on January 5, 2004.

 

On January 5, 2004, we acquired interests in certain oil and gas leases of the Johns Valley, Utah project and the rights to acquire interests in the Weston County, Carter Creek, Deer Creek and Gordon Creek Projects, as well as to enter into the Exploration Services Funding Agreement with Thomasson Partner Associates, Inc. of Denver, Colorado, owned by Diamond Oil & Gas Corporation, in exchange for 3,500,000 shares of common stock. Initially, the transaction was deemed to have value of $1,050,000 based on the $0.30 stock price at the time the agreement was negotiated. Since determining that there were conditions precedent to close this transaction, we have restated the valuation of these assets and interests to properly account for them under the guidance of ETIF 98-16.  The transaction is deemed to have value of $6,405,000 under this guidance, at the share price on date of acquisition of $1.83, which was the value of the stock on the date that performance under the agreement was completed.

 

Upon applying the criteria of EITF 98-16, the Company increased the valuation of its oil and gas property acquired by $5,355,000 to $6,405,000 from $1,050,000, as previously stated. Accordingly, the $5,355,000 adjustment has been recorded by increasing the stated value of the Company’s Oil and Gas Property and by increasing Additional Paid in Capital on the Company’s balance sheet for the year ended December 31, 2004. There was no effect on the Company’s statements of operations for the years ended December 31, 2004 and 2003 or for the period from inception (November 13, 2003) through December 31, 2004.

 

 

Following is the effect of our restatement on our Balance Sheet for the year ended December 31, 2004:

 

 

		As Previously Reported			Adjustment			As Restated
Oil and gas property		$	3,688,648		$	5,355,000		$	9,043,648
Additional paid in capital		$	(4,201,702	)	$	(5,355,000	)	$	(9,556,702	)
					$	--

27

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Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

None.

 

Item 8A. Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying officers, the effectiveness of our disclosure controls and procedures as of December 31, 2004, pursuant to Rule 13A-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of December 31, 2004, our disclosure controls and procedures were effective.

 

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financing reporting.

 

Item 8B. Other Information

 

Circus Project, Montana. In May 2004, we optioned the Circus project through our affiliation with Thomasson. In February 2005 we agreed to sell the project for $1.98 million to an unrelated third party. We have received half of the proceeds from the sale. The buyer has committed to pay the other half upon completion of routine title work on the property. We acquired the leases in October, 2004, for $451,000 and thus realized a $1,493,000 gain on the sale. We are using the proceeds from the sale to pay down the $1.5 million November 2004 JMG note and for working capital.

 

Kirby and Castle Rock projects, Powder River Basin, Montana. In March 2005 we agreed, subject to customary closing conditions, with Quaneco to acquire a 12.5% working interest in the Kirby and Castle Rock Coal Bed Natural Gas projects for $3,850,000 in cash and one million shares of restricted common stock. See Item 2—Property, “Kirby and Castle Rock projects.”

 

Consulting Agreements. In February 2005, we retained CEOcast, Inc. as a consultant for a three month period, pursuant to which we agreed to pay a monthly fee of $7,500 and issue 50,000 shares of our common stock. In December 2004, we agreed to pay a referral fee to Axiom Capital Management, under which Axiom would receive fees from financings or projects that Axiom presents to us.

 

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