IGPG Ignis Petroleum Group Inc (CE)

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1
TO

FORM 10-QSB

(Mark One)

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 000-50929

Ignis Petroleum Group, Inc.

(Exact name of small business issuer as specified in its charter)

Nevada

(State or other jurisdiction of incorporation or organization)

16-1728419

(IRS Employer Identification No.)

7160 Dallas Parkway, Suite 380, Plano, Texas 75024

(Address of principal executive offices)

972-526-5250

(Issuer’s telephone number)

Check 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 þ No o

Indicate by check mark whether the registrant is a shell company (as defined in rule 12 b-2 of the Exchange Act). Yes o No þ

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. As of November 5, 2007, the registrant had issued and outstanding 57,171,982 shares of common stock.

     Transitional Small Business Disclosure Format (check one);

Yes o No þ

 

 

EXPLANATORY NOTE

          We are filing this Amendment No.1 (“Amendment No.1”) to our Form 10-QSB for the quarter ended September 30, 2006 filed on November 14, 2006 (“Original 10-QSB”) to amend and restate our consolidated balance sheet as of September 30, 2006 and our consolidated statements of operation, stockholders’ equity, and cash flows for the quarter ended September 30, 2006. This Amendment No. 1 amends our original recordation of warrant and derivative liability and the related method of amortization of debt discount, as well as various expense and reclassifications affecting net loss and loss per share. The effects of the restatement are presented in Item 2 Management’s Discussion and Analysis of this Amendment No.2 and in Note 2, Notes to the Financial Statements, September 30, 2006.

          We are also filing amendments to our Quarterly Reports on Form 10-QSB for the quarters ended March 31, 2006, December 31, 2006 and March 31, 2007, to reflect the effects of these restatements. For the convenience of the reader, this Amendment No.1 sets forth our original 10-QSB in its entirety, as amended by, and to reflect, the Amendment No.1. No attempt has been made in this Amendment No.1 to update other disclosures presented in our original 10-QSB, except as required to reflect the effects of the restatement. This Amendment No.1 does not reflect events occurring after the filing of our Original 10-QSB, or modify or update those disclosures, including the exhibits to the Original 10-QSB affected by subsequent events except as applicable in our financial statement footnotes subsequent event disclosures. The following sections of our Original 10-QSB have been amended to reflect this Amendment No.1:

	•		Part I - Item 1 — Financial Statements;
	•		Part I - Item 2 — Management’s Discussion and Analysis or Plan of Operation;
	•		Part II - Item 3 — Controls and Procedures.

          This Amendment No.1 has been signed as of a current date and all certifications of our Chief Executive Officer and Chief Financial Officer are given as of a current date. Accordingly, this Amendment No.1 should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the Original 10-QSB for the quarter ended September 30, 2006.

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 30, 2006 (unaudited)			3
Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2006 and 2005 (unaudited)			4
Condensed Consolidated Statement of Cash Flows for the Three Months ended September 30, 2006 and 2005 (unaudited)			6
Selected Notes to the Condensed Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis or Plan of Operation			16
Item 3. Controls and Procedures			27
PART II — OTHER INFORMATION			28
Item 2. Unregistered sale of equity securities and use of proceeds			28
Item 6. Exhibits.			28
SIGNATURES			29
Rule 13a-14(a) Certification of Chief Executive Officer
Rule 13a-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer

The accompanying notes are an integral part of these condensed consolidated financial statements

The accompanying notes are an integral part of these condensed consolidated financial statements

The accompanying notes are an integral part of these condensed consolidated financial statements

IGNIS PETROLEUM GROUP, INC. AND SUBSIDIARY

flow or liquidity for any period. In addition, we identified an error in that the recording of the original warrants dated April 28, 2006 at $0.93 and warrants dated April 28, 2006 at $0.81 were recorded $374,000 below fair market value. The fair market value exceeded the principal value of $5,000,000 and any fair market value in excess of the principal value should have been expensed at inception of the recording of the debt which properly states the true liability. We will use the full fair market value as calculated by the Black-Scholes model to record gain/loss on the value of the warrants. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the registration statement no later than May 3, 2006, or if the registration statement is not declared effective by September 5, 2006 we are considered in default. As of September 30, 2006 the registration statement had not been declared effective, therefore we are considered in default and accordingly we reclassified the warrant liability from long term to short term liabilities.

          We identified an error in our accounting for the derivative liability issued to Cornell Capital Partners LP. Under the Secured Convertible Debenture, Section 3(b)(i) limits the number of shares issuable to Cornell Capital Partners, LP upon conversion to 4.99% of the outstanding stock at time of conversion. Under section 39(a)(ii) of the same agreement, we are required to pay cash in lieu of shares for the portion greater than 4.99%. The amount of cash is determined by the number of shares issuable upon conversion and the current market price of our stock. Since the number of shares issuable is calculated using 94% of the market price, the cash conversion results in approximately a 6% premium paid on conversion. As a result, the value of the derivative liability related to the conversion in excess of 4.99% will be based on the conversion premium at the end of the reporting period, the Cash Premium Method rather than using the Black-Scholes model. We corrected the derivative liability for the period ended September 30, 2006 resulting in a decrease in the liability of $4,441,585. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the registration statement no later than May 3, 2006, or if the registration statement is not declared effective by September 5, 2006 we are considered in default. As of September 30, 2006 the registration statement had not been declared effective, therefore we are considered in default and accordingly we reclassified the derivative liability from long term to short term liabilities.

          We also identified an error in accounting for the amortization of the debt discount related to the $5,000,000 convertible debenture issued to Cornell Capital Partners, LP. We calculated the amortization of the debt discount using an amortization method that is not in accordance with generally accepted accounting principles. We corrected the calculation using the effective interest method, which results in near zero amortization in the first year and exponentially increasing in the later years because the debt balance (net of discount) is zero at inception. We corrected the method of amortization in this restatement resulting in a decrease to interest expense and increase to the debt discount of $22,885. For the period ended September 30, 2006 the balance of convertible debt less debt discount was $6. As of September 30, 2006 the registration statement had not been declared effective, therefore we are considered in default and accordingly we reclassified the debt and debt discount from long term to short term liabilities.

          The effects of these changes on the consolidated balance sheet as of September 30, 2006, and the statements of operations for the twelve month period ended September 30, 2006 are summarized as follows:

Note 3
Nature of Operations

          Ignis Petroleum Corporation was incorporated in the State of Nevada on December 9, 2004.

          On May 11, 2005, the stockholders of Ignis Petroleum Corporation entered into a stock exchange agreement with Sheer Ventures, Inc. pursuant to which Sheer Ventures, Inc. issued 9,600,000 shares of common stock in exchange for all of the issued and outstanding shares of common stock of Ignis Petroleum Corporation. As a result of this stock exchange, Ignis Petroleum Corporation became a wholly owned subsidiary of Sheer Ventures, Inc. The stock exchange was accounted for as a reverse acquisition in which Ignis Petroleum Corporation acquired Sheer Ventures, Inc. in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations”. Also on May 11, 2005, and in connection with the stock exchange, D.B. Management Ltd., a corporation owned and controlled by Doug Berry, who was then the President, Chief Executive Officer, Secretary, Treasurer and sole director of Sheer Ventures, Inc., agreed to sell an aggregate of 11,640,000 shares of Sheer Ventures, Inc.’s common stock to six individuals, including Philipp Buschmann, the President, Secretary, Treasurer and sole director of Ignis Petroleum Corporation, for $0.0167 per share for a total purchase price of $194,000. The stock exchange and the stock purchase were both consummated on May 16, 2005.

          On July 11, 2005, Sheer Ventures, Inc. changed its name to Ignis Petroleum Group, Inc.

Our Operations

          We are engaged in the exploration, development, and production of crude oil and natural gas properties in the United States. We plan to explore for and develop crude oil and natural gas primarily in the onshore areas of the United States Gulf Coast. Our strategy is to build an energy portfolio that benefits from:

	•		the maturing of new petroleum technologies, such as seismic interpretation;
	•		the expected increase of oil and gas prices; and
	•		the availability of short “outsteps” in the same play as previously-discovered hydrocarbons.

          We have acquired several prospects that benefit from state-of-the-art 3-D seismic data interpretation. In addition, we are actively seeking to acquire other prospects. We employ and leverage industry technology, engineering, and operating talent. We may, from time to time, participate in high-value or fast-payback plays for short-term strategic reasons. We outsource lower value activities so that we can focus our efforts on the earliest part of the value chain while leveraging outstanding talent and strategic partnerships to execute our strategy. We believe this approach will allow us to grow our business through rapid identification, evaluation and acquisition of high-value prospects, while enabling us to use specialized industry talent and keep overhead costs to a minimum. We believe this strategy will result in significant growth in our reserves, production and financial strength.

Our Properties

          We own or have the right to acquire working interests in the following oil and gas prospects in the United States onshore Gulf Coast region.

North Wright Field Prospect

          We have the right to earn 75% of the working interest, which is equal to a 52.5% net revenue interest, in oil and gas leases and proposed operations covering the North Wright Field Prospect, which is located in Acadia Parish, Louisiana. We will carry 100% of the costs to drill and test each well drilled on the prospect. Bayou City Exploration, Inc. will be the operator of the prospect. The remaining 25% of the working interest in the prospect will be held by Argyle Energy, Inc., who will hold 12.5% of the working interest, and three other parties, who collectively will hold 12.5% of the working interest in the prospect. We are required to commence drilling operations on the prospect on or before December 31, 2006, or our interests in the prospect will revert to Argyle. We decided not to pursue the prospect and we should have taken a write down at June 30, 2006. We corrected this error in these financial statements and in the restated 10KSB/A2 for the period ended June 30, 2006. This resulted in decrease in exploration expense of $199,082 for the three months ended September 30, 2006.

Acom A-6 Property

          We have 25% of the working interest, which is equal to an 18.75% net revenue interest, in the Acom A-6 Prospect, which is located in Chambers County, Texas. Anadarko Petroleum Corporation is the operator of the prospect and holds the remainder of the working interest. Drilling of this prospect commenced production in August 2005 and was completed in October 2005. The Acom A-6 Prospect currently holds proved reserves and is producing oil and gas with revenues being earned by us. We have estimated remaining proved reserves of 8,701 Bbls of oil and 48,045 Mcf of gas. We have realized a total of 10,299 Bbls of oil at an average price of $61.09 and 41,179 Mcf of gas at an average price of $7.47 through September 30, 2006.

          Our partner and operator, Anadarko Petroleum Corporation, recently performed a workover of the well to clean out paraffin buildup, which had progressively reduced the oil and gas production rates. Upon completion of the project, the downhole pressure increased to levels close to those encountered when production began in October 2005, and average gross daily production rates increased to over 225 Bbls of crude oil and 1.15 Mcf of natural gas.

Crimson Bayou Prospect

          We have the right to earn 25% of the working interest, which is equal to a 17.88% net revenue interest, in the test well before payout and 20% of the working interest, which is equal to a 14.3% net revenue interest, after payout in the Crimson Bayou Prospect, which is located in Iberville Parish, Louisiana. Range Production I, L.P. is the operator of the prospect and will hold the remainder of the working interest. Drilling of the first test well on the prospect is expected to commence in 2007. The Crimson Bayou Prospect is currently unproved. We do not expect to drill this prospect and expect a full refund of our investment in the second quarter 2006.

Barnett Shale Property

          We hold 12.5% of the working interest, which is equal to a 9.38% net revenue interest before payout and 10% of the working interest, which is equal to a 7.5% net revenue interest after payout, in three wells located in the Barnett Shale trend in Greater Fort Worth Basin, Texas. Rife Energy Operating, Inc. is the operator of the prospect and holds a majority of the remaining working interest. All three wells have been drilled. One well has been completed and is producing oil and gas. The other two wells have been partially completed to test the geological formations and have some revenue production. During the fourth calendar quarter of 2006, we anticipate that we will complete these two wells, which will bring them up to their full production potential. The Barnett Shale Prospect currently holds proved reserves and is producing oil and gas. We have estimated proved reserves of 2,072 Bbl of oil and 13,085 Mcf of gas. Between April 6, 2006 and September 30, 2006 the Barnett Shale wells produced approximately 324 Bbls of oil and 2.1 Mcf of gas, net to us.

Sherburne Prospect

          On May 5, 2006 we entered into a participation agreement to drill the Sherburne Field Development prospect, located in Pointe Coupee Parish, Louisiana. Under the terms of the agreement, we will pay 15% of the drilling, testing and completion costs. Upon completion, we will earn a 15% working interest in the well before payout and an 11.25% working interest in the well after payout. Drilling operations commenced in August 2006 and was finished in September 2006. Multiple gas zones were detected. The commercial viability of the gas zones will be tested in the fourth quarter of 2006. The Sherburne Prospect is currently unproved.

Ignis Barnett Shale Joint Venture

          On September 27, 2006, through our then wholly-owned subsidiary, Ignis Barnett Shale, LLC, we entered into a purchase and sale agreement with W.B. Osborn Oil & Gas Operations., Ltd. and St. Jo Pipeline, Limited to acquire the 45% of W.B. Osborn Oil & Gas Operations and St. Jo Pipeline’s interest in the acreage, oil and natural gas producing properties and natural gas gathering and treating system located in the St. Jo Ridge Field in the North Texas Fort Worth Basin. The purchase price of the acquisition is $17,600,000, subject to certain adjustments, plus $850,000 payable by us in thirty-six monthly installments of $23,611, beginning one month after closing. In addition, we agreed to fund additional lease acquisitions up to a total of $5,000,000 for a period of two years. To fund Ignis Barnett Shale’s acquisition of the properties as contemplated by the Purchase Agreement, on November 15, 2006, we entered into an Amended and Restated Limited Liability Company Agreement of Ignis Barnett Shale with affiliates of Silver Point Capital, L.P.. Under the terms of the LLC Agreement, we agreed to manage the day-to-day operations of Ignis Barnett Shale and the Silver Point affiliates agreed to fund 100% of the purchase price of the

transaction and 100% of future acreage acquisitions and development costs of Ignis Barnett Shale to the extent approved by Silver Point. Ignis Barnett Shale’s budget and generally all material decisions affecting Ignis Barnett Shale are subject to the approval of Silver Point. Distributions from Ignis Barnett Shale will be made first to Silver Point until Silver Point has received a return of its aggregate capital contributions and a specified return on such contributions. Thereafter, we can earn up to 50% of the cash distributions after Ignis Barnett Shale meets certain performance criteria.

Note 4
Property and equipment

Oil and gas properties consisted of the following at September 30, 2006:

Note 5
Income Taxes

          Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. We had net operating income of approximately $1,450,000 for the three months ended September 30, 2006 and accumulated deficit of approximately $9,578,000. Pursuant to SFAS No. 109 we are required to compute tax asset benefits for net operating losses carried forward. Potential benefit of net operating losses have not been recognized in these financial statements because we cannot be assured it is more likely than not we will utilize the net operating losses carried forward in future years.

The components of the net deferred tax asset at September 30, 2006, and the effective tax rate and the elected amount of the valuation allowance are indicated below:

Note 6
Convertible Notes

          To obtain funding for our ongoing operations, we entered into a securities purchase agreement with Cornell Capital Partners, LP, an accredited investor, on January 5, 2006 and amended and restated on February 9, 2006 and April 28, 2006, for the sale of $5,000,000 in secured convertible debentures and 12,000,000 warrants. Cornell Capital provided us with an aggregate of $5,000,000 as follows:

•		$2,500,000 was disbursed on January 5, 2006;
•		$1,500,000 was disbursed on February 9, 2006; and
•		$1,000,000 was disbursed on April 28, 2006

Out of the $5 million in gross proceeds that we received from Cornell Capital upon issuance of all the secured convertible debentures, the following fees payable in cash were deducted or paid in connection with the transaction:

	•		$400,000 fee payable to Yorkville Advisors LLC, the general partner of Cornell Capital;
	•		$15,000 structuring fee payable to Yorkville Advisors LLC, the general partner of Cornell Capital;
	•		$5,000 due diligence fee payable to Cornell Capital; and
	•		$250,000 placement agent fee payable to Stonegate Securities, Inc.
	•		$65,000 other professional fees paid at closing

          Thus, we received total net proceeds of $4,260,000 from the issuance of secured convertible debentures to Cornell Capital. In connection with the issuance of secured convertible debentures to Cornell Capital, we were required under our placement agency agreement with Stonegate Securities, Inc. to issue to affiliates of Stonegate 75,000 shares of our common stock and 5-year warrants to purchase 400,000 shares of our common stock at an exercise price of $1.25.

          The secured convertible debentures bear interest at 7%, mature three years from the date of issuance, and are convertible into our common stock, at the selling stockholder’s option, at the lower of (i) $0.93 or (ii) 94% of the lowest volume weighted average prices of our common stock, as quoted by Bloomberg, LP, during the 30 trading days immediately preceding the date of conversion. Please refer to paragraph on limits of shares issuable on page 15. As of November 6, 2006, the lowest intraday trading price for our common stock during the preceding 30 trading days as quoted by Bloomberg, LP was $0.17 and, therefore, the conversion price for the secured convertible debentures was $0.1598. Based on this conversion price, the $5,000,000 in secured convertible debentures, excluding interest, were convertible into 31,289,112 shares of our common stock. The conversion price of the secured convertible debentures will be adjusted in the following circumstances:

	•		If we pay a stock dividend, engage in a stock split, reclassify our shares of common stock or engage in a similar transaction, the conversion price of the secured convertible debentures will be adjusted proportionately;
	•		If we issue rights, options or warrants to all holders of our common stock (and not to Cornell Capital) entitling them to subscribe for or purchase shares of common stock at a price per share less than $0.93 per share, other than issuances specifically permitted by the securities purchase agreement, as amended and restated, then the conversion price of the secured convertible debentures will be adjusted on a weighted-average basis;
	•		If we issue shares, other than issuances specifically permitted by the securities purchase agreement, as amended and restated, of our common stock or rights, warrants, options or other securities or debt that are convertible into or exchangeable for shares of our common stock, at a price per share less than $0.93 per share, then the conversion price will be adjusted to such lower price on a full-ratchet basis;
	•		If we distribute to all holders of our common stock (and not to Cornell Capital) evidences of indebtedness or assets or rights or warrants to subscribe for or purchase any security, then the conversion price of the secured convertible debenture will be adjusted based upon the value of the distribution as a percentage of the market value of our common stock on the record date for such distribution;
	•		If we reclassify our common stock or engage in a compulsory share exchange pursuant to which our common stock is converted into other securities, cash or property, Cornell Capital will have the option to either (i) convert the secured convertible debentures into the shares of stock and other securities, cash and property receivable by holders of our common stock following such transaction, or (ii) demand that we prepay the secured convertible debentures; and
	•		If we engage in a merger, consolidation or sale of more than one-half of our assets, then Cornell Capital will have the right to (i) demand that we prepay the secured convertible debentures, (ii) convert the secured convertible debentures into the shares of stock and other securities, cash and property receivable by holders of our common stock following such transaction, or (iii) in the case of a merger or consolidation, require the surviving entity to issue to a convertible debenture with similar terms.

          In connection with the securities purchase agreement, as amended and restated, we issued Cornell Capital warrants to purchase 6,000,000 shares of our common stock exercisable for a period of five years at an exercise price of $0.81 and warrants to purchase 6,000,000 shares of our common stock, exercisable for a period of five years at an exercise price of $0.93. We have the option to force the holder to exercise the warrants, as long as the shares underlying the warrants are registered pursuant to an effective registration statement, if our closing bid price trades above certain levels. If the closing bid price of our common stock is greater than or equal to $1.10 for a period of 15 consecutive trading days prior to the forced conversion, we can force the warrant holder to exercise the warrants exercisable at a price of $0.81. If the closing bid price of our common stock is greater than or equal to $1.23 for a period of 15 consecutive trading days prior to the forced conversion, we can force the warrant holder to exercise the warrants exercisable at a price of $0.93.

          In connection with the exercise of any of the warrants issued to Cornell Capital, we are required under our placement agency agreement with Stonegate Securities, Inc. to pay a fee to Stonegate equal to five percent (5%) of the gross proceeds of any such exercise.

          Cornell Capital has agreed to restrict its ability to convert the secured convertible debentures or exercise the warrants and receive shares of our common stock such that the number of shares of common stock held by it and its affiliates after such conversion does not exceed 4.99% of the then issued and outstanding shares of common stock. If the conversion price is less than $0.93, Cornell Capital may not convert more than $425,000 of secured convertible debentures in any month, unless we waive such restriction. In the event that the conversion price is equal to or greater than $0.93, there is no restriction on the amount Cornell Capital can convert in any month.

          We have the right, at our option, with three business days advance written notice, to redeem a portion or all amounts outstanding under the secured convertible debentures prior to the maturity date if the closing bid price of our common stock, is less than $0.93 at the time of the redemption. In the event of redemption, we are obligated to pay an amount equal to the principal amount being redeemed plus a 15% redemption premium, and accrued interest.

          In connection with the second amended and restated securities purchase agreement, we also entered into a second amended and restated registration rights agreement providing for the filing, within five days of April 28, 2006, of a registration statement with the Securities and Exchange Commission registering the common stock issuable upon conversion of the secured convertible debentures and warrants. We are obligated to use our best efforts to cause the registration statement to be declared effective no later than 130 days after filing and to insure that the registration statement remains in effect until the earlier of (i) all of the shares of common stock issuable upon conversion of the secured convertible debentures have been sold or (ii) January 5, 2008. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the registration statement no later than May 3, 2006, or if the registration statement is not declared effective by September 5, 2006, we are required pay to Cornell Capital, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the secured convertible debentures. The Company has accrued a liability of $100,000 at September 30, 2006 in connection with this provision.

          In connection with the securities purchase agreement, we executed a security agreement in favor of the investor granting them a first priority security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The security agreement states that if an event of default occurs under the secured convertible debentures or security agreements, the investor has the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements.

          We also pledged 18,750,000 shares of common stock to secure the obligations incurred pursuant to the securities purchase agreement, as amended and restated.

          In accordance with Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’, (“FASB 133”), we determined that the conversion feature of the secured convertible debentures met the criteria of an embedded derivative and therefore the conversion feature of the debt needed to be bifurcated and accounted for as a derivative. Due to the reset provisions of the secured convertible debentures, the debt does not meet the definition of “conventional convertible debt” because the number of shares which may be issued upon the conversion of the debt is not fixed. Therefore, the conversion feature fails to qualify for equity classification under EITF 00-19, and must be accounted for as a derivative liability.

          Under the Secured Convertible Debenture, Section 3(b)(i) limits the number of shares issuable to Cornell Capital Partners, LP upon conversion to 4.99% of the outstanding stock at time of conversion. Under section 39(a)(ii) of the same agreement, we are required to pay cash in lieu of shares for the portion greater than 4.99%. The amount of cash is determined by the number of shares issuable upon conversion and the current market price of our stock. Since the number of shares issuable is calculated using 94% of the market price, the cash conversion results in approximately a 6% premium paid on conversion. As a result, the value of the derivative liability related to the conversion in excess of 4.99% will be based on the Cash Premium Method rather than using the Black-Scholes model. The value of the conversion feature up to the 4.99% cap will be valued using the Black-Scholes model. We are correcting the error due to valuation in this restatement. As of September 30, 2006 we recorded a liability of $877,564.

          The holders of the secured convertible debentures and warrants have registration rights that required us to file a registration statement with the Securities and Exchange Commission to register the resale of the common stock issuable upon conversion of the debenture or the exercise of the warrants. Under EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock the ability to register stock was deemed to be outside of our control. Accordingly, the initial aggregate fair value of the warrants were recorded as a derivative liability in the consolidated balance sheet, and is marked to market at the end of each reporting period. For the three months ended September 30, 2006 the warrants were assigned a value of $3,694,293 which is corrected in this restatement. Prior to the restatement the warrants were not marked-to-market. Utilizing the Black-Scholes method we marked-to-market the warrants on a quarterly basis which resulted in a liability at September 30, 2006 and 2005 of $3,134,451 and $0, respectively. In accordance with EITF No. 00-19, EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments , the values assigned to both the debenture, conversion feature and the warrants were allocated based on their fair values. The fair market value of the warrants and conversion option at issuance exceeded the principal balance of the secured convertible debentures by $4,933,880. The excess value was expensed to interest expense at issuance. The amount allocated as a discount on the secured convertible debentures for the value of the warrants and conversion option will be amortized to interest expense, using the effective interest method, over the term of the secured convertible debentures. For the quarter ended September 30, 2006 we recorded the amortization of the debt discount using the effective interest method. For the period ended September 30, 2006, the amortization of the discount and resulting balance of convertible debt less debt discount was $6. As of September 30, 2006 we had not completed the registration statement and therefore we are considered in default of our agreement. The lender has not technically declared us in default of our amended and restated securities purchase agreement. For the three months ended September 30, 2006, we reclassified net convertible debenture debt from long term to short term liabilities along with the associated warrant and derivative liability on our consolidated balance sheet.

The convertible debenture liability is as follows at September 30, 2006:

Note 7
Stockholders’ Equity

          On July 20, 2006, we issued 25,000 shares of common stock to Roger A. Leopard for services to us as a director. This issuance is considered exempt pursuant to Rule 506 and/or Section 4(2) of the Securities Act. No underwriters were used. These shares were valued at $10,750 or $0.22 per share, the fair market value of the common stock at the date of grant.

           On July 20, 2006, we issued 25,000 shares of common stock to Geoff Evett for services to us as a director. This issuance is considered exempt pursuant to Rule 506 and/or Section 4(2) of the Securities Act. No underwriters were used. These shares were valued at $10,750 or $0.22 per share, the fair market value of the common stock at the date of grant.

          On September 21, 2006, we issued an aggregate of 218,125 shares of common stock to our advisors for services to us as advisors. This issuance is considered exempt pursuant to Rule 506 and/or Section 4(2) of the Securities Act. No underwriters were used. These shares were valued at $71,981 or $0.33 per share, the fair market value of the common stock at the date of grant.

Note 8
Basic and Diluted Net Loss per Share

          We compute net income (loss) per share in accordance with SFAS No. 128, “Earnings per Share”. SFAS No. 128 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible notes using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive.

          As of September 30, 2006, the senior convertible debentures diluted earnings per share to $0.03. The net income attributed to common stock was reduced by $1,694,323 represented by interest expense, debt discount amortization and changes in the derivative liability. The weighted average shares was increased by approximately 8,000,000 share assuming conversion of the senior convertible debentures.

          Any of our warrants which were outstanding in the periods presented were also excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive.

projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties, but we cannot assure you that management’s expectations, beliefs or projections will result or be achieved or accomplished.

Introduction

          For the year ended June 30, 2006, our auditors, in Note 2 of the Financial Statements from the Form 10-KSB/A 2, have noted that there is substantial doubt about our ability to continue as a going concern. Our existence is dependent upon management funding operations and raising sufficient capital. At this point in time it is impossible to state an amount of profitable operations and/or additional funding which we believe would remove the going concern opinion.

          We do not have any historical business operations. We have neither a history of earnings nor have we paid dividends. We are unlikely to realize earnings or pay dividends in the immediate or foreseeable future.

THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

          Revenues for the three months ended September 30, 2006 were $487,121. Revenue was a result of production of crude oil and natural gas at the Acom A-6 Prospect, located in Chambers County, Texas and the Barnett Shale prospect, located in Montague and Cooke counties, Texas. There were no revenues for the three months ended September 30, 2005.

          We incurred operating expenses in the amount of $887,766 and $1,050,858 for the three months ended September 30, 2006 and 2005, respectively.

          Depletion expense was $372,783 for the three months ended September 30, 2006. Depletion expense is related to the Acom A-6 prospect and the Barnett Shale prospect.

          For the three months ended September 30, 2006 general and administrative expenses of $483,015 were mainly comprised of payroll expenditures of $101,203, professional fees of $266,004 (of which $172,523 was in cash and $93,481 was a non-cash issuance of our common stock), advertising of $10,090, rent expense of $28,379, travel expenses of $28,799, and other office and related expenses of $48,540. The total cash expended for general and administrative expenses were $389,534. For the three months ended September 30, 2005 general and administrative expenses were $1,050,858. These operating expenses were mainly comprised of payroll expenditures of $280,562 (of which $207,000 was a non-cash issuance of our common stock), professional fees of $671,458 (of which $561,000 was a non-cash issuance of our common stock), advertising of $64,300, rent expense of $7,927, travel expenses of $10,007, and other office and related expenses of $16,605. The total cash expended for general and administrative expenses were $282,858.

          For the three months ended September 30, 2006 we incurred interest expense of $259,866 of which $67,099 represented amortization of the discount associated with the convertible debentures. In addition, we incurred a gain of $2,111,426 in connection with valuing our derivative and warrant liability at September 30, 2006. Both the amortization of the discount and the charge related to the derivative and warrant liability are non-cash charges.

PLAN OF OPERATION

          Our strategy is to identify and acquire prospects with attractive return potential and significant in-field development and expansion opportunities. We hope to accomplish this through a disciplined approach and a rigorous process of screening and evaluating projects. We seek to apply the most advanced technologies and methods with

staff, consultants, and operating partners having proven track records. Our strategy emphasizes the following core elements:

	•		Focused geography;
	•		Experienced team;
	•		Prospects with attractive risk to reward balance;
	•		Control over value-added activities; and
	•		Conservative financial and cost structure.

Focused Geography

          We intend to focus on specific geographic areas primarily along the onshore United States Gulf Coast. We believe that substantial undiscovered reserves remain in this region. Because of significant existing 3-D seismic data, numerous industry participants are currently engaged in the reprocessing and review of this data to identify prospective acreage. In addition, many of the major and large independent oil companies are focusing less on such areas as they are engaged in seeking “elephant” fields in the offshore and international areas. At present we own several prospects and we intend to initially focus our resources primarily to develop those opportunities. In the future, we intend to generate prospects both internally and in partnership with others to take advantage of area-specific expertise gained by exploration specialists over the past few decades.

Experienced team

          We have assembled a highly talented team of professionals with executive, exploration, engineering and financial experience. We intend to employ personnel with specialized geological, geophysical and other technical expertise to carry out the most crucial value-added functions. We seek to attract and retain a high-quality workforce by offering an entrepreneurial team-oriented environment, equity ownership and performance-based compensation programs.

Prospects with attractive risk to reward balance

          We plan to grow reserves through drilling a balanced portfolio of prospects. We will retain the majority of the interests in those prospects that we believe will have a highly attractive risk to reward balance and where we have high confidence in its success. Such prospects will have a high expected net present value relative to capital investment. Additionally, we will sell a portion of our interests in prospects that involve higher costs and greater risks, to industry partners. This will mitigate our exploration risk and fund the anticipated capital requirements and will enable us to gain access, through trades of property interest, to our partners’ prospects in order to diversify our exploratory program.

Control over value-added activities

          In our participation agreements with industry partners, we seek to exercise control over what we believe are the most critical functions in the exploration process. These functions include:

	•		Identification, evaluation and acquisition of prospects;
	•		Creation of development plans and design of drill sites;
	•		Management of portfolio risk; and
	•		Direction of critical reservoir management and production operations activities.

          Our approach is to perform the day to day field operations activities by contracting experienced operators with proven track records.

Conservative financial and cost structure

          We believe that a conservative financial structure is crucial to consistent, positive financial results. This has benefits for the management of cyclical swings in the industry and enables us to move quickly to take advantage of acquisition and drilling opportunities. In order to maximize our financial flexibility while improving overall stockholder returns, we plan to maintain a conservative debt-to-capital ratio. We seek to fund most of our ongoing capital expenditures from operating cash flow, reserving our debt capacity for potential investment opportunities that will profitably add to our program. Part of a sound financial structure is constant attention to costs, both operating and overhead. We will work to control our operating and overhead costs, and institute a formal, disciplined capital budgeting process. We will, wherever practicable, use partnerships to leverage our resources and enhance our ability to meet objectives.

Planned Projects

          The table below outlines specific oil and gas projects that we have planned through June 30, 2007 and the estimated time to for us to drill the test well to casing point or complete the test well and begin production on each of our prospects. We anticipate raising an additional $5 million during the fiscal year ending June 30, 2007 to conduct our planned operations. We currently do not have any contracts, plans or commitments for any additional financing. There is no guarantee that we will be successful in raising additional funds on terms that are acceptable to us, if at all. If we are unable to raise additional funds, we will be forced to reduce or eliminate the drilling activities outlined below.

          The table below outlines the following:

	•		the estimated amount of costs we have incurred to date for specific oil and gas projects, including the costs to acquire our interests in the prospects, if any;
	•		the estimated cash outlays that are expected to be incurred by us to drill test wells to casing point and determine whether or not to complete such test wells;
	•		the estimated cash outlays that are expected to be incurred by us to complete the test wells and begin production, if we deem it advisable to do so;
	•		the total costs expected to be incurred by us on each of the prospects; and
	•		the percentage of the total costs for each prospect expected to be incurred by us through December 31, 2006.

          If we are not satisfied with the results of our test wells on any of the prospects, we will not complete such well and no additional wells will be drilled on such prospect unless we decide to drill a substitute test well. If we are unable to raise an addition $5 million in gross proceeds from Cornell Capital or other sources during calendar year 2006, we will be forced to slow down or stop our drilling activities and the costs outlined below will be reduced accordingly.

LIQUIDITY AND CAPITAL RESOURCES

          As of September 30, 2006, we had a working capital deficit of $4,234,867. Excluding the reclassification of debt, derivative and warrant liability we had working capital of $222,846. For the three ended September 30, 2006, we generated a net cash flow deficit from operating activities of $341,599. Cash used in investing activities totaled $37,276, which was utilized for the purchase of oil and gas properties. Cash provided by financing activities totaled $500,000.

          We expect continued capital expenditures through the end of calendar year 2006, contingent upon raising capital. These anticipated expenditures are for seismic data acquisitions, land and drilling rights acquisitions, drilling programs, overhead and working capital purposes. We have sufficient funds to conduct our operations for approximately four months under our current drilling plan without additional external capital or improved operating income. We anticipate that we will need approximately $5 million to continue our planned operations for the next 12 months, depending on revenues from operations. Additional financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to secure additional capital, we will be forced to slow or stop our drilling activities.

          By reducing our drilling activity to a level consistent with our current capital resources, we believe we could continue to operate our business for at least 12 months. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.

          We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not been a source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. We cannot assure you that we will be successful in obtaining additional funding.

          We will still need additional investments in order to continue operations to cash flow break even. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new

equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

          Our registered independent auditors have stated in their report dated October 13, 2006, that we are dependent on outside financing, lack sufficient working capital, and have incurred recurring losses from operations. These factors among others may raise substantial doubt about our ability to continue as a going concern.

          To obtain funding for our ongoing operations, we entered into a securities purchase agreement with Cornell Capital Partners, LP, an accredited investor, on January 5, 2006 and amended and restated on February 9, 2006 and April 28, 2006, for the sale of $5,000,000 in secured convertible debentures and 12,000,000 warrants. The investors provided us with an aggregate of $5,000,000 as follows:

	•		$2,500,000 was disbursed on January 5, 2006;
	•		$1,500,000 was disbursed on February 9, 2006; and
	•		$1,000,000 was disbursed on April 28, 2006.

Out of the $5 million in gross proceeds we received from Cornell Capital upon issuance of the secured convertible debentures, the following fees payable in cash have been deducted in connection with the transaction:

	•		$400,000 fee payable to Yorkville Advisors LLC, the general partner of Cornell Capital;
	•		$15,000 structuring fee payable to Yorkville Advisors LLC, the general partner of Cornell Capital;
	•		$5,000 due diligence fee payable to Cornell Capital;
	•		$250,000 placement agent fee payable to Stonegate Securities, Inc.; and
	•		$65,000 other professional fees paid at closing

          Thus, we received net proceeds of $4,265,000 from the issuance of secured convertible debentures to Cornell Capital, prior to any other expenses we have or will incur in connection with the transaction. In connection with the issuance of secured convertible debentures to Cornell Capital, we were required under our placement agency agreement with Stonegate Securities, Inc. to issue to affiliates of Stonegate 75,000 shares of our common stock and 5-year warrants to purchase 400,000 shares of our common stock at an exercise price of $1.25.

          The secured convertible debentures bear interest at 7%, mature three years from the date of issuance, and are convertible into our common stock, at the selling stockholder’s option, at the lower of (i) $0.93 or (ii) 94% of the lowest volume weighted average prices of our common stock, as quoted by Bloomberg, LP, during the 30 trading days immediately preceding the date of conversion. Accordingly, there is no limit on the number of shares into which the secured convertible debentures may be converted. As of November 6, 2006, the lowest intraday trading price for our common stock during the preceding 30 trading days as quoted by Bloomberg, LP was $0.17 and, therefore, the conversion price for the secured convertible debentures was $0.1598. Based on this conversion price, the $5,000,000 in secured convertible debentures, excluding interest, were convertible into 31,289,112 shares of our common stock. The conversion price of the secured convertible debentures will be adjusted in the following circumstances:

	•		If we pay a stock dividend, engage in a stock split, reclassify our shares of common stock or engage in a similar transaction, the conversion price of the secured convertible debentures will be adjusted proportionately;
	•		If we issue rights, options or warrants to all holders of our common stock (and not to Cornell Capital) entitling them to subscribe for or purchase shares of common stock at a price per share less than $0.93 per share, other than issuances specifically permitted be the securities purchase agreement, as amended and restated, then the conversion price of the secured convertible debentures will be adjusted on a weighted-average basis;

	•		If we issue shares, other than issuances specifically permitted be the securities purchase agreement, as amended and restated, of our common stock or rights, warrants, options or other securities or debt that are convertible into or exchangeable for shares of our common stock, at a price per share less than $0.93 per share, then the conversion price will be adjusted to such lower price on a full-ratchet basis;
	•		If we distribute to all holders of our common stock (and not to Cornell Capital) evidences of indebtedness or assets or rights or warrants to subscribe for or purchase any security, then the conversion price of the secured convertible debenture will be adjusted based upon the value of the distribution as a percentage of the market value of our common stock on the record date for such distribution;
	•		If we reclassify our common stock or engage in a compulsory share exchange pursuant to which our common stock is converted into other securities, cash or property, Cornell Capital will have the option to either (i) convert the secured convertible debentures into the shares of stock and other securities, cash and property receivable by holders of our common stock following such transaction, or (ii) demand that we prepay the secured convertible debentures; and
	•		If we engage in a merger, consolidation or sale of more than one-half of our assets, then Cornell Capital will have the right to (i) demand that we prepay the secured convertible debentures, (ii) convert the secured convertible debentures into the shares of stock and other securities, cash and property receivable by holders of our common stock following such transaction, or (iii) in the case of a merger or consolidation, require the surviving entity to issue to a convertible debenture with similar terms.

          In connection with the securities purchase agreement, as amended and restated, we issued Cornell Capital warrants to purchase 6,000,000 shares of our common stock exercisable for a period of five years at an exercise price of $0.81 and warrants to purchase 6,000,000 shares of our common stock, exercisable for a period of five years at an exercise price of $0.93. Six million of the warrants were issued upon closing on January 5, 2006 and the other six million were issued on April 28, 2006 in connection with amending and restating our securities purchase agreement. We have the option to force the holder to exercise the warrants, as long as the shares underlying the warrants are registered pursuant to an effective registration statement, if our closing bid price trades above certain levels. If the closing bid price of our common stock is greater than or equal to $1.10 for a period of 15 consecutive trading days prior to the forced conversion, we can force the warrant holder to exercise the warrants exercisable at a price of $0.81. If the closing bid price of our common stock is greater than or equal to $1.23 for a period of 15 consecutive trading days prior to the forced conversion, we can force the warrant holder to exercise the warrants exercisable at a price of $0.93.

          In connection with the exercise of any of the warrants issued to Cornell Capital, we are required under our placement agency agreement with Stonegate Securities, Inc. to pay a fee to Stonegate equal to five percent (5%) of the gross proceeds of any such exercise.

          The investor has contractually agreed to restrict its ability to convert the secured convertible debentures or exercise the warrants and receive shares of our common stock such that the number of shares of common stock held by it and its affiliates after such conversion does not exceed 4.99% of the then issued and outstanding shares of common stock. If the conversion price is less than $0.93, the investor may not convert more than $425,000 of secured convertible debentures in any month, unless we waive such restriction. In the event that the conversion price is equal to or greater than $0.93, there is no restriction on the amount that the investor can convert in any month.

          We have the right, at our option, with three business days advance written notice, to redeem a portion or all amounts outstanding under the secured convertible debentures prior to the maturity date if the closing bid price of our common stock, is less than $0.93 at the time of the redemption. In the event of a redemption, we are obligated to pay an amount equal to the principal amount being redeemed plus a 15% redemption premium, and accrued interest.

          In connection with the second amended and restated securities purchase agreement, we also entered into a second amended and restated registration rights agreement providing for the filing, within five days of April 28, 2006, of a registration statement with the Securities and Exchange Commission registering the common stock issuable upon conversion of the secured convertible debentures and warrants. We are obligated to use our best efforts to cause the registration statement to be declared effective no later than 130 days after filing and to insure that the registration statement remains in effect until the earlier of (i) all of the shares of common stock issuable upon

conversion of the secured convertible debentures have been sold or (ii) January 5, 2008. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the registration statement no later than May 3, 2006, or if the registration statement is not declared effective by September 5, 2006, we are required pay to Cornell Capital, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the secured convertible debentures. The Company has accrued a liability of $100,000 at September 30, 2006 in connection with this provision. The lender has not technically declared us in default of our amended and restated securities purchase agreement.

          In connection with the securities purchase agreement, we executed a security agreement in favor of the investor granting them a first priority security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The security agreement states that if an event of default occurs under the secured convertible debentures or security agreements, the investor has the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements.

          We also pledged 18,750,000 shares of common stock to secure the obligations incurred pursuant to the securities purchase agreement, as amended and restated.

          On August 28, 2006, we entered into an Amended and Restated Loan Agreement with Petrofinanz GmbH, which amended and restated the Loan Agreement with Petrofinanz GmbH, dated December 22, 2005, in the original principal amount of $100,000. Pursuant to the Amended and Restated Loan Agreement, Petrofinanz agreed to loan us an additional $500,000. Interest on the entire loan amount will accrue interest at a rate of 10% per annum beginning August 28, 2006. We must repay the principal amount of the loan at a rate of $30,000 per month beginning January 28, 2007 and continuing until the February 28, 2008, at which time the entire outstanding principal amount and accrued interest will be due. Petrofinanz may accelerate the loan if we obtain new financing from the issuance of debt or equity securities in excess of $1,000,000 prior to the loan’s maturity date.

ACCOUNTING CHANGES AND ERROR CORRECTIONS

          For the three-month period ended September 30, 2006, we elected to reclassify the costs as presented in the Statement of Operations. The original presentation did not separately disclose lease operating expense and production taxes for oil and gas operations. We reclassified the netted oil and natural gas sales from $471,214 to $487,121. Production tax was $27,170. We reclassified lease operating expense for the Acom A-6 well from proved property to expense in the amount of $2,074.

          We identified an error in recording oil and gas properties. The Acom A-6 well included an over-accrual of capitalized costs by approximately $100,000. We wrote down the Inglish Sisters #3 well effective June 30, 2006 as stated in our Amendment No. 2 to our Annual Report on Form 10-KSB resulting in an overall decrease in oil and gas properties of $146,966.

          We identified an error in recording depletion. We recorded a reduction of $30,410 in depletion expense under the units of production method which has been corrected in this restatement.

          We identified an error in exploration expense. The North Wright Field should have been written off to expense at June 30, 2006. We corrected this error in our Amendment No.2 to our Annual Report on Form 10-KSB, resulting in the decrease in exploration expense of $199,082 for the period ended September 30, 2006.

          The original presentation included amortization of debt discount in general and administrative expense. We reclassified amortization expense of $66,640 to interest expense.

          We identified errors in our accounting for the warrant liability for warrants issued to Cornell Capital Partners, LP. The warrant liability error relates to adjusting the warrant liability for changes in fair market value on a quarterly basis. We historically recorded the fair market

value of the warrant liability at inception with no subsequent adjustments for changes in the market value. As a result, we did not record the gain/loss on change in the warrant liability as of September 30, 2006.

          The warrant liability error resulted in an overstatement of warrant liability and related expense of $559,842 for the three months ended September 30, 2006. These corrections had no effect on our revenue, total assets, cash flow or liquidity for any period. In addition, we identified an error in that the recording of the original warrants dated April 28, 2006 at $0.93 and warrants dated April 28, 2006 at $0.81 were recorded $374,000 below fair market value. The fair market value exceeded the principal value of $5,000,000 and any fair market value in excess of the principal value should have been expensed at inception of the recording of the debt which properly states the true liability. We will use the full fair market value as calculated by the Black-Scholes model to record gain/loss on the value of the warrants. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the registration statement no later than May 3, 2006, or if the registration statement is not declared effective by September 5, 2006 we are considered in default. As of September 30, 2006 the registration statement had not been declared effective, therefore we are considered in default and accordingly we reclassified the warrant liability from long term to short term liabilities.

          We identified an error in our accounting for the derivative liability issued to Cornell Capital Partners LP. Under the Secured Convertible Debenture, Section 3(b)(i) limits the number of shares issuable to Cornell Capital Partners, LP upon conversion to 4.99% of the outstanding stock at time of conversion. Under section 39(a)(ii) of the same agreement, we are required to pay cash in lieu of shares for the portion greater than 4.99%. The amount of cash is determined by the number of shares issuable upon conversion and the current market price of our stock. Since the number of shares issuable is calculated using 94% of the market price, the cash conversion results in approximately a 6% premium paid on conversion. As a result, the value of the derivative liability related to the conversion in excess of 4.99% will be based on the conversion premium at the end of the reporting period, the Cash Premium Method rather than using the Black-Scholes model. We corrected the derivative liability for the period ended September 30, 2006 resulting in a decrease in the liability of $4,441,585. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the registration statement no later than May 3, 2006, or if the registration statement is not declared effective by September 5, 2006 we are considered in default. As of September 30, 2006 the registration statement had not been declared effective, therefore we are considered in default and accordingly we reclassified the derivative liability from long term to short term liabilities.

          We also identified an error in accounting for the amortization of the debt discount related to the $5,000,000 convertible debenture issued to Cornell Capital Partners, LP. We calculated the amortization of the debt discount using an amortization method that is not in accordance with generally accepted accounting principles. We corrected the calculation using the effective interest method, which results in near zero amortization in the first year and exponentially increasing in the later years because the debt balance (net of discount) is zero at inception. We corrected the method of amortization in this restatement resulting in a decrease to interest expense and increase to the debt discount of $22,885. For the period ended September 30, 2006 the balance of convertible debt less debt discount was $6. As of September 30, 2006 the registration statement had not been declared effective, therefore we are considered in default and accordingly we reclassified the debt and debt discount from long term to short term liabilities.

          The effects of these changes on the consolidated balance sheet as of September 30, 2006, and the statements of operations for the three month period ended September 30, 2006 are summarized as follows:

CRITICAL ACCOUNTING POLICIES

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such difference may be material to our financial statements. We believe that the following discussion addresses our Critical Accounting Policies.

          Depreciation, depletion and amortization, based on cost less estimated salvage value of the asset, are primarily determined under either the unit-of-production method, which is based on estimated asset service life taking obsolescence into consideration. Maintenance and repairs, including planned major maintenance, are expensed as incurred. Major renewals and improvements are capitalized and the assets replaced are retired.

          The accounting for our business is subject to special accounting rules that are unique to the oil and gas industry. There are two allowable methods of accounting for oil and gas business activities: the successful-efforts method and the full-cost method. There are several significant differences between these methods. Under the

successful-efforts method, costs such as geological and geophysical (G&G), exploratory dry holes and delay rentals are expensed as incurred, where under the full-cost method these types of charges would be capitalized to their respective full-cost pool.

          We use the “successful efforts” method to account for our exploration and production activities. Under this method, costs are accumulated on a field-by-field basis. The costs of drilling exploratory wells shall be capitalized as part of the enterprise’s uncompleted wells, equipment, and facilities pending determination of whether the well has found proved reserves. If the well has found proved reserves, the capitalized costs of drilling the well shall become part of the enterprise’s wells and related equipment and facilities (even though the well may not be completed as a producing well); if, however, the well has not found proved reserves, the capitalized costs of drilling the well, net of any salvage value, shall be charged to expense. To date, we have incurred $2,813,268 in dry hole costs that have been expensed as such. We have yet to determine any other dry holes that we are drilling or plan to drill. Costs of productive wells and development dry holes are capitalized and amortized on the unit-of-production method for each field.

          Acquisition costs of proved properties are amortized using a unit-of-production method, computed on the basis of total proved oil and gas reserves. Significant unproved properties are assessed for impairment individually and valuation allowances against the capitalized costs are recorded based on the estimated economic chance of success and the length of time that we expect to hold the properties. The valuation allowances are reviewed at least annually. Other exploratory expenditures, including geological, geophysical and 3-D seismic survey costs are expensed as incurred.

          Production costs are expensed as incurred.

          In the absence of a determination as to whether the reserves that have been found can be classified as proved we will not carry the costs of drilling such an exploratory well as an asset for more than one year following completion of drilling. If, after that year has passed, a determination that proved reserves have been found cannot be made, we will assume the well is impaired and charge its costs to expense.

          Proved oil and gas properties held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

          Liabilities for environmental costs are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. These liabilities are not reduced by possible recoveries from third parties, and projected cash expenditures are not discounted. To date we have not had any environmental cost liabilities.

          We accrue for contingencies in accordance with Statement of Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require our exercise of judgment both in assessing whether or not a liability or loss has been incurred and estimating the amount of probable loss. To date we have not had any significant contingency accruals.

          We account for income taxes in accordance with SFAS No.109. Since we are in the early stages of our development, our deferred tax assets are not expected to be utilized in the future. We have provided a full valuation allowance against the assets.

          We adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

          In February 2006, the FASB issued FASB Statement No. 155 (SFAS 155), “Accounting for Certain Hybrid Financial Instruments: an amendment of FAS 133 and 140.” FAS 155 nullifies the guidance from the FASB’s

Derivatives Implementation Group (DIG) in Issue D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets, which deferred the application of the bifurcation requirements of SFAS 133 for certain beneficial interests. FAS 155 provides a fair value measurement option for certain hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation and requires that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or whether they are hybrid instruments that contain embedded derivatives requiring bifurcation. FAS 155 also provides clarification on specific points related to derivative accounting. FAS 155 is effective for fiscal years beginning after September 15, 2006.

          In June 2001, the FASB issued SFAS No.143 “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires that an asset retirement obligation associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which a legal obligation is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset. The cost of the tangible asset, including the initially recognized asset retirement obligation, is depleted such that the cost of the asset retirement obligation is recognized over the life of the asset. We elected not to recognize asset retirement obligation during prior periods as the amount was immaterial and did not materially affect our obligations or misstate income.

PART II — OTHER INFORMATION

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Ignis Petroleum Group, Inc. (Registrant)
Date: November 14 , 2007				By:		/s/ Michael Piazza
				Michael Piazza,
				President, Chief Executive Officer and Treasurer

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