-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KoRbJzDADtIGbawC0J2JnGWDsZpXPkmZyzR4K8Hp/NzARhLMbcIuXVBRi6uaxnTh AaGfpg/d8xrYDGCHuy232A== 0001193805-07-002084.txt : 20070814 0001193805-07-002084.hdr.sgml : 20070814 20070814171345 ACCESSION NUMBER: 0001193805-07-002084 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070814 DATE AS OF CHANGE: 20070814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Baseline Oil & Gas Corp. CENTRAL INDEX KEY: 0001291983 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 300226902 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-51888 FILM NUMBER: 071056755 BUSINESS ADDRESS: STREET 1: 16161 COLLEGE OAK, SUITE 101 CITY: SAN ANTONIO STATE: TX ZIP: 78249 BUSINESS PHONE: 210-408-6019 EXT 2 MAIL ADDRESS: STREET 1: 16161 COLLEGE OAK, SUITE 101 CITY: SAN ANTONIO STATE: TX ZIP: 78249 FORMER COMPANY: FORMER CONFORMED NAME: College Oak Investments, Inc. DATE OF NAME CHANGE: 20040527 10QSB 1 e602459_10qsb-baseline.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITITES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2007 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 BASELINE OIL & GAS CORP. (Name of small business issuer in its charter) Nevada 30-0226902 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11811 North Freeway (I-45), Suite 200 Houston, Texas 77060 (Address of principal executive office) (281) 591-6100 (Issuer's telephone number) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes |_| No |X| State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of August 9, 2007, there were 33,054,150 shares of common stock, $0.001 par value, outstanding. Transitional Small Business Disclosure Format (Check one). Yes |_| No |X| PART I - FINANCIAL INFORMATION Item 1. Financial Statements BASELINE OIL & GAS CORP. BALANCE SHEETS (Unaudited)
June 30, December 31, 2007 2006 ---- ---- ASSETS CURRENT ASSETS Cash and marketable securities $ 156,396 $ 123,678 Cash - restricted 1,131,107 -- Accounts receivable, trade 1,175,289 -- Prepaid and other current assets 123,661 125,000 ------------ ------------ Total current assets 2,586,453 248,678 ------------ ------------ OIL AND NATURAL GAS PROPERTIES - using successful efforts method of accounting Proved properties 27,416,424 -- Unproved properties 8,092,302 7,810,135 Less accumulated depletion, depreciation and amortization (514,580) -- ------------ ------------ Oil and natural gas properties, net 34,994,146 7,810,135 ------------ ------------ OTHER ASSETS Deferred acquisition costs -- 99,631 Property acquisition - deposit -- 1,000,000 Deferred loan costs, net of accumulated amortization of $2,141,832 and $237,192, respectively 3,767,604 88,947 Other property and equipment, net of accumulated depreciation of $3,125 at June 30, 2007 37,635 -- ------------ ------------ Total other assets 3,805,239 1,188,578 ------------ ------------ TOTAL ASSETS $ 41,385,838 $ 9,247,391 ============ ============
The accompanying notes are an integral part of the financial statements. 2 BASELINE OIL & GAS CORP. BALANCE SHEETS (Unaudited)
June 30, December 31, 2007 2006 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable - trade 599,074 82,873 Accrued expenses 417,575 172,750 Royalties payable 508,440 -- Short term notes to related parties 100,000 -- Short term debt and current portion of long-term debt 2,257,450 1,996,751 Derivative liability - short term 956,463 104,896 ------------ ------------ Total current liabilities 4,839,002 2,357,270 ------------ ------------ NONCURRENT LIABILITIES Long-term debt 30,218,224 -- Asset retirement obligations 450,779 -- Derivative liability - long term 834,490 -- ------------ ------------ Total noncurrent liabilities 31,503,493 -- ------------ ------------ Total liabilities 36,342,495 2,357,270 ------------ ------------ COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Common stock, $0.001 par value per share; 140,000,000 shares authorized; 32,210,238 and 31,342,738 shares issued and outstanding, respectively 32,211 31,343 Additional paid-in capital 31,629,156 28,423,418 Accumulated other comprehensive income (1,691,686) -- Accumulated deficit (24,926,338) (21,564,640) ------------ ------------ Total stockholders' equity 5,043,343 6,890,121 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,385,838 $ 9,247,391 ============ ============
The accompanying notes are an integral part of the financial statements. 3 BASELINE OIL & GAS CORP. STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30, ----------------------------- 2007 2006 ---- ---- REVENUES Oil and gas sales $ 2,819,739 $ -- ------------ ------------ OPERATING EXPENSES Production 1,309,387 -- General and administrative 563,823 839,019 Depreciation, depletion and amortization 517,705 -- Accretion expense 12,332 -- ------------ ------------ Total operating expenses 2,403,247 839,019 ------------ ------------ Net income (loss) from operations 416,492 (839,019) OTHER INCOME (EXPENSE) Other income 23,366 -- Interest income 102 37,513 Interest expense (2,954,872) (354,418) Unrealized gain (loss) on derivative instruments (40,806) 433,650 ------------ ------------ Total other expense, net (2,972,210) 116,745 ------------ ------------ NET LOSS $ (2,555,718) $ 722,274 ============ ============ OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gain (loss) on derivative instruments (1,691,686) -- ------------ ------------ Total comprehensive loss $ (4,247,404) $ (722,274) ============ ============ NET LOSS PER SHARE - Basic and Diluted $ (0.08) $ (0.02) ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING BASIC AND DILUTED 31,641,960 39,303,227 ============ ============
The accompanying notes are an integral part of the financial statements. 4 BASELINE OIL & GAS CORP. STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended June 30, ----------------------------- 2007 2006 ---- ---- REVENUES Oil and gas sales $ 2,819,739 $ -- ------------ ------------ OPERATING EXPENSES Production 1,309,387 -- General and administrative 851,929 1,265,274 Depreciation, depletion and amortization 517,705 -- Accretion expense 12,332 -- ------------ ------------ Total operating expenses 2,691,353 1,265,274 ------------ ------------ Net income (loss) from operations 128,386 (1,265,274) OTHER INCOME (EXPENSE) Other income 23,366 -- Interest income 860 59,543 Interest expense (3,519,939) (764,257) Unrealized gain on derivative instruments 5,629 333,677 ------------ ------------ Total other expense, net (3,490,084) (371,037) ------------ ------------ NET LOSS $ (3,361,698) $ (1,636,311) ============ ============ OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gain (loss) on derivative instruments (1,691,686) -- ------------ ------------ Total comprehensive loss $ (5,053,384) $ (1,636,311) ============ ============ NET LOSS PER SHARE - Basic and Diluted $ (0.11) $ (0.04) ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING BASIC AND DILUTED 31,514,831 37,440,583 ============ ============
The accompanying notes are an integral part of the financial statements. 5 BASELINE OIL & GAS CORP. STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ----------------------------- 2007 2006 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (3,361,698) $ (1,636,311) Adjustments to reconcile net loss to net cash provided by operating activities Share based compensation 55,371 -- Common stock issued for consulting fees 150,000 -- Depreciation, depletion and amortization expense 517,705 -- Amortization of debt discount 426,999 118,596 Amortization of deferred loan costs 2,047,140 637,243 Derivative gain (loss) (5,629) (333,677) Accretion expense 12,332 -- Changes in operating assets and liabilities Cash - restricted (1,131,107) -- Accounts receivable, trade (1,175,289) -- Prepaid and other current assets 101,050 (37,500) Accounts payable - trade 516,201 (27,486) Accrued liabilities 368,263 387,774 Royalties payable 508,440 -- ------------ ------------ Net cash used in operating activities (970,222) (891,361) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of proved oil and gas properties (28,195,001) -- Development costs incurred (361,345) -- Additions to unproved properties (282,167) (4,664,723) Purchase of property and equipment, other (40,760) -- ------------ ------------ Net cash used in investing activities (28,879,273) (4,664,723) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 30,013,224 -- Proceeds from short term debt 1,700,000 -- Proceeds from short tern notes to related parties 100,000 -- Repayments of short term debt (1,761,011) (16,496) Proceeds from common stock sales, net -- 8,284,109 Deferred loan costs incurred (170,000) -- ------------ ------------ Net cash provided by financing activities 29,882,213 8,267,613 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 32,718 2,711,529 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 123,678 206,489 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 156,396 $ 2,918,018 ============ ============ SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 474,641 $ -- Cash paid for income taxes -- -- NON-CASH ACTIVITIES Unrealized gain/(loss) on derivative liability (1,686,057) 333,677 Warrants issued in conjunction with debt 2,687,797 -- Stock issued for note extension 190,000 -- Asset retirement obligation incurred 400,298 -- Warrants issued in conjunction with stock issuance -- 505,671 Stock issued on conversion of debt -- 350,000 Stock issued in lieu of cash interest 93,750 --
The accompanying notes are an integral part of the financial statements. 6 Baseline Oil & Gas Corp. Notes to Unaudited Financial Statements June 30, 2007 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Organization Baseline Oil & Gas Corp. ("Baseline" or the "Company") is an independent exploration and production company primarily engaged in the acquisition, development, production and exploration of oil and natural gas properties onshore in the United States. Basis of Presentation The accompanying unaudited interim financial statements of Baseline have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (the "SEC"), and should be read in conjunction with Baseline's audited financial statements for the year ended December 31, 2006, and notes thereto, which are included in the Company's annual report on Form 10-KSB filed with the SEC on April 17, 2007. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements, which would substantially duplicate the disclosure required in Baseline's 2006 annual financial statements have been omitted. Use of Estimates The preparation of these financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Oil and Natural Gas Properties Baseline uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, to drill and equip development wells and related asset retirement costs are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of the impairment by providing an impairment allowance. Capitalized costs of producing oil and gas properties, after considering estimated residual salvage values, are depreciated and depleted by the unit-of-production method. Support equipment and other property and equipment are depreciated over their estimated useful lives. On the sale or retirement of a complete unit of proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income. 7 On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained. Asset Retirement Obligations The Company records a liability for legal obligations associated with the retirement of tangible long-lived assets in the period in which they are incurred in accordance with Statement of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset Retirement Obligations." Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded the carrying amount of the related oil and natural gas properties are increased. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted over the useful life of the related asset. Revisions to such estimates are recorded as adjustments to the ARO, capitalized asset retirement costs and charges to operations during the periods in which they become known. At the time the abandonment cost is incurred, the Company will be required to recognize a gain or loss if the actual costs do not equal the estimated costs included in ARO. Revenue and Cost Recognition The Company uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes to which the Company is entitled based on our interest in the properties. Costs associated with production are expensed in the period incurred. NOTE 2 - CONCENTRATION OF RISK At June 30, 2007, Baseline's cash in financial institutions exceeded the federally insured deposits limit by $1,087,503. Restricted cash in the amount of $1,131,107 represents cash in a bank account controlled by an administrative agent under a credit agreement (see NOTE 4). NOTE 3 - ACQUISITION OF NORTH TEXAS PROPERTIES On April 12, 2007, Baseline acquired an interest in producing oil and gas properties from Statex Petroleum I, L.P. and Charles W. Gleeson LP. The properties consist of a 100% working interest in approximately 4,600 acres in Stephens County in North Texas (the "North Texas Assets"). The purchase price was $28,000,000, plus interest from January 15, 2007 until the date of closing and an adjustment for cash flow from the properties from the effective date until the date of closing. In addition, Baseline has capitalized $1,551,106 in costs associated with the transaction and $438,447 related to the asset retirement obligations associated with the properties. Upon execution of the Purchase and Sale Agreement Baseline paid a $1,000,000 non-refundable deposit to be credited against the purchase price. Baseline entered into an amendment to the agreement, whereby for an additional deposit of $300,000, the deadline to close on the purchase was extended. The effective date for the transfer of the assets was February 1, 2007. Baseline funded the adjusted purchase price, less the deposits previously paid, and a portion of the costs associated with the transaction through borrowings under a newly created credit agreement (see Note 4). 8 NOTE 4 - DEBT Total debt at June 30, 2007 and December 31, 2006 consisted of the following: June 30, 2007 December 31, 2006 ------------- ----------------- Short term notes to related parties $ 100,000 $ -- Other short term notes 87,450 48,750 Convertible notes, net of discount of $0 and $426,999 2,375,000 1,948,001 Term loans under credit agreement 9,713,224 -- Revolving loans under credit agreement 20,300,000 -- ------------ ------------ 32,575,674 1,996,751 Less short term debt and current portion of long-term debt (2,357,450) (1,996,751) ------------ ------------ Long-term debt $ 30,218,224 $ -- ============ ============ Long-term Debt On April 12, 2007, Baseline entered into a $75 million Credit Agreement (the "Credit Agreement") with Drawbridge Special Opportunities Fund LP ("Drawbridge"), as Administrative Agent and various named lenders (the "Lenders"). The Credit Agreement provides for a revolving credit commitment of up to $54.7 million and a Term Loan Commitment of $20.3 million. Revolving Loans must be paid on or before April 12, 2010 and Term Loans on or before October 12, 2010. The Revolving Loans accrue interest at the Prime Rate and the Term Loans accrue interest at the Prime Rate or 7.5%, whichever is greater, plus 3%. Additionally, Baseline granted the Lenders an overriding royalty interest ranging between 2% and 3% in its existing oil and gas properties and any properties that it acquires while the Credit Agreement is in effect. The Credit Agreement requires Baseline's revenues to be deposited into a lockbox account controlled by the Administrative agent. Funds in the lockbox account on the last business day of the month are utilized, in order of priority, to pay any amounts due for the overriding royalty interest granted under the Credit Agreement, amounts due to third parties under swap agreements, lease operating costs approved by the Administrative agent, interest due on the Term Loans and Revolving loans and general and administrative expenses up to $225,000 per quarter. Any amounts remaining in the lockbox account in excess of $250,000 are to be used to repay outstanding principal, to be applied first to the Term Loans. Baseline's obligations under the Credit Agreement are secured by a first lien on all of its existing oil and gas properties, including the North Texas Assets, and any properties acquired while the Credit Agreement is in effect. On April 12, 2007 Baseline drew down $9.7 million as a Revolving Loan. In addition, Baseline drew down $20.3 million as a Term Loan. The funds were utilized to repay the bridge loan financing, including accrued interest and fees, and to fund the adjusted purchase price and a portion of the capitalized transaction costs for the acquisition of the North Texas Assets. The Company recorded a discount of $2,678,000 related to the conveyance of the overriding royalty interest to the Lenders as discussed above. As of June 30, 2007, $44,633 of this discount has been amortized as a component of interest expense. This discount is being amortized over the expected term of the Credit Agreement using the effective interest method. On May 30, 2007 holders of Baseline's 10% convertible notes unanimously agreed to extend the maturity date of the notes from May 15, 2007 to November 15, 2007. As consideration for the extension of the notes, Baseline issued 380,000 shares in aggregate to the holders of the notes and increased the coupon rate on the notes from 10% to 12% per annum effective May 16, 2007. Bridge Loan Financing On March 15, 2007, Baseline borrowed $1,700,000 from a single accredited investor, Lakewood Group, LLC ("Lakewood"). Baseline issued to Lakewood a Senior Secured Debenture ("Debenture") bearing interest at 16%, a common stock purchase warrant to purchase up to 3,000,000 shares of Common Stock at an exercise price 9 of $0.50 per share, and entered into a security agreement collateralized by the assets of Baseline. In addition Baseline was required to pay Lakewood a closing fee of $170,000 on April 12, 2007, when the outstanding principal and accrued interest were paid. The proceeds from the Lakewood financing were used to pay an additional deposit of $300,000 on the North Texas Assets (see NOTE 3), to partially satisfy a capital call in the New Albany-Indiana LLC (see NOTE 6), to pay expenses related to the ongoing financing and acquisition efforts, and to pay a $170,000 fee to Casimir Capital, the placement agent. Additionally, The Company issued Casimir Capital a warrant exercisable for up to 340,000 shares of Common Stock at an exercise price of $0.50 per share. On April 12, 2007, the Debenture was fully paid from proceeds received under the Credit Agreement. Loans From Founders On January 26, 2007, Barrie Damson our former Chairman and CEO and Alan Gaines our Vice Chairman and a director each made a loan of $50,000 to the Company to be used for short term working capital needs. The loans, in the form of promissory notes, bear interest at an annual rate of 6% and mature on the earlier to occur of the date on which Baseline closes a financing transaction in which it obtains proceeds in excess of $5,000,000 or July 26, 2007. On April 10, 2007, Messrs. Gaines and Damson agreed to extend the maturity of their promissory notes to the earlier of October 10, 2010 or the date on which Baseline closes an equity offering in which it obtains gross proceeds in excess of $3,000,000. NOTE 5 - STOCKHOLDERS' EQUITY Common Stock On March 31, 2007, Baseline issued an aggregate of 93,750 shares of common stock, with a value of $46,875, in payment of accrued interest through February 15, 2007, to holders of 10% convertible promissory notes issued by Baseline in privately negotiated transactions involving the offer and sale of $2.375 million in units consisting of such notes and Common Stock. On May 15, 2007, Baseline issued an aggregate of 93,750 shares of common stock, with a value of $46,875, in payment of accrued interest through May 15, 2007, to holders of 10% convertible promissory notes issued by Baseline in privately negotiated transactions involving the offer and sale of $2.375 million in units consisting of such notes and Common Stock. On May 30, 2007, Baseline issued 380,000 shares to holders of 10% convertible promissory notes in consideration of the holders' agreement to extend the maturity of the notes by six months. Baseline's 10% convertible notes will now mature on November 15, 2007. Such shares were valued at $190,000 which has been charged to interest expense. On June 22, 2007, Baseline issued 300,000 shares to an outside consultant as compensation for services valued at $150,000. Stock Options and Warrants On January 4, 2007, Baseline granted a five year stock option to Richard Cohen, CFO, exercisable for up to 100,000 shares of Common Stock at an exercise price of $0.56 per share. Such option had a fair value of $55,371. 10 On March 15, 2007, concurrently with the closing of the bridge loan financing (see NOTE 4), Alan Gaines, Baseline's Vice-Chairman, and Barrie Damson, a former officer and director of Baseline, each cancelled stock options to purchase 1,670,000 shares of Baseline's common stock at an exercise price of $0.05 per share. In connection with our entry into the Credit Agreement, on April 12, 2007 we issued warrants to Drawbridge and D.B. Zwirn Special Opportunities Fund, L.P., another lender participating therein, which warrants are each exercisable for up to 1.6 million shares of our Common Stock, at an exercise price of $0.50 per share. Pursuant to certain warrant agreements executed with these two lenders, any unexercised warrants expire on April 11, 2014. The warrants also afford the holders certain anti-dilution protection. In connection with the issuance of the warrants we also entered into a registration rights agreement dated April 12, 2007 with each of the holders of the warrants, under which we granted piggy-back registration rights, demand registration rights and shelf registration rights to these holders. Such warrants had a fair value of $1,209,085 which has been capitalized as a deferred loan cost and is being amortized over the term of the Credit Agreement. On April 12, 2007, concurrently with the execution of the Credit Agreement (see Note 4), Alan Gaines, our Vice Chairman, and Barrie Damson, a former officer and director of our Company, each surrendered additional stock options to purchase 1,670,000 shares of Common Stock at an exercise price of $0.05 per share, resulting in the cancellation of options for an aggregate of 3,340,000 million shares of Common Stock. NOTE 6 - INVESTMENT IN JOINT VENTURE AND REDEMPTION OF MEMBERSHIP INTEREST On March 16, 2007, Baseline paid $300,000 to New Albany-Indiana LLC ("New Albany") to pay a portion of the outstanding capital calls that it, as a member of New Albany, was required to make. Pursuant to a Membership Interest Redemption Agreement between the Company and New Albany, Baseline then redeemed its membership interest in New Albany for the direct assignment to the Company of an undivided 40.423% working interest in and to all oil and gas properties, rights, and assets of New Albany. Such assets were then pledged to Lakewood under a mortgage to secure Lakewood's Debenture. The reduction in our membership interest of 50% to a 40.423% direct working interest reflected an adjustment of our membership interest in New Albany at the time of our redemption, as a result of outstanding capital calls owed by us but assumed by the affiliates and/or assigns of Rex Energy, the other joint venture partner. After redeeming its membership interest in New Albany on March 16, 2007, Baseline now owns the following assets: o 19.7% working interest in the Aurora/Wabash Area of Mutual Interest (AMI), consisting of approximately 122,000 gross acres (approximately 24,400 acres net to us), seven New Albany natural gas pilot wells (four horizontal and three vertical wells), one natural gas compression/treating facility, two salt water disposal wells, three Devonian Reef gas wells (5% working interest to us) and three horizontal wells currently scheduled to be drilled in 2007; o 18.2% working interest in the Rex Knox County AMI, consisting of approximately 41,000 total acres (approximately 7,380 acres net to us) acquired from Source Rock, and five horizontal wells currently scheduled to be drilled in 2007; and 11 o 6.9% working interest in the El Paso AMI, consisting of approximately 8,000 acres (560 acres net to us) and one horizontal well drilled in 2007. NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On April 12, 2007, in accordance with a requirement of the Credit Agreement, Baseline also entered into a Swap Agreement ("Swap Agreement") with Macquarie Bank Limited, which provides that Baseline puts in place, for each month through the third anniversary of April 12, 2007, separate swap hedges with respect to approximately 75% of the projected production from Proved Developed Producing Reserves. The swap hedges provide for a fixed price of $68.20 per barrel for a three year period, commencing June 1, 2007. The hedging arrangement is based upon a minimum of 11,000 barrels in the first year and provides for monthly settlements. During July 2007, Baseline modified its hedge from a fixed price swap to a collar with a floor of $68.20 and a ceiling of $74.20 for the period from August 2007 through December 2008. Subsequent to December 2008 it reverts to a swap agreement at $68.20. In exchange for the near term switch from a fixed price swap to a collar, Baseline provided a right to the hedge provider to purchase 7,000 barrels per month at $73.20 per barrel from June 2010 through December 2011. SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of each derivative is recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. To make this determination, management formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the item, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed, and a description of the method of measuring effectiveness. This process includes linking all derivatives that are designated as cash-flow hedges to specific cash flows associated with assets and liabilities on the balance sheet or to specific forecasted transactions. Baseline also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items. A derivative that is highly effective and that is designated and qualifies as a cash-flow hedge has its changes in fair value recorded in other comprehensive income to the extent that the derivative is effective as a hedge. Any other changes determined to be ineffective do not qualify for cash-flow hedge accounting and are reported currently in earnings. Baseline discontinues cash-flow hedge accounting when it is determined that the derivative is no longer effective in offsetting cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, the derivative is redesignated as a non-hedging instrument because it is unlikely that a forecasted transaction will occur, or management determines that designation of the derivative as a cash-flow hedge instrument is no longer appropriate. In situations in which cash-flow hedge accounting is discontinued, Baseline continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When the criteria for cash-flow hedge accounting are not met, realized gains and losses (i.e., cash settlements) are recorded in other income and expense in the Statements of Operations. Similarly, changes in the fair value of the derivative instruments are recorded as unrealized gains or losses in the Statements of Operations. In contrast cash settlements for derivative instruments that qualify for hedge accounting are recorded as additions to or reductions of oil and gas revenues while changes in fair value of cash flow hedges are recognized, to the extent the hedge is effective, in other comprehensive income until the hedged item is recognized in earnings. 12 Based on the above, management has determined the swaps qualify for cash-flow hedge accounting treatment. For the period ended June 30, 2007, Baseline recognized a derivative liability of $1,691,686 with the change in fair value reflected in other comprehensive income/loss. NOTE 8 - SUBSEQUENT EVENTS On July 3, 2007, Baseline issued 300,000 shares to a consultant for services rendered valued at $150,000. On July, 5, 2007 non-employee option holders exercised options to purchase 200,000 shares of Common Stock at $ .05 per share on a "cashless" basis. As a result Baseline issued 185,714 shares. On July 13, 2007, a consultant exercised an option to purchase 100,000 shares of Common Stock at $0.30 per share on a "cashless" basis. As a result, Baseline issued 56,522 shares. During July 2007 holders of $150,000 of Baseline's 10% Convertible Promissory Notes converted such notes into 301,676 shares. On August 3, 2007, the Board of Directors (i) granted five-year options exercisable for up to an aggregate of 370,000 shares of common stock to several employees, which options vest in equal one-third installments on each of the first, second and third anniversary dates from the date of grant, (ii) granted a five-year stock option to Richard d'Abo, an outside director, exercisable for up to 150,000 shares of common stock and (iii) authorized the payment of a transaction bonus to Alan Gaines, our vice-chairman, in an amount equal to 0.25% of the gross proceeds raised by Baseline in its next debt and/or equity offering, if any. All such options are exercisable at $0.55 per share. On August 3, 2007 the Company entered into a two year employment agreement with Mr Patrick McGarey to become Chief Financial Officer effective August 16, 2007. Mr McGarey succeeds Richard Cohen who will continue to serve through August 15, 2007. Concurrently with the entry into the employment agreement with Mr. McGarey, Baseline granted to Mr. McGarey five-year options, exercisable for (i) up to 500,000 shares of common stock, at an exercise price equal to $0.55, (ii) up to 500,000 shares, at an exercise price of $0.825 per share, and (iii) up to 500,000 shares, at an exercise price of $1.10 per share. Each option grant provides for the following vesting schedule: (i) 166,666 shares on August 3, 2007, (ii) 166,667 shares on August 3, 2008 and (iii) 166,667 shares on August 3, 2009, provided that Mr. McGarey remains in the employ of the Company through such dates. 13 Item 2. Management's Discussion and Analysis or Plan of Operation. Cautionary Notice Regarding Forward Looking Statements Baseline Oil & Gas Corp. (referred to herein as "we" or the "Company") desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. This report contains a number of forward-looking statements that reflect management's current views and expectations with respect to our business, strategies, future results and events and financial performance. All statements made in this annual report other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to future reserves, cash flows, revenues, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward-looking statements. In particular, the words "believe," "expect," "intend," " anticipate," "estimate," "may," "plan," "will," variations of such words and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain known and unknown risks and uncertainties, which may cause our actual results, performance or achievements to differ materially from historical results as well as those expressed in, anticipated or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and as are those set forth in our annual reports filed with the Securities and Exchange Commission, together with the risks discussed in our press releases and other communications to shareholders issued by us from time to time, which attempt to advise interested parties of the risks and factors that may affect our business. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, but are not limited to, our ability to raise capital as and when required, the timing and extent of changes in prices for oil and gas, the availability of drilling rigs, competition, environmental risks, drilling and operating risks, uncertainties about the estimates of reserves, the prices of goods and services, legislative and government regulations, political and economic factors in countries in which we operate and implementation of our capital investment program. Overview We were incorporated as a Nevada corporation in February 2004 under the name of College Oak Investments, Inc., and changed our name to Baseline Oil & Gas Corp. on January 17, 2006. On April 12, 2007, Baseline acquired an interest in producing oil and gas properties from Statex Petroleum I, L.P. and Charles W. Gleeson LP. The properties consist of a 100% working interest in approximately 4,600 acres in Stephens County in North Texas (the "North Texas Assets"). Prior to the acquisition of the North Texas Assets, we had conducted only nominal operations and had only nominal assets. Accordingly, we have no operating history upon which our operations plan or future prospects can be evaluated. With the acquisition of the North Texas Assets, Baseline has become an independent oil and gas operator located in Houston, Texas. We are currently adding to our administrative and technical staff to manage, develop, and operate its properties. We also intend to take a more active role in the evaluation and enhancement of our New Albany Shale acreage and to find and evaluate additional acquisitions. 14 Our business and prospects must be also considered in light of the risks and uncertainties frequently encountered by companies in the oil and gas industry. The successful development of oil and gas fields is highly uncertain and we cannot reasonably estimate or know the nature, timing and estimated expenses of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence from, any oil and gas production from our existing fields or other fields, if any, acquired in the future. Risks and uncertainties associated with oil & gas production include: o reservoir performance and natural field decline; o changes in operating conditions and costs, including costs of third party equipment or services such as drilling rigs and shipping; o the occurrence of unforeseen technical difficulties, including technical problems that may delay start-up or interrupt production; o the outcome of negotiations with co-venturers, governments, suppliers, or other third party operators; o our ability to manage expenses successfully; o regulatory developments, such as de-regulation of certain energy markets or restrictions on exploration and production under laws and regulations related to environmental or energy security matters; and changes in oil, gas and petrochemical prices and by changes in margins on gasoline and other refined products based upon supply and demand for oil and gas affected by general economic growth rates and conditions, supply disruptions, new supply sources and the competitiveness of alternative hydrocarbon or other energy sources. Results of Operations Financial results for the three-month period ended June 30, 2007 are not directly comparable to either the three-month period ended March 31, 2007 or the corresponding period from the prior year. We completed the acquisition of the North Texas Assets on April 12, 2007. Prior to such time we have only conducted nominal operations and have had only nominal assets. Presented below is key operating data from the 15 operations of the North Texas Assets which are included in our results of operations for the three-month period ended June 30, 2007. Three Months Ended June 30, 2007 ------------- Production volumes - Oil (Bbls) 44,041 Natural Gas (Mcf) 6,760 Average sales prices - Oil (per Bbl) $ 63.53 Natural gas (per Mcf) 3.24 Operating revenue Oil $2,797,858 Natural gas 21,881 ---------- $2,819,739 ---------- Production expense - Total $1,309,387 Per equivalent BBL $ 23.01 In addition, included in interest expense for the periods included in this quarterly report are certain non-cash components as follows: Three Months Ended June 30, --------------------------- 2007 2006 ---- ---- Amortization of debt discount $ 143,332 $ 59,298 Amortization of debt issuance costs 1,796,657 294,726 Interest paid through the issuance of stock 46,875 -- ---------- ---------- Total non-cash components of interest expense $1,986,864 $ 354,024 ========== ========== Six Months Ended June 30, --------------------------- 2007 2006 ---- ---- Amortization of debt discount $ 426,999 $ 118,596 Amortization of debt issuance costs 2,002,507 637,243 Interest paid through the issuance of stock 93,750 -- ---------- ---------- Total non-cash components of interest expense $2,523,256 $ 755,839 ========== ========== Plan of Operation Our intended strategy in the next twelve months will be to focus on oil and gas exploration, development and production within our two existing core areas: one located in southern Indiana and the other a waterflood in north Texas, which we acquired in April 2007. We believe that the north Texas waterflood can provide us with long life oil reserves and the southern Indiana resource play can provide us with long life, natural gas reserves. We also believe that these two fields provide us with significant growth potential through the drilling of new infill wells and the workover of existing wells. However, the success or potential of either of these asset bases cannot be assured. 16 We will manage our operations and evaluate our fields from our new office location in Houston, Texas. While the majority of the effort will be spent on developing our existing two core areas, we will continue to pursue acquisitions in the vicinity of our two core properties, and, in addition, we will continue to evaluate acquisition opportunities in the gulf coast, north Texas and mid-continent regions where we could acquire existing oil and gas production with significant development potential. New Albany Shale Asset Base. Our acreage is grouped into three separate Areas of Mutual Interest (AMIs), where we have varying working interests. Management anticipates the booking of proved reserves coupled with initial revenue from its New Albany Shale acreage by year-end 2007. To date, we have invested $8.1 million in the New Albany Shale asset base. As discussed below, we participated in the drilling of 7 horizontal wells during the first half of 2007, and previously (in 2006) participated in the drilling of 7 pilot wells and 3 Devonian Reef wells in this southern Indiana region. We have an 18.2% working interest in the Rex Knox County AMI, consisting of approximately 41,000 total acres (approximately 7,380 acres net to us) acquired from Source Rock. Management believes that Knox County represents our most highly prospective New Albany Shale acreage, as it is located between Noble Energy's production to the north (southern Sullivan County) and El Paso's production to the southeast (in Knox and Davies Counties). Thus far in 2007, we have participated in the drilling of 4 wells in Knox County: Holscher 1h, Bond 1h, Taylor 1h, and the Scott 1h. All 4 of these wells were drilled horizontally using a foam drilling fluid system, and all encountered numerous fractures based upon the formation water and natural gas encountered during drilling. These 4 wells are presently being completed with pumping units installed in order to remove initial formation water and to allow longer term testing of the wells. Management is very encouraged with results experienced to date in this area. We and our partners are planning the installation of a gathering and compression system, as well as the drilling of 3 additional horizontal wells in the same area of this AMI later this year. In Greene County, we have a 19.7% working interest in the Aurora/Wabash Area of Mutual Interest (AMI), consisting of approximately 122,000 gross acres (approximately 24,400 acres net to us). Also in Greene County, Baseline has a 6.9% working interest in an El Paso AMI (approximately 8,000 acres of which we have 560 acres net to our interest). In 2006, Baseline participated in seven New Albany natural gas pilot wells (four horizontal and three vertical wells), one natural gas sales facility, two salt water disposal wells, three Devonian Reef gas wells (5% working interest to us). To date in 2007, we have participated in the drilling of 3 New Albany Shale horizontal wells in Greene County. Of these 3 horizontal wells, the Corbin 1h (19.7% WI) just recently completed drilling, another of the 3 wells was drilled in southern Greene County in the El Paso AMI tested natural gas and has been temporarily shut-in waiting on pipeline infrastructure (6.9% WI), and the third of these 3 wells encountered mechanical problems during drilling and operations were suspended 19.7% WI). With regard to the Corbin 1h, our partners and us utilized the foam drilling fluid approach, which was successfully utilized in Knox County. This well has had very encouraging early test results and, based on the Corbin 1h, we and our partners are further evaluating and high-grading the prospective areas of this large acreage position as testing is completed and additional drilling and gas sales infrastructure are assessed. We intend to continue to participate in the New Albany Shale development and, based on the results of the wells drilled during 2007, will work with our partners to evaluate and prioritize future drilling. We anticipate that as many as 500 to 1,000 horizontal wells could be eventually drilled on the current leasehold, depending on the productivity and reserve potential of the horizontal wells. The industry has reported a range of natural gas production rate reserve potential in the New Albany Shale Play; however, because there is not extensive production history from horizontal wells completed in the New Albany Shale, we 17 have no proven reserves booked to its acreage position. Currently available public information indicates that each horizontal well should drain 160 to 320 acres at a depth of 1500 to 2500 feet. Estimated reserves are in the range of 0.7 bcf to nearly 2 bcf per well, depending on initial production rates. Wells have had reported test rates of 50 mcfpd to 1,000 mcfpd, and `typical' wells are currently expected to produce 300 mcfpd or more. The ability to better predict production rates and reserves per well, as well as establishing the best methodology to drill and complete the horizontal wells, will allow us and our partners to better understand the economics of each well, and the overall play in general. We believe that a more complete understanding and longer term production histories will drive the future drilling activity and accelerated development potential of the New Albany Shale play, as well as will influence our continuing participation and funding needs in 2008 and beyond. North Texas Assets The North Texas Assets acquired by us in Stephen's County, Texas consists of a 100% working interest (78% net revenue interest) on a contiguous 4,600 acre waterflood which presently produces 660 Boe/d gross(520 Boe/d net). There are 81 oil wells producing in the field, and it is an active waterflood with 54 injection wells. There are two central operating facilities and three tank batteries. After the waterflood was initiated in the 1980's, oil production peaked at 1500 bopd from the central six leases. The two western leases have not been incorporated into the waterflood with the central leases and it is planned to expand the waterflood to the western leases. We believe the Stephens County Transaction provides immediate development opportunities. Last year, the property generated $6.5 million of field level cash flow. The entirety of current production and proved reserves are contained within the existing producing Caddo Lime formation, located at a depth of approximately 3,300 feet. Of the total 4,600 acres, the central and eastern 2,800 acres are under existing waterflood while the western 1,800 acres have yet to be extensively developed. During the second quarter Stephens County and its environs experienced very heavy rains, numerous strong electrical storms, and flooding. Despite the adverse weather conditions resulting in periodic downtime, we experienced no meaningful damage to our facilities, and have been able to maintain production rates in the field while initiating our development plans to expand the existing waterflood. We have worked over and completed 8 wells, each producing 5-10 BO/D. This increase in production offset the aforementioned periodic weather related shut-ins. Production currently averages 660 BOE/D (gross), or 520 BOE/D net. Since the closing of the acquisition of the North Texas Assets, we have commenced a field study of existing wells. Coupled with the very favorable results (100% success rate) of the first eight workovers, management has identified 20 to 25 additional workovers to perform during 2007. As weather conditions return to normal, we intend to accelerate our workover activity in the field, and expect to begin infill drilling in the field by the end of the third quarter of 2007. Management believes this should have a significant positive impact on cash flow generated by this property during the remainder of 2007 and beyond. Proved reserves have been estimated by a third party engineering firm to be 3.6 million boe (net) with a pre-tax PV10 value of $49.9 million at field product prices of $58/bbl and $1.77/mcf. Of the proved reserves, 70% are PDP, 10% PDNP and 20% are PUD reserves. We will be evaluating and finalizing further development plans for the significant expansion of the waterflood to the western leases, which are presently producing oil from the Caddo Lime, but not under waterflood. Management believes that this western expansion could add up to 2.0 MMbbls of incremental proved reserves. In addition, we believe the Caddo Lime oil formation is a good candidate for an Alkaline Surfactant Polymer (ASP) flood, and this enhanced oil recovery technique will be evaluated in 2007. There also is shallow gas production in this region, and the natural gas potential for the Marble Falls and Duffer gas formations will be evaluated during 2007, together with the identification of additional leases which may be attractive in the 18 area. In addition, the Barnett Shale is located at approximately 4900 feet in this area, and the production potential of the Shale in this region has not been evaluated. Liquidity and Source of Capital We currently believe, based upon our forecasts and our liquidity and capital requirements for the near-term future, that the combination of our expected internally-generated cash, the borrowings under our revolving credit facility entered into in April 2007 and our working capital, we have adequate funds for our anticipated capital and liquidity requirements for the next twelve months in connection with our above plan of operations. On April 12, 2007, we entered into a $75 million revolving credit commitment and term loan under the Credit Agreement (as defined below), of which approximately $45 million was available to be drawn down by us at May 12, 2007, subject to and only in the event that we satisfied various financial and other covenants contained in the credit agreement. On April 12, 2007, we drew down approximately $9.7 million as a Revolving Loan and $20.3 million as a Term Loan in connection with acquisition of the North Texas Assets and our repayment of the Lakewood Financing (as defined below). We also expect to receive proceeds during 2007 from production associated with those wells operating in north Texas that we acquired as part of the North Texas Assets. During the second quarter of 2007 our net revenues attributable to production from these wells were approximately $2,800,000. Should our estimated capital needs be erroneous and our costs and expenses prove to be greater than we currently anticipate, or should we change our current operations plan in a manner that will increase or accelerate our anticipated costs and expenses, the depletion of our working capital would be accelerated. Although we anticipate that adequate funds will remain available to us under the Credit Agreement, if we were unable to access such funding by reason of our failure to satisfy borrowing covenants under the credit agreement we would have to use other alternative resources. To the extent it becomes necessary to raise additional cash in the future if our current cash and working capital resources are depleted, we will seek to raise it through the public or private sale of debt or our equity securities, funding from joint venture or strategic partners, or a combination of the foregoing. We may also seek to satisfy indebtedness without any cash outlay through the private issuance of debt or equity securities. The sale of additional equity securities or convertible debt securities would result in dilution to our shareholders. We cannot give you any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations in such circumstances. On April 12, 2007, we entered into a $75 million Credit Agreement (the "Credit Agreement") with Drawbridge Special Opportunities Fund LP, as Administrative Agent and various named lenders (the "Lenders"). The Credit Agreement provides for a revolving credit commitment of up to $54.7 million and a Term Loan Commitment of $20.3 million. Revolving Loans must be paid on or before April 12, 2010 and Term Loans on or before October 12, 2010. The Revolving Loans accrue interest at the Prime Rate and The Term Loans accrue interest at the Prime Rate or 7.5%, whichever is greater, plus 3%. Additionally, we granted the Lenders an overriding royalty interest ranging between 2% and 3% in its existing oil and gas properties and any properties that it acquires while the Credit Agreement is in effect. The Credit Agreement requires our revenues to be deposited into a lockbox account controlled by the Administrative agent. Funds in the lockbox account on the last business day of the month are utilized, in order of priority, to pay any amounts due for the overriding royalty interest granted under the Credit Agreement, amounts due to third parties under swap agreements, lease operating costs approved by the Administrative Agent, interest due on the Term Loans and Revolving loans and general and administrative expenses up to $225,000 per quarter. Any amounts remaining in the lockbox account in excess of 19 $250,000 are to be used to repay outstanding principal, to be applied first to the Term Loans. Baseline's obligations under the Credit Agreement are secured by a first lien on all of its existing oil and gas properties, including the North Texas Assets, and any properties acquired while the Credit Agreement is in effect. On April 12, 2007 Baseline drew down $9.7 million as a Revolving Loan. In addition, Baseline drew down $20.3 million as a Term Loan. The funds were utilized to repay the $1,700,000 principal amount loaned to us by Lakewood Group, LLC (the "Lakewood Financing"), including related accrued interest and fees, and to fund the adjusted purchase price and a portion of the capitalized transaction costs for the acquisition of the North Texas Assets. In accordance with a requirement of the Credit Agreement, on April 12, 2007, we also entered into a Swap Agreement ("Swap Agreement") with Macquarie Bank Limited, which Swap Agreement provides that we put in place, for each month through the third anniversary thereof, separate swap hedges, as adjusted from time to time as specified therein, with respect to notional volumes which are approximately 75% of the reasonably anticipated projected production from Proved Developed Producing Reserves (as defined in the credit agreement) for each of crude oil and natural gas, calculated separately pursuant to the requirements of the Credit Agreement. Immediately subsequent to the credit facility transaction, we entered into a hedging arrangement under the Swap Agreement with Macquarie Bank Limited, providing for a fixed price of $68.20 per barrel for a three year period, commencing June 1, 2007. The hedging arrangement is based upon a minimum of 11,000 barrels in the first year and provides for monthly settlements. During July 2007, Baseline modified its hedge from a fixed price swap to a collar with a floor of $68.20 and a ceiling of $74.20 for the period from August 2007 through December 2008. Subsequent to December 2008 it reverts to a swap agreement at $68.20. In exchange for the near term switch from a fixed price swap to a collar, Baseline provided a right to the hedge provider to purchase 7,000 barrels per month at $73.20 per barrel from June 2010 through December 2011. On May 30, 2007 holders of our 10% convertible promissory notes unanimously agreed to extend the maturity date of the notes from May 15, 2007 to November 15, 2007. As consideration for the extension of the notes, Baseline issued 380,000 shares in aggregate to the holders of the notes and increased the coupon rate on the notes from 10% to 12% per annum effective May 16, 2007. The 10% convertible promissory notes, in the aggregate principal amount of $2.375 million, were initially issued in November 2005. Under the notes, the holders (i) may elect to receive interest in cash or in shares of common stock valued at $0.50 per share and (ii) at any time prior to maturity may convert the principal and accrued but unpaid interest on their note into such number of shares of common stock equal to the outstanding principal amount plus accrued but unpaid interest, divided by $0.50, or a total of 4,750,000 shares, excluding interest. Contractual Obligations Except for the Swap Agreement, as discussed above in connection with the Credit Agreement, which is to be settled on a monthly basis commencing June 1, 2007, the Credit Agreement, on which interest and principal is to be paid on a monthly basis and the convertible notes issued in privately negotiated transactions involving the offer and sale of $2.375 million in units consisting of 10% convertible promissory notes and shares of common stock, which provide for us to make quarterly interest payments of approximately $59,000, payable either in cash or shares of our Common Stock, we do not currently have any contractual obligations. 20 Off-Balance-Sheet Arrangements We have no off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to any investor in our securities. Item 3. Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. At the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2007, the disclosure controls and procedures of the Company were effective to ensure that the information required to be disclosed in the Company's Exchange Act reports was recorded, processed, summarized and reported on a timely basis. There were no changes in internal controls over financial reporting that occurred during the fiscal quarter ended June 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 21 PART II OTHER INFORMATION Item 5. Other Information. (a) Reports on Form 8-K During the period covered by this Report, we filed Current Reports on Form 8-K on each of the following dates: (i) April 18, 2007 (announcing entry into a credit agreement and unregistered sales of securities) and (ii) June 6, 2007 (announcing an extension of a loan agreement and unregistered sales of securities. Item 6. Exhibits. Exhibit Number Description -------------- ----------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer 32.2 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. BASELINE OIL & GAS CORP. Date: August 14, 2007 By: /s/ Thomas Kaetzer ---------------------------------------- Name: Thomas Kaetzer Title: Chairman, Chief Executive Officer Date: August 14, 2007 By: /s/ Richard M. Cohen ---------------------------------------- Name: Richard M. Cohen Title: Chief Financial Officer 23 EX-31.1 2 e602459_ex31-1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas Kaetzer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Baseline Oil & Gas Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 14, 2007 /s/ Thomas Kaetzer ------------------------------ Name: Thomas Kaetzer Title: Chief Executive Officer EX-31.2 3 e602459_ex31-2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard Cohen, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Baseline Oil & Gas Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions); (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 14, 2007 /s/ Richard Cohen ------------------------------ Name: Richard Cohen Title: Chief Financial Officer EX-32.1 4 e602459_ex32-1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION OF PERIODIC FINANCIAL REPORTS I, Thomas Kaetzer, Chairman of the Board and Chief Executive Officer of Baseline Oil & Gas Corp., a Nevada corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-QSB for the three months ended June 30, 2007 (the "Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2007 /s/ Thomas Kaetzer --------------------------------- Thomas Kaetzer Chairman, Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 5 e602459_ex32-2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION OF PERIODIC FINANCIAL REPORTS I, Richard Cohen, Chief Financial Officer of Baseline Oil & Gas Corp., a Nevada corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-QSB for the three months ended June 30, 2007 (the "Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2007 /s/ Richard Cohen ----------------------- Richard Cohen Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----