f10q-amd1_123107.htm
 


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10- Q/A
AMENDMENT NO. 1
(Mark One)

R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2007

Or

£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  _____  to _____

Commission file number: 000-51152

PETROHUNTER ENERGY CORPORATION
(Exact name of registrant as specified in its charter)

Maryland
 
98-0431245
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
1600 Stout Street
 
80202
Suite 2000, Denver, Colorado
 
(Zip Code)
(Address of principal executive offices)
   

Registrant’s telephone number, including area code:
(303) 572-8900

Registrant’s former address:
1875 Lawrence Street,
Suite 1400, Denver, Colorado 80202

Indicate by check mark whether the registrant (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 R     No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company . See definitions of “large accelerated filer,” “accelerated filer” and ”smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £                                                        Accelerated filer £
Non-accelerated filer £                                                           Smaller reporting company R

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

As of January 31, 2008, the registrant had 318,748,841 shares of common stock outstanding.

 
 

 

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report constitute “forward-looking statements”. These statements, identified by words such as “plan”, “anticipate”, “believe”, “estimate”, “should”, “expect” and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties include those set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. We advise you to carefully review the reports and documents we file from time to time with the Securities and Exchange Commission (the “SEC”).


EXPLANATORY NOTE REGARDING RESTATEMENTS

This Quarterly Report on Form 10-Q/A for the three month period ended December 31, 2007 includes restatements of the previously filed condensed consolidated financial statements and data (and related disclosures) for the period ended December 31, 2007.  A summary of these restatements and corrections are discussed in Note 2, Restatement of Previously Issued Financial Statements, included in the accompanying condensed consolidated financial statements for the period ended December 31, 2007.  These corrections are also discussed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.  We previously announced, in a Form 8-K filed with the SEC on November 20, 2008, that we would restate our previously reported financial statements as originally filed with the SEC on February 19, 2008, as a result of the discovery of several significant errors by management during its year-end review, and in conjunction with the annual audit.  The information contained in this Quarterly Report on Form 10-Q/A amends only Items 1, 2 and 4 of Part I to the originally filed Quarterly Report on Form 10-Q filed with the SEC on February 19, 2008 (the “Original Report”).

This Quarterly Report on Form 10-Q/A does not reflect all events occurring after the original filing of the Original Report or modify or update all the disclosures affected by subsequent events.  Information not modified or updated herein reflects the disclosures made at the time of the filing of the Original Report on February 19, 2008.  Accordingly, this Form 10-Q/A should be read in conjunction with all of our periodic filings, including our amended filings on Form 10-Q/A in relation to the three- and six-month period ended March 31, 2008, and in relation to the three- and nine-month period ended June 30, 2008, filed with the SEC in conjunction with the filing of this report.

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.


CURRENCIES

All amounts expressed herein are in U.S. dollars unless otherwise indicated.



 
2

 


GLOSSARY

Unless otherwise indicated in this document, oil equivalents are determined using the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or natural gas liquids so that six Mcf of natural gas are referred to as one barrel of oil equivalent.

API Gravity. A specific gravity scale developed by the American Petroleum Institute (API) for measuring the relative density of various petroleum liquids, expressed in degrees. API gravity is gradated in degrees on a hydrometer instrument and was designed so that most values would fall between 10° and 70° API gravity. The arbitrary formula used to obtain this effect is: API gravity = (141.5/SG at 60°F) — 131.5, where SG is the specific gravity of the fluid.

Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.

Bcf. One billion cubic feet of natural gas at standard atmospheric conditions.

Capital Expenditures. Costs associated with exploratory and development drilling (including exploratory dry holes); leasehold acquisitions; seismic data acquisitions; geological, geophysical and land related overhead expenditures; delay rentals; producing property acquisitions; other miscellaneous capital expenditures; compression equipment and pipeline costs.

Carried Interest. The owner of this type of interest in the drilling of a well incurs no liability for costs associated with the well until the well is drilled, completed and connected to commercial production/processing facilities.

Completion. The installation of permanent equipment for the production of oil or natural gas.

Developed Acreage. The number of acres that are allocated or assignable to producing wells or wells capable of production.

Development Well. A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

Exploitation. The continuing development of a known producing formation in a previously discovered field. To make complete or maximize the ultimate recovery of oil or natural gas from the field by work including development wells, secondary recovery equipment or other suitable processes and technology.

Exploration. The search for natural accumulations of oil and natural gas by any geological, geophysical or other suitable means.

Exploratory Well. A well drilled to find and produce oil or natural gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir, or to extend a known reservoir.

Farm-In or Farm-Out. An agreement under which the owner of a working interest in a natural gas and oil lease assigns the working interest or a portion of the working interest to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a “farm-in” while the interest transferred by the assignor is a “farm-out”.

Field. An area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Finding and Development Costs. The total capital expenditures, including acquisition costs, and exploration and abandonment costs, for oil and gas activities divided by the amount of proved reserves added in the specified period.

3

Force Pooling. The process by which interests not voluntarily participating in the drilling of a well, may be involuntarily committed to the operator of the well (by a regulatory agency) for the purpose of allocating costs and revenues attributable to such well.

Gross Acres or Gross Wells. The total acres or wells, as the case may be, in which we have a working interest.

Lease. An instrument which grants to another (the lessee) the exclusive right to enter to explore for, drill for, produce, store and remove oil and natural gas on the mineral interest, in consideration for which the lessor is entitled to certain rents and royalties payable under the terms of the lease. Typically, the duration of the lessee’s authorization is for a stated term of years and “for so long thereafter” as minerals are producing.

Mcf. One thousand cubic feet of natural gas at standard atmospheric conditions.

MCFE. One thousand cubic feet of gas equivalent. Gas equivalents are determined using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.

Net Acres or Net Wells. A net acre or well is deemed to exist when the sum of our fractional ownership working interests in gross acres or wells, as the case may be, equals one. The number of net acres or wells is the sum of the fractional working interests owned in gross acres or wells, as the case may be, expressed as whole numbers and fractions thereof.

Operator. The individual or company responsible to the working interest owners for the exploration, development and production of an oil or natural gas well or lease.

Overriding Royalty. A revenue interest in oil and gas, created out of a working interest which entitles the owner to a share of the proceeds from gross production, free of any operating or production costs.

Payout. The point at which all costs of leasing, exploring, drilling and operating have been recovered from production of a well or wells, as defined by contractual agreement.

Productive Well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.

Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Proved Reserves. The estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.

Reserves. Natural gas and crude oil, condensate and natural gas liquids on a net revenue interest basis, found to be commercially recoverable.

Reservoir. A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

Royalty. An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage, or of the proceeds of the sale thereof, but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.

Spud. To start the well drilling process by removing rock, dirt and other sedimentary material with the drill bit.

4

3-D Seismic. The method by which a three-dimensional image of the earth’s subsurface is created through the interpretation of reflection seismic data collected over a surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do conventional surveys and contribute significantly to field appraisal, exploitation and production.

Undeveloped Acreage. Lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether or not such acreage contains proved reserves.

Working Interest. An interest in an oil and gas lease that gives the owner of the interest the right to drill and produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to the owners of royalties.


 
5

 

PETROHUNTER ENERGY CORPORATION

FORM 10-Q/A

FOR THE THREE-MONTH PERIOD ENDED
DECEMBER 31, 2007
(restated)

INDEX

   
Page
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
39
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48
Item 4.
Controls and Procedures
48
PART II — OTHER INFORMATION
Item 1.
Legal Proceedings
51
Item 1A.
Risk Factors
51
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
51
Item 3.
Defaults Upon Senior Securities
52
Item 4.
Submission of Matters to a Vote of Security Holders
52
Item 5.
Other Information
52
Item 6.
Exhibits
52
 
Signatures
53
     

 
6

 

PART I. FINANCIAL INFORMATION
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
   
December 31, 2007
   
September 30, 2007
 
   
(unaudited)
(restated)
       
   
($ in thousands)
 
ASSETS
 
Current Assets
           
Cash and cash equivalents
  $ 462     $ 120  
Receivables
               
Oil and gas receivables, net
    306       487  
GST receivable
    424        
Due from related parties
          500  
Other receivables
    31       59  
Note receivable — related party
          2,494  
Prepaid expenses and other assets
    249       187  
Marketable securities, available for sale
    3,896        
Total Current Assets
    5,368       3,847  
Property and Equipment, at cost
               
Oil and gas properties under full cost method, net
    163,006       162,843  
Furniture and equipment, net
    737       569  
      163,743       163,412  
Other Assets
               
Joint interest billings
    1,029       13,637  
Restricted cash
    599       599  
Deposits and other assets
    90        
Deferred financing costs, net
    2,084       529  
Intangible asset
    1,997        
Total Assets
  $ 174,910     $ 182,024  
   
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current Liabilities
               
Accounts payable and accrued expenses
  $ 23,532       26,631  
Notes payable — short-term
    2,548       4,667  
Convertible notes payable
    400       400  
Note payable — related party — current portion
    2,385       3,755  
Note payable — current portion of long term liabilities
    120       120  
Accrued interest payable
    3,821       2,399  
Accrued interest payable — related party
    654       516  
Due to shareholder and related parties
    1,353       1,474  
Contract payable — oil and gas properties
          1,750  
Contingent purchase obligation
    1,997        
Total Current Liabilities
    36,810       41,712  
                 
Non-Current Obligations
               
Notes payable — net of discount and current portion
    29,464       27,944  
Subordinated notes payable — related parties
    1,149       9,050  
Convertible notes payable — net of discount
    60        
Asset retirement obligation
    104       136  
Net Non-Current Obligations
    30,777       37,130  
Total Liabilities
    67,587       78,842  
                 
Common Stock Subscribed
          2,858  
Commitments and Contingencies (Note 13)
               
Stockholders’ Equity
               
Preferred stock, $0.001 par value; authorized 100,000,000 shares; none issued
           
Common stock, $0.001 par value; authorized 1,000,000,000 shares; issued and outstanding — 318,748,841 and 278,948,841 shares
    319       279  
Additional paid-in-capital
    197,993       172,672  
Other comprehensive loss
    (1,559 )     (5 )
Deficit accumulated during the development stage
    (89,430 )     (72,622 )
Total Stockholders’ Equity
    107,323       100,324  
Total Liabilities and Stockholders’ Equity
  $ 174,910     $ 182,024  
See accompanying notes to consolidated financial statements.

 
7

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three-Months
Ended
December 31, 2007
   
Three-Months
Ended
December 31, 2006
   
Cumulative
From Inception
(June 20,
2005) to
December 31, 2007
 
   
(unaudited, restated, $ in thousands, except per share amounts)
 
Revenue
                 
Oil and gas revenue
  $ 507     $ 449     $ 3,363  
Costs and Expenses
                       
Lease operating expenses
    100       162       897  
General and administrative
    2,318       3,671       35,266  
Project development costs — related party
          1,815       7,205  
Impairment of oil and gas properties
          5,151       24,053  
Depreciation, depletion, amortization and accretion
    262       386       1,580  
Total Operating Expenses
    2,680       11,185       69,001  
                         
Loss from Operations
    (2,173 )     (10,736 )     (65,638 )
Other Income (Expense)
                       
Loss on conveyance of property
    (11,875 )           (11,875 )
Foreign currency exchange
                23  
Interest income
    25       8       63  
Interest expense
    (2,785 )     173       (12,003 )
Total Other Income (Expense)
    (14,635 )     181       (23,792 )
                         
Net Loss
  $ (16,808 )   $ (10,555 )   $ (89,430 )
                         
Net loss per common share — basic and diluted
  $ (0.05 )   $ (0.05 )        
Weighted average number of common shares outstanding — basic and diluted
    306,471       219,929          

See accompanying notes to consolidated financial statements


 
8

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(unaudited, restated)
 
 
 
 
Common Stock
   
 
Additional
Paid-in
   
Deficit
Accumulated
During the
Development
   
Accumulated
Other
Comprehensive
   
 
Total
Stockholders’
   
 
Total
Comprehensive
 
 
Shares
   
Amount
   
Capital
   
Stage
   
Loss
   
Equity
   
Loss
 
 
($ in thousands)
 
Balance, June 20, 2005 inception)
    $     $     $     $     $     $  
Shares issued to founder at $0.001 per share
100,000,000       100                         100        
Stock based compensation costs for options granted to non- employees
            823                   823        
Net loss
                  (2,119 )           (2,119 )     (2,119 )
Balance, September 30, 2005
100,000,000       100       823       (2,119 )           (1,196 )     (2,119 )
Shares issued for property interests at $0.50 per share
3,000,000       3       1,497                   1,500        
Shares issued for finder’s fee on property at $0.50 per share
3,400,000       3       1,697                   1,700        
Shares issued upon conversion of debt, at $0.50 per share
44,063,334       44       21,988                   22,032        
Shares issued for commission on convertible debt at $0.50 per share
2,845,400       3       1,420                   1,423        
Sale of shares and warrants at $1.00 per unit
35,442,500       35       35,407                   35,442        
Shares issued for commission on sale of units
1,477,500       1       1,476                   1,477        
Costs of stock offering: Cash
            (1,638 )                 (1,638 )      
Shares issued for commission at $1.00 per share
            (1,478 )                 (1,478 )      
Exercise of warrants
1,000,000       1       999                   1,000        
Recapitalization of shares issued upon merger
28,700,000       30       (436 )                 (406 )      
Stock based compensation
            9,189                   9,189        
Net loss
                  (20,692 )           (20,692 )     (20,692 )
Balance, September 30, 2006
219,928,734       220       70,944       (22,811 )           48,353       (20,692 )
Shares issued for property interests at $1.62 per share
50,000,000       50       80,950                   81,000        
Shares issued for property interests at $1.49 per share
256,000             382                   382        
Shares issued for commission costs on property at $1.65 per share
121,250             200                   200        
 
 
9

 
Shares issued for finance costs on property at $0.70 per share
642,857       1       449                   450        
Shares issued for property and finance interests at various costs per share
8,000,000       8       6,905                   6,913        
Foreign currency translation adjustment
                        (5 )     (5 )     (5 )
Discount on notes payable
            4,670                   4,670        
Stock based compensation
            8,172                   8,172        
Net loss
                  (49,811 )           (49,811 )     (49,811 )
Balance, September 30, 2007
278,948,841       279       172,672       (72,622 )     (5 )     100,324       (49,816 )
Shares issued for property interests at $0.31 per share – related party
25,000,000       25       7,725                   7,750        
Shares issued  in connection with  debt conversion at $0.23 per share – related party
16,000,000       16       3,664                   3,680        
Shares issued for property
conveyance at $0.25 per share
5,000,000       5       1,245                   1,250        
Shares returned for property conveyance at $0.22 per share (restated)
(6,400,000 )     (6 )     (1,402 )                 (1,408 )      
Shares issued for finance costs at $0.28 per share
200,000             56                   56        
Discounts associated with beneficial conversion feature and detachable warrants on convertible debenture issuance
            6,956                   6,956        
Warrant value associated with convertible debenture issuance (restated)
            21                   21        
Warrants issued in connection with debt offering (restated)
            1,895                   1,895        
Warrant value associated with  debt conversion  - related party (restated)
            1,841                   1,841        
Debt conversion – related party (restated)
            2,704                   2,704        
Discount on notes payable (restated)
            143                   143        
Foreign currency translation adjustment (restated)
                        79       79       79  
Unrealized loss on marketable securities (restated)
                        (1,633 )     (1,633 )     (1,633 )
 
 
10

 
Stock based compensation (restated)
            473                   473        
Net loss (restated)
                  (16,808 )           (16,808 )     (16,808 )
Balance, December 31, 2007
318,748,841     $ 319     $ 197,993     $ (89,430 )   $ (1,559 )   $ 107,323     $ (18,362 )
 
 
 

 
See accompanying notes to consolidated financial statements.


 
11

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
Three-Months
Ended
December 31,
2007
   
Three-Months
Ended
December 31,
2006
   
Cumulative From
Inception
(June 20,
2005) to December 31,
2007
 
   
(unaudited, restated, $ in thousands)
 
Cash flows from operating activities
                 
Net loss
  $ (16,808 )   $ (10,555 )   $ (89,430 )
Adjustments used to reconcile net loss to net cash used in operating activities:
                       
Stock based compensation
    473       1,561       18,657  
Detachable warrants recorded as interest expense
    163             163  
Depreciation, depletion, amortization and accretion
    262       386       1,580  
Impairment of oil and gas properties
          5,151       24,053  
Amortization of deferred financing costs
    709             2,332  
Amortization of debt discount and beneficial conversion feature costs on convertible debentures
    606             1,642  
Loss on conveyance of property
    11,875             11,875  
Other adjustments to reconcile to net loss
    56             133  
   Changes in assets and liabilities:
Receivables
    (215 )     (476 )     (761 )
Due from related party
          786       (500 )
Prepaids and other
    (152 )     (33 )     (197 )
Accounts payable, accrued expenses, and other liabilities
    (647 )     (451 )     4,207  
Due to shareholder and related parties
          470       1,474  
Net cash used in operating activities
    (3,678 )     (3,161 )     (24,772 )
Cash flows from investing activities
                       
Additions to oil and gas properties
    (7,857 )     (1,241 )     (73,522 )
Proceeds from sale of oil and gas properties
    7,500             7,500  
Notes receivable-related party
          (6,427 )     (2,494 )
Additions to furniture and equipment
    (129 )     (33 )     (816 )
Restricted cash
          (525 )     (1,077 )
Net cash used in investing activities
    (486 )     (8,226 )     (70,409 )
Cash flows from financing activities
                       
Proceeds from the sale of common stock
                35,742  
Proceeds from common stock subscribed
          1,588       2,858  
Proceeds from the issuance of notes payable
    1,250             32,800  
Borrowing on short-term notes payable
    750             1,250  
Payments on short-term notes
    (3,805 )           (3,805 )
Proceeds from related party borrowings
    500             775  
Payments on related party borrowing
    (519 )           (519 )
Proceeds from the exercise of warrants
                1,000  
Cash received upon recapitalization and merger
                21  
Proceeds from issuance of convertible notes
    6,330       1,505       27,162  
Offering and financing costs
          (30 )     (1,638 )
Net cash provided by financing activities
    4,506       3,063       95,646  
Effect of exchange rate changes on cash
                (3 )
Net increase (decrease) in cash and cash equivalents
    342       (8,324 )     462  
Cash and cash equivalents, beginning of period
    120       10,632        
Cash and cash equivalents, end of period
  $ 462     $ 2,308     $ 462  
                         
Supplemental schedule of cash flow information
                       
Cash paid for interest
  $ 11     $     $ 1,512  
Cash paid for income taxes
  $     $     $  
 

See accompanying notes to consolidated financial statements.

 
12

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 
Note 1 — Organization and Basis of Presentation

PetroHunter Energy Corporation, formerly known as Digital Ecosystems Corporation (“Digital”), was incorporated on February 21, 2002 under the laws of the State of Nevada. On February 10, 2006, Digital entered into a Share Exchange Agreement (the “Agreement”) with GSL Energy Corporation (“GSL”) and certain shareholders of GSL pursuant to which Digital acquired more than 85% of the issued and outstanding shares of common stock of GSL, in exchange for shares of Digital’s common stock. On May 12, 2006, the parties to the Agreement completed the share exchange and Digital changed its business to the business of GSL. Subsequent to the closing of the Agreement, Digital acquired all the remaining outstanding stock of GSL, and effective August 14, 2006, Digital changed its name to PetroHunter Energy Corporation (“PetroHunter” or the “Company”).

GSL was incorporated under the laws of the State of Maryland on June 20, 2005 for the purpose of acquiring, exploring, developing and operating oil and gas properties. PetroHunter is considered a development stage company as defined by Statement of Financial Accounting Standards (“SFAS”) 7, Accounting and Reporting by Development Stage Enterprises. A development stage enterprise is one in which planned principal operations have not commenced, or if its operations have commenced, there have been no significant revenues therefrom. As of December 31, 2007, our principal activities since inception have been raising capital through the sale of common stock and convertible notes and the acquisition of oil and gas properties in the western United States and Australia and we have not commenced our planned principal operations. In October 2006, GSL changed its name to PetroHunter Operating Company.

As a result of the Agreement, GSL became a wholly-owned subsidiary of PetroHunter. Since this transaction resulted in the former shareholders of GSL acquiring control of PetroHunter, for financial reporting purposes the business combination was accounted for as an additional capitalization of PetroHunter (a reverse acquisition with GSL as the accounting acquirer). In accounting for this transaction:

i. GSL was deemed to be the purchaser and parent company for financial reporting purposes. Accordingly, its net assets were included in the consolidated balance sheet at their historical book value; and

ii. Control of the net assets and business of PetroHunter was effective May 12, 2006 for no consideration.

The fair value of the Digital assets acquired and liabilities assumed pursuant to the transaction with GSL are as follows ($ in thousands):

Net cash acquired
  $ 21  
Other current assets
    22  
Liabilities assumed
    (449 )
   Value of 28,700,000 Digital Shares
  $ (406 )
 
Note 2 – Restatement of Previously Issued Financial Statements

On August 11, 2008, we concluded our unaudited financial statements for the quarterly periods ended December 31, 2007 and March 31, 2008, included in our Quarterly Reports on Form 10-Q for the quarterly periods ended December 31, 2007 and March 31, 2008, should not be read without also considering the effect of errors that were discovered in subsequent periods.  The Company had identified the aggregate effects of correcting these errors in their proper quarterly periods, which was announced in our Form 8-K filed with the SEC on August 14, 2008.

On November 14, 2008, we concluded our unaudited financial statements included in the Company’s Quarterly Reports on Form 10-Q for the quarters ended December 31, 2007, March 31, 2008 and June 30, 2008 would be restated due to the discovery of additional errors.
 
 
13

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 
The following errors affected our Original Report for the three month period ended December 31, 2007:

1.  
Detachable Warrants with Convertible Debentures – We corrected an error in relation to our accounting for the value of detachable warrants that were issued in relation to the issuance of $7.0 million of Convertible Debentures, where we erroneously charged the $2.9 million of value assigned to the detachable warrants to interest expense, versus recording the warrant value as a discount against the face value of the Convertible Debentures and amortizing the discount to interest expense over the remaining term of the convertible debentures using the effective interest method.
 
2.  
Detachable Warrants with Global Debt Facility – We corrected errors in our accounting for detachable warrants issued in relation to our Global Credit Facility.  We inappropriately used a warrant term assumption in our Black-Scholes calculation of fair value that was less than the contractual life of the warrants, which understated the initial value of the warrants by $1.9 million in total.  Second, we failed to properly record $1.2 million of the total as deferred financing costs associated with the warrants that were issued in connection with securing the facility.
 
3.  
Heavy Oil Asset Sale – We corrected several errors in our accounting for the sale of our Heavy Oil Projects.  First, we corrected an error in our accounting for the proceeds from the sale of these assets to Pearl Exploration and Production Ltd., where we erroneously recorded $2.7 million of contingent consideration (in the form of the common stock of the acquirer) relating to the sale of assets that did not ultimately transfer, net of $0.9 million in unrealized losses also recognized in error.  Second, we corrected a $2.4 million error in our accounting for unrealized losses from declines in the market value of the securities received in the transaction, where we erroneously treated the securities as trading securities and recorded an unrealized loss in our statement of operations, versus reflecting the $1.6 million in unrealized losses (net of the $0.9 million excess discussed above) as a charge to other comprehensive income.  Finally, we determined we should have recorded a $11.9 million loss on conveyance on the transaction, based on the relationship of the fair value of the Heavy Oil Projects, versus what was recorded in our full cost pool.
 
4.  
Related Party Consulting Agreement Termination – We corrected a $0.2 million error in our accounting for the termination of certain consulting services that had been provided by a significant shareholder, which understated accrued expenses and general and administrative expense.
 
5.  
Contingent Purchase Obligation – We corrected an error in our accounting for a financial guarantee in relation to capital costs incurred by a third party in conjunction with the construction of a gas gathering system and the provision of gas gathering services for our Buckskin Mesa Project, and recorded a $2.0 million intangible asset and contingent purchase obligation to reflect the value of this guarantee.
 
6.  
Unrecorded Property Costs – We corrected several errors that resulted from the discovery of unrecorded obligations relating to our property accounts.  The correction of these errors resulted in a $0.9 million increase in oil and gas properties and accrued expenses.
 
7.  
Stock-Based Compensation Expense – During our first quarter ended December 31, 2007, we corrected a $0.2 million error in our accounting for stock-based compensation expense, resulting from various errors in valuing this expense using the Black-Scholes calculation of fair value.
 
8.  
Maralex Transaction – We corrected an error in our accounting for the value of 6.4 million shares of our common stock that we reacquired during the quarter ended December 31, 2007.  The shares were originally issued during our year ended September 30, 2007 in relation to the acquisition of certain properties (our “Sugarloaf Project”) and the incurrence of penalties on a series of payment defaults on our contract.  The correction of this error resulted in a $4.1 million increase in our oil and gas property accounts, with a corresponding increase in additional paid in capital.

9.  
Other Errors – We corrected several other errors that were individually insignificant and primarily related to the timing of the recognition of costs and expenses in our statement of operations between the first

 
14

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 
  
quarterly period ended December 31, 2007 and the second quarterly period ended March 31, 2008, and the proper classification of Goods and Services Taxes on Australia, and the proper classification of certain of our debt obligations.
 
Balance Sheet Effects of Restatements

The following table sets forth the unaudited condensed consolidated balance sheet, showing previously reported amounts, adjustments resulting from the correction of errors and reclassifications, and restated balances as of December 31, 2007 (in thousands):
 
   
December 31, 2007
   
As previously reported
   
Net Adjustments
   
As restated
 
                   
Current Assets
                 
Cash and cash equivalents
  $ 462     $ -     $ 462  
Receivables
    93       668       761  
Marketable securities, available for sale
    6,619       (2,723 )     3,896  
Other current assets
    326       (77 )     249  
Total Current Assets
    7,500       (2,132 )     5,368  
                         
Property and Equipment, at cost and Other Assets
                       
Oil and gas properties under full cost method, net
    166,764       (3,758 )     163,006  
Intangible asset
    -       1,997       1,997  
Deferred financing costs, net
    847       1,237       2,084  
Other assets
    2,256       199       2,455  
                         
Total Assets
  $ 177,367     $ (2,457 )   $ 174,910  
                         
Current Liabilities
                       
Accounts payable and accrued expenses
  $ 22,995     $ 537     $ 23,532  
Due to shareholders and related parties
    1,132       221       1,353  
Notes and interest payable
    5,781       1,108       6,889  
Notes and interest payable, related parties
    606       2,433       3,039  
Contingent purchase obligation
    -       1,997       1,997  
Total Current Liabilities
    30,514       6,296       36,810  
                         
Non-Current Obligations
                       
Notes payable, net
    30,088       (624 )     29,464  
Convertible notes payable, net
    2,954       (2,894 )     60  
Subordinated notes payable, related parties
    3,392       (2,243 )     1,149  
Asset retirement obligation
    104       -       104  
Net Non-Current Obligations
    36,538       (5,761 )     30,777  
                         
Total Liabilities
    67,052       535       67,587  
                         
Stockholders' Equity
                       
Common stock
    319       -       319  
Additional paid-in-capital
    192,050       5,943       197,993  
Accumulated other comprehensive loss
    (16 )     (1,543 )     (1,559 )
Deficit accumulated during the development stage
    (82,038 )     (7,392 )     (89,430 )
Total Stockholders' Equity
    110,315       (2,992 )     107,323  
                         
Total Liabilities and Stockholders' Equity
  $ 177,367     $ (2,457 )   $ 174,910  
 
 
15

 
 
 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 
Statement of Operations Effects of Restatements

The following table presents our unaudited condensed consolidated statement of operations, showing previously reported amounts, adjustments resulting from the correction of errors, and restated balances for the three month period ended December 31, 2007 (in thousands, except share data):
 

   
For the three months ended December 31, 2007
 
   
As previously reported
   
Net Adjustments
   
As restated
 
 
                 
Oil and Gas Revenue
  $ 287     $ 220     $ 507  
                         
Costs and Expenses:
                       
General and administrative
    1,894       424       2,318  
Other operating expenses
    359       3       362  
Total Operating Expenses
    2,253       427       2,680  
                         
Loss From Operations
    (1,966 )     (207 )     (2,173 )
                         
Other Income (Expense):
                       
Loss on conveyance of property
    -       (11,875 )     (11,875 )
Interest expense
    (5,035 )     2,250       (2,785 )
Trading security losses
    (2,393 )     2,393       -  
Other, net
    (22 )     47       25  
Total Other Expense
    (7,450 )     (7,185 )     (14,635 )
                         
NET LOSS
  $ (9,416 )   $ (7,392 )   $ (16,808 )
                         
Net loss per share - basic and diluted
  $ (0.03 )   $ (0.02 )   $ (0.05 )
Weighted average number of shares outstanding
                       
 - basic and diluted
    306,471       -       306,471  
 
Statement of Cash Flows Effects of Restatements

The following table presents selected unaudited condensed consolidated statement of cash flows information, showing previously reported amounts, adjustments resulting from the correction of errors and reclassifications, and restated balances for the three months ended December 31, 2007 (in thousands):
 
   
For the three months ended December 31, 2007
 
   
As previously reported
   
Net Adjustments
   
As restated
 
 
                 
Net cash used in operating activities
  $ (4,357 )   $ 679     $ (3,678 )
Net cash provided by investing activities
    1,764       (2,250 )     (486 )
Net cash provided by financing activities
    2,929       1,577       4,506  
Effect of exchange rate changes on cash
    6       (6 )     -  
Increase in cash and cash equivalents
    342       -       342  
                         
Cash and cash equivalents beginning of year
    120       -       120  
                         
Cash and cash equivalents end of period
  $ 462     $ -     $ 462  

 
16

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)

Note 3 — Summary of Significant Accounting Policies

Basis of Accounting. The accompanying financial statements have been prepared on the basis of accounting principles applicable to a going concern, which contemplates the realization of assets and extinguishment of liabilities in the normal course of business. As shown in the accompanying statements of operations, PetroHunter, together with its wholly-owned subsidiaries (the “Company”, “we” or “us”) has incurred a cumulative loss in the amount of $89.4 million for the period from inception (June 20, 2005) to December 31, 2007, has a working capital deficit of approximately $31.4 million as of December 31, 2007, was not in compliance with the covenants of several loan agreements, has had multiple property liens and foreclosure actions filed by vendors and has significant capital expenditure commitments. As of December 31, 2007, the Company has earned oil and gas revenue from its initial operating wells, but will require significant additional funding to sustain operations and satisfy contractual obligations for planned oil and gas exploration, development and operations in the future. These factors, among others, may indicate that the Company may be unable to continue in existence. The Company’s financial statements do not include adjustments related to the realization of the carrying value of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. The Company’s ability to establish itself as a going concern is dependent upon its ability to obtain additional financing to fund planned operations and to ultimately achieve profitable operations. Management believes that we can be successful in obtaining equity and/or debt financing and/or sell interests in some of our properties, which will enable us to continue in existence and establish ourselves as a going concern. The Company has raised approximately $ 100.0 million through December 31, 2007 through issuances of common stock and convertible and other debt. We believe we will be successful at raising necessary funds to meet our  obligations for our planned operations. In November 2007, we raised an additional $7.0 million in a private placement of convertible debentures and we sold our Heavy Oil assets for total potential consideration of up to $30.0 million, of which $7.5 million was cash.

For the three-months ended December 31, 2007 and 2006, the consolidated financial statements include the accounts of PetroHunter and its wholly-owned subsidiaries. For the period from June 20, 2005 through September 30, 2005, the consolidated financial statements include only the accounts of GSL. All significant intercompany transactions have been eliminated upon consolidation.

The accompanying financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year-ended September 30, 2007. Significant accounting policies disclosed therein have not changed. The accompanying consolidated financial statements are unaudited; however, in the opinion of management, they include all normal recurring adjustments necessary for a fair presentation of the consolidated financial position of the Company at December 31, 2007 and the consolidated results of its operations and cash flows for the three-months ended December 31, 2007 and 2006. The results of operations for the three-months ended December 31, 2007 are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2008.

Use of Estimates. Preparation of the Company’s financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates.

In the course of preparing the consolidated financial statements, management makes various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, revenue and expenses, and to disclose commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events and, accordingly, actual results could differ from amounts initially established.

The more significant areas requiring the use of assumptions, judgments and estimates relate to volumes of natural gas and oil reserves used in calculating depletion, the determination of whether losses should be recorded on property conveyances, the amount of expected future cash flows used in determining possible impairments of oil and gas properties and the amount of future capital costs estimated for such calculations. Assumptions, judgments and
 
17

PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 
estimates are also required to determine future abandonment obligations, the value of undeveloped properties for impairment analysis and the value of deferred tax assets.
 
Reclassifications. Certain prior period amounts have been reclassified in the consolidated financial statements to conform to the current period presentation. Such reclassifications had no effect on our net loss.

Marketable Securities, Available for Sale. In November 2007, we sold our Heavy Oil assets (see Note 5). As partial consideration, we accepted 1.5 million shares of common stock of the purchaser, Pearl Exploration and Production Ltd. These shares are available for sale in the short term and as a result we account for them by marking them to market with unrealized gains and losses reflected as a component of Other Comprehensive Income, until such gains or losses become realized when they are then recognized in our statement of operations. During the first quarter ended December 31, 2007, we did not recognize any gain or loss relating to our marketable securities.

Joint Interest Billings. Joint interest billings represents our working interest partners’ share of costs that we paid, on their behalf, to drill certain wells. During the first quarter 2008, we entered into a transaction whereby we increased our interest in 14 of these wells to 100% (see Note 5) and we therefore reclassified $12.7 million of costs related to those wells from Joint interest billings to Oil and gas properties. We are currently in negotiations with our other partner regarding the remaining two wells and the balance of $1.0 million at December 31, 2007.

Oil and Gas Properties. The Company utilizes the full cost method of accounting for oil and gas activities. Under this method, subject to a limitation based on estimated value, all costs associated with property acquisition, exploration and development, including costs of unsuccessful exploration, are capitalized within a cost center on a country basis. No gain or loss is recognized upon the sale or abandonment of undeveloped or producing oil and gas properties unless the sale represents a significant portion of oil and gas properties and the sale or abandonment significantly alters the relationship between capitalized costs and proved oil and gas reserves of the cost center. Depletion and amortization of oil and gas properties is computed on the units-of-production method based on proved reserves. Amortizable costs include estimates of future development costs of proved undeveloped reserves.

Capitalized costs of oil and gas properties may not exceed an amount equal to the present value, discounted at 10%, of the estimated future net cash flows from proved oil and gas reserves plus the cost, or estimated fair market value, if lower, of unproved properties. Should capitalized costs exceed this ceiling, an impairment is recognized. The present value of estimated future net cash flows is computed by applying year-end prices of oil and natural gas to estimated future production of proved oil and gas reserves as of year-end, less estimated future expenditures to be incurred in developing and producing the proved reserves and assuming continuation of existing economic conditions.

Asset Retirement Obligation. Asset retirement obligations associated with tangible long-lived assets are accounted for in accordance with SFAS 143, Accounting for Asset Retirement Obligations. The estimated fair value of the future costs associated with dismantlement, abandonment and restoration of oil and gas properties is recorded generally upon acquisition or completion of a well. The net estimated costs are discounted to present values using a risk adjusted rate over the estimated economic life of the oil and gas properties. Such costs are capitalized as part of the related asset. The asset is depleted on the units-of-production method on a field-by-field basis. The liability is periodically adjusted to reflect (1) new liabilities incurred, (2) liabilities settled during the period, (3) accretion expense, and (4) revisions to estimated future cash flow requirements. The accretion expense is recorded as a component of depletion, amortization and accretion expense in the accompanying consolidated statements of operations.

Guarantees. As part of a Gas Gathering Agreement we have with CCES Piceance Partners1, LLC (“CCES”), we have guaranteed that, should there be a mutual failure to execute a formal agreement for long-term gas gathering services in the future, we will repay CCES for certain costs they have incurred in relation to the development of a gas gathering system. We have accounted for this guarantee using FASB Interpretation No. 45 as amended, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which requires us to recognize a liability for the obligations undertaken upon issuing the guarantee in order to have a more representationally faithful depiction of the guarantor’s assets and
 
18

PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 
liabilities. Accordingly, we have recognized a $ 2.0 million contingent purchase obligation and related intangible asset on our consolidated balance sheet as of December 31, 2007. 
 
Impairment. SFAS 144, Accounting for the Impairment and Disposal of Long-Lived Assets, requires long-lived assets to be held and used to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We use the full cost method of accounting for our oil and gas properties. Properties accounted for using the full cost method of accounting are excluded from the impairment testing requirements under SFAS 144. Properties accounted for under the full cost method of accounting are subject to SEC Regulation S-X Rule 4-10, Financial Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy and Conservation Act of 1975 (“Rule 4-10”). Rule 4-10 requires that each regional cost center’s (by country) capitalized cost, less accumulated amortization and related deferred income taxes not exceed a cost center “ceiling”. The ceiling is defined as the sum of:

 
The present value of estimated future net revenues computed by applying current prices of oil and gas reserves to estimated future production of proved oil and gas reserves as of the balance sheet date less estimated future expenditures to be incurred in developing and producing those proved reserves to be computed using a discount factor of 10%; plus

       The cost of properties not being amortized; plus

       The lower of cost or estimated fair value of unproven properties included in the costs being amortized; less

       Income tax effects related to differences between the book and tax basis of the properties.

If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling, the excess is charged to expense. During the three-months ended December 31, 2007 there was no impairment charge to expense. During the three-months ended December 31, 2006, we recorded an impairment charge in the amount of $5.2 million.

Fair Value. The carrying amount reported in the consolidated balance sheets for cash, receivables, prepaids, accounts payable and accrued liabilities approximates fair value because of the immediate or short-term maturity of these financial instruments.

Based upon the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of payable notes, approximates their face value.

Revenue Recognition. We recognize revenue from the sales of natural gas and crude oil related to our interests in producing wells when delivery to the customer has occurred and title has transferred. We currently have no gas balancing arrangements in place.

Comprehensive Loss. Comprehensive loss consists of net loss and foreign currency translation adjustments. Comprehensive loss is presented net of income taxes in the consolidated statements of stockholders’ equity and comprehensive loss.

Income Taxes. In June 2006, the FASB issued Interpretation (“FIN”) 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was effective for us on October 1, 2007. The cumulative effect of adopting FIN 48 did not have a significant impact on the Company’s financial position or results of operations and accordingly no adjustment was made.
 
19

PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 

The Company has adopted the provisions of SFAS 109, Accounting for Income Taxes. SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Temporary differences between the time of reporting certain items for financial and tax reporting purposes consist primarily of exploration and development costs on oil and gas properties, and stock based compensation of options granted.

Loss per Common Share. Basic loss per share is based on the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Convertible equity instruments such as stock options and convertible debentures are excluded from the computation of diluted loss per share, as the effect of the assumed exercises would be anti-dilutive. The dilutive weighted-average number of common shares outstanding excluded potential common shares from stock options and warrants of approximately 139,863,026 and 44,701,500 for the three-months ended December 31, 2007 and 2006, respectively.

Share Based Compensation. Effective October 1, 2006, we adopted the provisions of SFAS 123(R) (as amended), Share-Based Payment, using the modified prospective method, which results in the provisions of SFAS 123(R) being applied to the consolidated financial statements on a going-forward basis. SFAS 123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (“APB”) Opinion 25, Accounting for Stock Issued to Employees. SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services at fair value, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

Stock-based compensation awarded to non-employees is accounted for under the provisions of EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the service period, which generally represents the vesting period.

Recently Issued Accounting Pronouncements. In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and is to be applied prospectively as of the beginning of the fiscal year in which the statement is applied. The Company is required to adopt SFAS 160 in the first quarter of 2009. Management believes that the adoption of SFAS 160 will have no impact on our consolidated results of operations, cash flows or financial position.

In December 2007, the FASB issued SFAS 141(R), Business Combinations. SFAS 141(R) replaces SFAS 141 and provides greater consistency in the accounting and financial reporting of business combinations. SFAS 141(R) requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date. This includes the measurement of the acquirer’s shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring
 
20

PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 
cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance and deferred taxes. SFAS 141(R) is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and is to be applied prospectively as of the beginning of the fiscal year in which the statement is applied. Early adoption is not permitted. The Company is required to adopt SFAS 141(R) in the first quarter of 2009. Management believes that the adoption of SFAS 141(R) will have no impact on our consolidated results of operations, cash flows or financial position.

In February 2007, the Financial Accounting Standards Board, or “FASB”, issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, which allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. SFAS 159 is effective for us on October 1, 2008. We have not assessed the impact of SFAS 159 on our consolidated results of operations, cash flows or financial position.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for more information about: (1) the extent to which companies measure assets and liabilities at fair value; (2) the information used to measure fair value; and (3) the effect that fair value measurements have on earnings. SFAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. SFAS 157 does not expand the use of fair value to any new circumstances. SFAS 157 is effective for us on October 1, 2008. We have not assessed the impact of SFAS 157 on our consolidated results of operations, cash flows or financial position.

Supplemental Cash Flow Information. Supplemental cash flow information for the three months ended December 31, 2007 and 2006, respectively, and cumulative from inception (June 2005) is as follows:

   
Three-Months
Ended
December 31,
2007
   
Three-Months
Ended
December 31,
2006
   
Cumulative
From Inception
(June 20, 2005)
to
December 31,
2007
 
   
(unaudited, restated, $ in thousands)
 
Supplemental disclosures of non-cash investing and financing activities
                 
Shares issued for expenditures advanced
  $     $     $ 100  
Contracts for oil and gas properties
  $ (1,500   $ 2,900     $ 12,024  
Shares issued for debt conversion
  $ 6,384     $     $ 28,416  
Shares issued for finance costs
  $ 56     $     $ 56  
Shares issued for property
  $ 9,000     $     $ 90,000  
Shares returned on property conveyance
  $ (1,408 )   $     $ (1,408 )
Shares issued for property and finder’s fee on property
  $     $     $ 9,644  
Warrants issued for debt
  $ 1,862     $     $ 6,532  
Non-cash uses of notes payable, accounts payable and accrued liabilities
  $     $     $ 26,313  
Convertible debt issued for property
  $     $     $ 1,200  
Common stock issuable
  $     $ 4,128     $  
Shares issued for common stock offerings
  $     $     $ 2,900  
Debt issued for common stock previously subscribed – related party
  $ 2,858     $     $ 2,858  
Receipt of trading securities related to sale of heavy oil assets
  $ 5,529     $     $ 5,529  
Debt discount related to beneficial conversion feature and warrants
  $ 6,956     $     $ 6,956  
Increase in oil and gas properties related to relief of joint interest billings
  $ 12,707     $     $ 12,707  

 
21

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)

Note 4 — Agreements with MAB Resources LLC

The Company and MAB Resources LLC (“MAB”) have entered into various agreements described below. MAB is a Delaware limited liability company controlled by the largest shareholder of the Company, who had an approximate 53.8% beneficial ownership interest in us at December 31, 2007. MAB is in the business of oil and gas exploration and development.

The Development Agreement. Commencing July 1, 2005 and continuing through December 31, 2006, the Company and MAB operated pursuant to the Development Agreement, and a series of individual property agreements (collectively, the “EDAs”).

The Development Agreement set forth: (i) MAB’s obligation to assign to the Company a minimum 50% undivided interest in any and all oil and gas assets that MAB was to acquire from third parties in the future; and (ii) MAB’s and the Company’s long-term relationship regarding the ownership and operation of all jointly-owned properties. Each of the Properties acquired was covered by a property-specific EDA that was consistent with the terms of the Development Agreement.

The material terms of the Development Agreement and the EDAs were as follows:

i. MAB and the Company each owned an undivided 50% working interest in all oil and gas leases, production facilities, and related assets (collectively, the “Properties”).

ii. The Company was named as Operator, and had appointed a related controlled entity, MAB Operating Company LLC, as sub-operator. The Company and MAB agreed to sign a joint operating agreement, governing all operations.

iii. Each party was to pay its proportionate share of costs and receive its proportionate share of revenues, subject to the Company bearing the following burdens:

a. Each assignment of Properties from MAB to the Company reserved an overriding royalty equivalent to 3% of 8/8ths (proportionately reduced to 1.5% of the Company’s undivided 50% working interest in the Properties) (the “MAB Override”), payable to MAB out of production and sales.

b. Each EDA provided that the Company would pay 100% of the cost of acquisitions and operations (“Project Costs”) up to a specified amount, after which time each party shall pay its proportionate 50% share of such costs. The maximum specified amount of Project Costs of which the Company was to pay 100%, under the Development Agreement for properties acquired in the future, was $100.0 million per project. There was no “before payout” or “after payout” in the traditional sense of a “carried interest” because the Company’s obligation to expend the specified amount of Project Costs and MAB’s receipt of its 50% share of revenues applied without regard to whether or not “payout” had occurred. Therefore, the Company’s payment of all Project Costs up to such specified amount may have occurred before actual payout, or may have occurred after actual payout, depending on each project and set of Properties.

c. Under the Development Agreement, the Company was to pay to MAB monthly project development costs representing a specified portion of MAB’s “carried” Project Costs. The total amount incurred to MAB by the Company was to be deducted from MAB’s portion of the Project Costs carried by the Company. During 2007, 2006 and 2005, we paid MAB $1.8 million, $4.5 million and $0.9 million, respectively, for Project Costs which are classified on the consolidated statements of operations as Project development costs — related party.

The Consulting Agreement. Effective January 1, 2007, the Company and MAB entered into an Acquisition and Consulting Agreement (the “Consulting Agreement”) which replaced in its entirety the Development Agreement entered into July 1, 2005, and materially revised the relationship between MAB and the Company. The material terms of the Consulting Agreement provide as follows:
 
22

PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 
i. MAB conveyed to the Company its entire remaining undivided 50% working interest in all rights and benefits under each EDA, and the Company assumed its share of all duties and obligations under each individual EDA (such as drilling and development obligations), with respect to said remaining undivided 50% working interest,

ii. A consulting agreement was agreed upon, including the Company’s obligation to pay fees in the amount of $.03 million per month for services rendered to us for which we paid a total of $0.2 million, during the year ended September 30, 2007,

iii. As a result of MAB’s above-referenced conveyance of its remaining undivided 50% working interest to us, the Company’s working interest in certain oil and gas properties increased from 50% to 100%,

iv. The Company’s obligation to pay up to $700.0 million in capital costs for MAB’s 50% interest as well as the monthly project cost advances against such capital costs was eliminated,

v. The Company became obligated for monthly payments in the amount of $0.2 million under a $13.5 million promissory note,

vi. MAB’s overriding royalty interest (the “Override”) was increased from 3% to 5%, half of which accrues but is deferred for three years. The Override does not apply to the Company’s Piceance II properties, and did not apply to certain other properties to the extent that the Override would cause the Company’s net revenue interest to be less than 75%,

vii. MAB would receive 7% of the issued and outstanding shares of any new subsidiary with assets comprised of the subject properties,

viii. MAB received 50.0 million shares of PetroHunter Energy Corporation, and would receive up to an additional 50.0 million shares (the “Performance Shares”) if the Company met certain thresholds based on proven reserves.

We accounted for the acquisition component of the Consulting Agreement in accordance with the purchase accounting provisions of SFAS 141 Business Combinations. Accordingly, at the date of acquisition, we recorded oil and gas properties of $94.5 million, notes payable of $13.5 million, and common stock and additional-paid-in capital totaling $81.0 million (equal to the 50.0 million shares issued to MAB at the trading price of $1.62 per share for our common stock on the trading date immediately preceding the closing date of the transaction).

On October 29, 2007, November 15, 2007, and December 31, 2007, we entered into the first, second, and third amendments, respectively, to the Consulting Agreement (the “First Amendment”, the “Second Amendment”, and the “Third Amendment”, respectively, and collectively, “the Amendments”). Portions of the First Amendment were effective January 1, 2007, the Second Amendment was effective November 1, 2007, and the Third Amendment was effective December 31, 2007. The Amendments significantly changed several provisions of the Consulting Agreement.

Pursuant to the First Amendment: (a) MAB relinquished its overriding royalty interest in all properties in Montana and Utah effective October 1, 2007 (the Override still applies to the Company’s Australian properties and Buckskin Mesa property); (b) MAB received 25.0 million additional shares of our common stock; (c) MAB relinquished all rights to the Performance Shares; and (d) the parties’ rights and obligations related to MAB’s consulting services were terminated effective retroactively back to January 1, 2007.

Under the terms of the Second Amendment, effective November 1, 2007, the note payable to MAB was reduced in accordance with and in exchange for the following (see Note 9 ):
 
 
23

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)


 
By $8.0 million in exchange for 16.0 million shares of our common stock with a value of $3.7 million based on the closing price of $0.23 per share at November 15, 2007 and warrants to acquire 32.0 million shares of our common stock at $0.50 per share. The warrants expire on November 14, 2009 and were valued at $1.8 million;

 
By $2.5 million in exchange for our release of MAB’s obligation to pay the equivalent amount as guarantor of the performance of Galaxy Energy Corporation under the subordinated unsecured promissory note dated August 31, 2007 (see Note 12 );

 
A reduction to the note payable to MAB of $0.5 million for cash payments made during the first quarter of 2008.
 
Further, in the Second Amendment, MAB waived all past due amounts and all claims against PetroHunter.

The net effect of the reduction of debt and issuance of our common shares in the Second Amendment resulted in a net benefit to us of $2.7 million and has been reflected as additional paid-in-capital during the first fiscal quarter ending December 31, 2007. Monthly payments on the revised promissory note in the amount of $2.0 million commence February 1, 2008 and will be paid in full in two years.

Under the terms of the Third Amendment, effective December 31, 2007, the note payable to MAB was reduced: (a) by $0.4 million for our release of MAB’s obligation to pay the equivalent amount as guarantor of the performance of Galaxy Energy Corporation under the subordinated unsecured promissory note dated August 31, 2007 (see Note 12 ); and (b) by $0.2 million for MAB assuming certain obligations of PaleoTechnology, Inc. (“Paleo”), which Paleo owed to the Company.

Note 5 — Oil and Gas Properties

Oil and gas properties consisted of the following ($ in thousands):

   
December 31,
2007
   
September 30,
2007
 
   
(unaudited,
restated)
       
Oil and gas properties, at cost, full cost method
           
Unproved
           
United States
  $ 102,967     $ 107,239  
Australia
    24,110       23,569  
Proved, United States
    37,219       57,168  
Total
    164,296       187,976  
Less accumulated  depreciation, depletion, amortization and  impairment
    (1,290 )     (25,133 )
  $ 163,006     $ 162,843  

Included in oil and gas properties above is capitalized interest of $0.2 million and $1.5 million for three-months ended December 31, 2007 and the year ended September 30, 2007, respectively. No interest was capitalized during the three-months ended December 31, 2006.

The following is a summary of depreciation, depletion, amortization and accretion, as reflected in the consolidated statements of operations (including depletion and amortization of oil and gas properties per thousand cubic feet of natural gas equivalent) for the three-months ended December 31, ($ in thousands, except per thousand cubic feet):

 
24

 
PETROHUNTER ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, restated)
 
   
2007
   
2006
   
Cumulative
Total
 
   
(restated)
         
(restated)