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EX-5 - EXHIBIT 5 - PetroShare Corp.ex5.htm
EX-4.2 - EXHIBIT 4.2 - PetroShare Corp.ex4x2.htm
EX-23.1 - EXHIBIT 23.1 - PetroShare Corp.ex23x1.htm
 

 
As filed with the Securities and Exchange Commission on January 14, 2015
 
Registration No. 333-198881


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
 
AMENDMENT NO. 3
to
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

PETROSHARE CORP.
(Exact name of registrant as specified in its charter)
______________________________

Colorado
1311
46-1454523
(State or other jurisdiction of
(Primary Standard Industrial
(I.R.S. Employer
incorporation or organization)
Classification Code Number)
Identification No.)

7200 S. Alton Way, Suite B-220
Centennial, Colorado 80112
(303) 500-1169
(Address and telephone number of principal executive offices)

Stephen J. Foley,
Chief Executive Officer
PetroShare Corp.
7200 S. Alton Way, Suite B-220
Centennial, Colorado 80112
(303) 500-1169
(Name, address and telephone number of agent for service)

With a copy to:
David J. Babiarz, Esq.
Dufford & Brown, P.C.
1700 Broadway, Suite 2100
Denver, Colorado 80290-2101
(303) 861-8013

Approximate date of commencement of proposed sale to public: As soon as practical after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o


If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” ”accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
Accelerated filer
o
Large accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
x
 
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
Title of each class of
securities to be registered
Amount to be
registered (1)
 
Proposed maximum offering price per share 
 
Proposed maximum aggregate
offering price
   
Amount of
registration fee
 
Common stock, $0.001 par value, to be sold by the selling shareholders
9,426,003 shares 
 
 
$1.00 
(2)
 
$
9,426,003
(2)  
$
1,095.30
 
Common stock, $0.001 par value, to be sold by the registrant
4,600,000 shares 
 
 
$1.00 
   
$
4,600,000
   
$
534.52
 
Broker warrants to purchase common stock (3) –  –  $ $ (4)
Common stock, $0.001 par value,  issuable upon exercise of broker warrants 460,000 shares  $1.10  $ 506,000 $ 58.80
TOTAL:
14,486,003 shares 
         
$
14,532,003
   
$
1,688.62
 
 

(1)
Pursuant to Rule 416 under the Securities Act of 1933, as amended, includes an indeterminate number of additional shares to prevent dilution in the event of stock splits, stock dividends or similar events.

(2)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.
 
(3)
We may issue broker warrants to participating broker-dealers in this offering, subject to approval of the compensation provisions by FINRA.  Any broker warrant issued by us would be exercisable to purchase up to 460,000 shares of our common stock (representing 10% of the total offering) and be exercisable at a price of $1.10 per share. As is customary, the exercise price would be subject to adjustments in certain events, including stock splits, stock dividends and recapitalizations.  The warrant would be exercisable for a period of five years from the date of issuance.

(4)
No registration fee required pursuant to Rule 457(g) under the Securities Act.

 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
 

 
The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED JANUARY 14, 2015

PRELIMINARY PROSPECTUS
 

PETROSHARE CORP.
___________________
4,600,000 Shares
of Common Stock
Offered by
PetroShare Corp.
___________________
9,426,003 Shares
of Common Stock
Offered by
Selling Shareholders
 


This is the initial public offering of our stock.  We are offering up to 4,600,000 shares of our common stock on a “best efforts” basis at a price of $1.00 per share. The shares will be offered through our officers and directors for a period of 60 days from the date of this prospectus, subject to an extension in our discretion for up to 90 additional days.  The Selling Shareholders identified in this prospectus are offering an additional 9,426,003 shares.  We will not receive any of the proceeds from the sale of the shares being sold by the Selling Shareholders. There is presently no market for our common stock. 
___________________

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and have elected to comply with certain reduced public company reporting requirements for future filings.  Investing in our common stock involves a high degree of risk and should only be purchased by those who can afford to lose their entire investment.  Before buying our common stock, you should read carefully the “RISK FACTORS” beginning on page 8 of this prospectus, including the material risks associated with our status as an emerging growth company.
__________________

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of our common stock or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
 
Price to the public
   
Underwriting
discount or
commissions(1)
   
Net proceeds to
the Company(2)
 
Per share
 
$
1.00
    $
-0-
   
$
1.00   
Total (4,600,000 shares)
  $ 4,600,000    
$
-0-
   
$
4,600,000   

(1)
We may sell the shares through FINRA registered broker-dealers or other intermediaries and pay a commission or other compensation in an amount up to 10% of the sales price and issue broker warrants exercisable to purchase shares of our common stock in an amount up to 10% of the number of shares sold through the efforts of such brokers. However, we have no obligation to do so.

(2)
Excludes expenses payable by the Company in connection with the offering, estimated to be $100,000, including legal and accounting fees, filing fees, travel and miscellaneous expenses.
 
 

 

Certain of our shareholders identified in this prospectus under SELLING SHAREHOLDERS or their successors or assigns may offer and sell from time to time up to 9,426,003 shares of our common stock. The shares may be offered at a fixed price of $1.00 per share until such time, if ever, that our shares are quoted on the electronic bulletin board, which we refer to as the OTC Bulletin Board, maintained by the Financial Industry Regulatory Authority, which we refer to as FINRA, or the interdealer quotation system known as OTC Markets, following which the shares may be offered at prices prevailing in the market or at privately negotiated prices.  We will pay the expenses incurred to register the shares for resale, but the Selling Shareholders will pay any underwriting discounts, commissions or agent’s commissions related to the sale of their shares of common stock.  See PLAN OF DISTRIBUTION on page 52.
This document does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such offer or solicitation is unlawful. An offer is not being made or directed to, nor is this document being delivered to, persons in any jurisdiction in which the making or acceptance of the offer would not be in compliance with the laws of such jurisdiction. However, we may, in our sole discretion, take such action as we may deem necessary to extend the offer to persons in any such jurisdiction.
__________________


The date of this prospectus is __________, 2015


TABLE OF CONTENTS

 
Additional Information

This prospectus contains descriptions of certain contracts, agreements or other documents affecting our business. These descriptions are not necessarily complete. For the complete text of these documents, you can refer to the exhibits filed with the registration statement of which this prospectus is a part. (SeeWHERE YOU CAN FIND MORE INFORMATION”).

You should rely only on the information contained in this prospectus, or to which we have referred you. We have not authorized anyone to provide you with information other than as contained or referred to in this prospectus. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate as of the date of this document.


Special Note Regarding Forward-Looking Statements

Please see the note under “RISK FACTORS for a description of special factors potentially affecting forward-looking statements included in this prospectus.

 

 
 
 
SUMMARY

The following summary highlights information contained elsewhere in this prospectus. It does not contain all of the information you should consider before investing in our stock. You should read the entire prospectus carefully, including the sections entitled “RISK FACTORS” and “FINANCIAL STATEMENTS.”

As used in this prospectus, unless the context requires otherwise, the terms “PetroShare,” “we,” “our” or “us” refer to PetroShare Corp.

Our Company

We were organized under the laws of the State of Colorado on September 4, 2012. We were organized to investigate, acquire and develop crude oil and natural gas properties in the Rocky Mountain or mid-continent region of the United States and produce crude oil, liquids and/or natural gas from those properties. Since our inception in 2012, we have completed the acquisition of certain crude oil and natural gas working interests in approximately 1,100 net undeveloped acres located in Moffat County, Colorado, and, together with our working interest partners, have completed drilling and casing two wells on that prospect. Currently, we own a 25% working interest in the wells and three other entities collectively own the remaining 75% working interest.
 
Based on information gathered and analysis performed in connection with drilling the two wells, we and our working interest partners decided to complete both wells. We commenced preliminary completion efforts in January 2014, but were halted by stipulations in our drilling permit related to the protection of wildlife. Following expiration of the wildlife stipulations in April 2014, we continued completion and stimulation efforts. We put the first well into production on November 26, 2014, and put the second well into production on December 12, 2014.  As of January 13, 2015, and based on preliminary test results, the first well was capable of producing at a rate of five to seven barrels (bbls) of crude oil per day, potentially from multiple Niobrara zones.  We have not yet received adequate data to determine a production rate for the second well. As of that date, however, we have generated only nominal revenue related to the sale of crude oil collected during our testing efforts.
 
Our goal is to become an independent producer of crude oil, natural gas and liquids, and participate successfully in the crude oil and natural gas industry. In the short term, we hope to identify and develop an economic, low-risk drilling inventory and oil-weighted reserve base to demonstrate the success of our business plan and management team.  In the longer term and depending on a number of factors, including drilling and production results, general economic conditions, crude oil and natural gas prices, and the availability of capital, we would entertain expanding our operations through internal growth and/or opportunistic acquisitions, or selling our assets to a larger independent or major crude oil and natural gas producer.
 
We believe we are distinguished from other start-up companies and independent crude oil and natural gas producers by the experience and relationships of our management team. We also believe the recent success demonstrated by other crude oil and natural gas producers drilling in the Niobrara Shale formation in Colorado provides a roadmap for our success.
 
Since inception, we have financed our operations through a combination of equity financing and the sale of working interests in the Buck Peak prospect. From inception through January 13, 2015, we raised approximately $3,374,002 through the sale of our common stock in private placements, including a $12,000 investment by our founders, and sold 75% of the working interests in the two wells on the Buck Peak prospect. We have used the proceeds from the sale of our common stock and prospect fees from the sale of the working interests to acquire the Buck Peak prospect, to finance our share of drilling costs and expenses, to pay general and administrative expenses, and to acquire a portion of the working interest of one of our former partners.
 
Our office is currently located at 7200 South Alton Way, Suite B-220, Centennial, CO 80112. Our telephone number, c/o Stephen J. Foley, our Chief Executive Officer, is (303) 500-1169. We maintain a website at www.petrosharecorp.com, but the information on our website is not part of this prospectus.
 
 
 
 
1

 
 
 
Buck Peak Prospect

 
On April 30, 2013, we completed the acquisition of crude oil and natural gas working interests ranging from less than 7.5% up to 100% in certain parcels totaling approximately 8,400 gross acres (1,100 net acres) located in Moffat County, Colorado, which we refer to as the Buck Peak prospect.  A small number of leases in which we own a minor interest were allowed to expire by the owner of the major working interest, such that we now own an interest in approximately 7,777 gross and 1,060 net acres.  This property is located approximately six miles southeast of Craig, Colorado, in the northwest corner of the State. The acreage position represented by the Buck Peak prospect is located in and around the Buck Peak Field, originally discovered in the late 1950s and developed on and off through the early 1970s.  Records from the Colorado Oil and Gas Conservation Commission (“COGCC”) show that the Buck Peak Field has produced over six million BOE (barrels of oil equivalent) from the Niobrara Shale geologic formation since its discovery and still has active wells producing which are over 40 years old.
 
The Buck Peak prospect targets crude oil and associated wet gas from the fractured Niobrara Shale formation. In addition, the prospect has demonstrated a potential for coal bed methane and conventional gas production from relatively shallow zones above the Niobrara. Wells drilled on the prospect acreage by other companies also have indicated both crude oil and natural gas production from various zones deeper than the Niobrara.  However, our first two wells were not drilled deep enough to test these lower zones.
 
The two wells that we drilled in 2013 are located in Section 25 of the Buck Peak prospect, on what we believe to be the top of the geologic structure holding crude oil and natural gas. Each well was drilled to a true vertical depth (TVD) of approximately 7,900 feet, one drilled vertically and the other directionally, from a single well pad. Following drilling of the two wells in December 2013, we conducted preliminary completion work until February 15, 2014, when wildlife stipulations contained in our drilling permit required postponement of further operations. Following expiration of those stipulations in May 2014, we resumed completion efforts in some of the zones deemed capable of production. After completing fracture stimulation on some of the lower Niobrara zones, we placed the first well on production on November 26, 2014 and put the second well on production on December 12, 2014. We have completed the installation of permanent surface production facilities for both wells and have weatherproofed the pipes and equipment. We intend to keep the wells producing during early 2015. In spring 2015, we likely will fracture stimulate an upper zone on our first well and will evaluate the production results for possible future drilling in the area and/or additional fracture stimulation on the existing wells.
 
Possible Additional Prospects
 
We also are exploring opportunities to acquire additional acreage, both developed and undeveloped, in the area surrounding the Buck Peak prospect and in other areas of the Rocky Mountain region.  In November 2014, we executed an agreement with a local lease broker affiliated with a local mineral interest owner that we hope will lead to the acquisition of Niobrara and Codell leases in the Wattenberg Field of northeast Colorado. We also may consider opportunities in other areas of the Rocky Mountain region.  We are in the process of validating the extent of the affiliated mineral owner’s estate as well as other leaseholders in the defined area of interest.
 
 


 
 
 
2

 
 
 
The Offering
 
       
 
Common stock outstanding before the offering (1)
17,008,191
 
 
Common stock offered by us (1)
 
4,600,000  
 
Common stock offered by the selling shareholders                                                                                    
 
9,426,003  
 
Common stock outstanding after the offering (1)(2)
21,608,191
 
 
Use of proceeds                                                                                    
We estimate that our net proceeds from the sale of the common stock we are offering will be approximately $4,500,000 after deducting estimated offering expenses payable by us. We intend to use the net proceeds from this offering to pay for general corporate purposes, including additions to working capital and capital expenditures. See “USE OF PROCEEDS.”
 
 
 
Dividend Policy
We do not anticipate paying any dividends on our common stock in the foreseeable future; however, we may change this policy in the future. See “Dividend Policy.”
 
  ___________________________    
  (1) Excludes 2,000,000 shares of common stock underlying outstanding options that are currently exercisable.  
  (2)
Assumes that all of the common stock offered under this prospectus is sold and excludes the issuance of common stock underlying the broker warrants, of which there is no assurance.
 
 
  
  
 
Risk Factors

This offering involves a high degree of risk. Our common stock should only be purchased by persons who can afford to lose their entire investment. Risk factors relating to our company and the crude oil and natural gas industry include:
 
     
 
·
Since we are a new business with essentially no operating history, investors have no basis to evaluate our ability to operate profitability.
 
     
 
·
As described in the notes to our financial statements, there is substantial doubt about our ability to continue as a going concern.
 
   
 
·
We are dependent on achieving profitable operations and receipt of additional working capital to fund continued development and implementation of our business plan, and our failure to obtain this capital may cause the partial or total loss of your investment.
 
     
 
·
Since we have no reserves at this time, investors in our common stock cannot be assured that we will have any cash flow in the future.
 
     
 
·
Our investment in a single prospect and the concurrent lack of diversification will increase the risk to investors that we may not be profitable.
 
     
 
·
If the Buck Peak prospect is not commercially productive of crude oil or natural gas, any funds spent on exploration may be lost.  
     
 
Whether or not the Buck Peak prospect is commercially productive, there is no assurance that we will be successful in identifying or acquiring other crude oil or natural gas prospects. 
 
 
       
 
 
 
3

 
 
·
 
A major oil company, Southwestern Energy Co., acquired in 2014 all the leasehold and certain producing assets of both Quicksilver Resources, Inc. and SWEPI (Royale Dutch Shell affiliate) in the Niobrara play in the Sand Wash Basin covering Moffat and Routt Counties, Colorado and such acquisition may increase competition for leases, drilling rigs and other services in the area.
 
 
 
 
 
 
·
Our ability to sell any production and/or receive market prices for our production may be adversely affected by lack of transportation, capacity constraints and interruptions.
 
 
 
 
 
 
·
We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
 
 
 
 
 
 
·
We are not required to obtain an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 until we are no longer an emerging growth company.
 
   
 
·
Our financial statements may not be comparable to other public companies.
 
   
 
While we believe we have adequate internal controls over financial reporting, we will be required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have a material adverse effect on the price of our common stock.
 
     
 
·
We may not be required to register our common stock under the Exchange Act, which would reduce the disclosure we are required to provide to our investors compared to other public companies and may adversely affect the price of our stock in any market that may develop.   
 
   
 
·
Our business is substantially dependent on our senior executive officers and the loss of service of any of these individuals would adversely affect our business.
 
   
 
·
Because we do not have an audit or compensation committee, shareholders will have to rely on our Board of Directors, which includes only one “independent” director as defined by a national securities exchange, to perform these functions.
 
   
 
·
Colorado law and our Articles of Incorporation may protect our directors from certain types of lawsuits at the expense of the shareholders.
 
   
 
·
Crude oil and natural gas exploration and development are affected by fluctuations in crude oil and natural gas prices and low prices could have a material adverse effect on the future of our business.
 
   
 
·
The cost of crude oil and natural gas exploration is extremely volatile and may adversely affect our operations.
 
   
 
·
Our operations are subject to health, safety and environmental laws and regulations which may expose us to significant costs and liabilities and which may not be covered by insurance.
 
   
 
·
 
Federal, state, and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as government reviews of such activities, could result in increased costs, additional operating restrictions or delays, and adversely affect our production and/or ability to record future reserves.
 
 
 
 
4

 
         
 
·
Competition in the crude oil and natural gas industry is intense, and many of our competitors have resources that are substantially greater than ours.
 
 
 
 
 
 
·
Seasonal weather conditions, lease stipulations, and permit restrictions adversely affect our ability to conduct drilling activities where we expect to operate.
 
 
 
 
 
 
·
We may incur losses as a result of title deficiencies.
 
 
 
 
 
 
·
The crude oil and natural gas business involves many operating risks that can cause substantial losses.
 
   
 
·
Extensive state and federal regulation may be costly to comply with and may result in significant fines and penalties.
 
   
 
Risk factors relating to our common stock include the following:
 
   
 
·
The initial price of our common stock in this offering has been arbitrarily determined and bears no necessary relationship to our lack of earnings, the book value of our common stock or any other traditional criteria of value.
 
   
 
·
Our offering is being conducted on a “best efforts” basis, and there is no assurance that we will obtain the funding we need to explore our property, pay our administrative expenses or further our business plan.
 
   
 
·
Since no broker or dealer has committed to create or maintain a market in our stock, there is no assurance that our stock will be quoted in the OTC Bulletin Board or OTC Markets, and purchasers of our common stock may have difficulty selling their shares, should they desire to do so.
 
   
 
·
Our stock price may be volatile and as a result you could lose all or part of your investment.
 
   
 
·
Investors in this offering will experience immediate substantial dilution of their investment.
 
   
 
·
A small number of existing shareholders own a significant amount of our common stock, which could limit your ability to influence the outcome of any shareholder vote.
 
   
 
·
The sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
 
   
 
·
Since our common stock is not presently listed, nor expected to be listed, on a national securities exchange, trading in our shares will likely be subject to rules governing “penny stocks,” which will impair trading activity in our shares.
 
   
 
·
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
 
   
 
·
Issuance of our stock in the future could dilute existing shareholders and adversely affect the market price of our common stock, if a public trading market develops.
 
   
 
·
 
We have never paid dividends on our common stock and we do not anticipate paying any in the foreseeable future.
 
 
 
 
 
 

5

 
 
 
Prospective investors in our common stock should be aware of these and other risk factors discussed in this prospectus.
 
Summary Financial Data
 
The following tables present certain selected historical financial data about our company. Historical financial information for the year ended December 31, 2013 has been derived from our financial statements, which have been audited by StarkSchenkein, LLP, our independent registered public accounting firm. The financial information as of and for the three and nine months ended September 30, 2014 and 2013 is unaudited. The selected balance sheet data also illustrates the anticipated proceeds to our company from this offering.  You should read the data set forth below in conjunction with the section entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” our financial statements and related notes included elsewhere in this prospectus.
 
 
 
 


 
 
 
6

 
 
 


Operating Data
 
 
Nine months
ended
September 30,
2014
 
Nine months
ended
September 30,
2013
 
Year
ended
December 31,
2013
 
 
(Unaudited)
 
 
Revenue
 
$
6,314
   
$
-
   
$
-
 
General and administrative expenses
   
520,731
     
253,224
     
473,668
 
Exploration costs
   
-
     
37,658
     
29,537
 
Total costs and expenses
   
534,025
     
292,267
     
504,089
 
Net (loss)
 
$
(527,681
)
 
$
(292,266
)
 
$
(504,075
)
Net (loss) per common share
 
$
(0.03
)
 
$
(0.02
)
 
$
(0.04
)



 
Balance Sheet Data
 
As of September 30, 2014
 
 
 
Actual (Unaudited)
   
 
   
As-Adjusted (1)
 
Cash
 
$
594,957
     
 
   
$
5,094,957
 
Joint interest billing receivable
   
105,011
             
105,011
 
Unproved crude oil and natural gas properties
   
452,780
             
452,780
 
Wells in progress
   
1,304,904
             
1,304,904
 
Total assets
   
2,511,158
             
7,011,158
 
Current Liabilities
   
119,960
             
119,960
 
Total Shareholders’ Equity
 
$
2,391,198
           
$
6,891,198
 

 
(1) The as-adjusted reflects the sale of all shares of common stock offered by the Company under this prospectus and includes the estimated offering expenses payable by the Company. There is no assurance that any or all of these shares will be sold, as the offering is being made on a “best efforts” basis.
 

 
7

 
RISK FACTORS

An investment in our securities involves a high degree of risk.  You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision.  If any of the following risks actually occurs, our business, financial condition or results of operation could materially suffer.  In that case, you may lose all or part of your investment.  If we are unable to prevent events that have a negative effect from occurring, then our business may suffer.

Risks Relating to Our Company

Since we are a new business with essentially no operating history, investors have no basis to evaluate our ability to operate profitability.  We were incorporated in September 2012 and have generated only nominal revenue related to the sale of crude oil collected during our testing efforts to date.  Our activities to date have been limited to organizational efforts, assembling a management team, raising capital, researching and developing our business plan, completing the acquisition of our first property and commencing our first drilling program.  We face all of the risks commonly encountered by other new businesses, including the lack of an established operating history, need for additional capital and personnel, and competition.  There is no assurance that our business will be successful or that we can ever operate profitably.  We may not be able to effectively manage the demands required of a new business in our industry, such that we may be unable to successfully implement our business plan or achieve profitability.
 
As described in the notes to our financial statements, there is substantial doubt about our ability to continue as a going concern.  This doubt is based in part on the recognition that we are an emerging growth company, have suffered operating losses since our inception, have generated very limited revenue since inception and are dependent on raising capital to continue in business.  Since our inception in 2012, we have generated only nominal revenue related to the sale of crude oil collected during our testing efforts and have never been profitable.  As of September 30, 2014, our accumulated deficit was approximately $1.7 million, including a loss of $504,075 in 2013 and a loss of $527,681 for the nine months ended September 30, 2014.  In the future, our ability to become profitable will depend on the success of our current drilling efforts, future exploration and development efforts and our ability to generate revenue sufficient to cover our costs and expenses.  In pursuit of those objectives, we will seek to identify additional hydrocarbons that can be extracted economically at operating and exploration properties.  We may suffer significant additional losses in the future and may never be profitable.  Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
We are dependent on achieving profitable operations and receipt of additional working capital to fund continued development and implementation of our business plan, and our failure to obtain this capital may cause the partial or total loss of your investment.  Our company has limited capitalization and is dependent upon achieving profitable operations and receipt of additional financing to continue operations.  Continued development of our business plan will require significant additional working capital, and we have no established source of obtaining that financing other than through this offering. Significant amounts of capital are required for companies to participate in the business of exploration for crude oil and natural gas resources, and many companies that are engaged in this business are significantly better capitalized than us.  We will also require additional capital to pay our administrative expenses, including salary and rent.  Adverse developments in our business or general economic conditions may require us to raise additional financing at prices or on terms that are disadvantageous to existing shareholders.  We may not be able to obtain additional capital at all and may be forced to curtail or cease our operations.  As an alternative to equity financing, we may seek debt financing or may be required to farm-out our crude oil and natural gas properties for development on less than favorable terms.  We currently have no credit available to us and we can offer no assurance that such debt will be available or if available, that it will be available on reasonable terms.  The inability to obtain necessary financing may adversely impact our ability to develop our properties and to expand our business operations.
Since we have no reserves at this time, investors in our common stock cannot be assured that we will have any cash flow in the future.  The Buck Peak prospect is the primary crude oil and natural gas prospect where we have invested all of our capital resources.  This prospect is in the early production stage. As of January 13, 2015, the first well was estimated to be capable of producing at a rate of five to seven bbls of crude oil per day. We have not yet received adequate data to determine a production rate for the second well. Due to the fact that the wells were only recently put on production, we have not collected enough data to evaluate the reserves that might be available.  Even with new technology such as 3D seismic and other exploration techniques, crude oil and natural gas exploration is a high risk undertaking.  As a result, investors have no assurance that we will have any cash flow.


 
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Our investment in a single prospect and the concurrent lack of diversification will increase the risk to investors that we may not be profitable. Our investment in the Buck Peak prospect and the capital required to pay our share of drilling costs increases the risk that the operation of our business may not be profitable, as we will not be able to spread the risk of investment and operation over a number of different assets until we become profitable or receive additional investment.  If one or both of the wells at the Buck Peak prospect is not successful in producing commercially viable amounts of crude oil and/or natural gas, our business may suffer and you may lose all or part of your investment.
 
If the Buck Peak prospect is not commercially productive of crude oil or natural gas, any funds spent on exploration and production may be lostAll of our current capital investment is tied up in the Buck Peak prospect.  Since the Buck Peak prospect is in the early production stage, we are dependent on establishing sufficient reserves at the Buck Peak prospect for additional cash flow and a return of our investment.  If the Buck Peak prospect is not economic, all of the funds that we have invested will be lost.  In addition, the failure of the Buck Peak prospect to produce commercially may make it more difficult for us to raise additional funds in the form of additional sale of our equity securities or working interests in other property in which we may acquire an interest.
 
Whether or not the Buck Peak prospect is commercially productive, there is no assurance that we will be successful in identifying or acquiring other crude oil and natural gas prospects.   Investigating and locating suitable property for acquisition is expensive and time consuming.  Even if we are successful in identifying one or more additional properties for acquisition, there is no assurance that we can obtain such property at reasonable prices or that sufficient working capital will be available to finance the acquisition.
 
A major oil company, Southwestern Energy Co., acquired in 2014 all the leasehold and certain producing assets of both Quicksilver Resources, Inc. and SWEPI (Royale Dutch Shell affiliate) in the Niobrara play in the Sand Wash Basin covering Moffat and Routt Counties and such acquisition may increase competition for leases, drilling rigs and other services in the area. Previously, SWEPI had announced plans to monetize their assets in this area as well as other selected assets across the US.  The agreement between SWEPI and Southwestern represents the culmination of SWEPI’s efforts as it relates to its Sand Wash Basin assets.  Drilling results in the Niobrara play in the Sand Wash Basin to date have been mixed, with some good wells and also some mechanically-plagued and uneconomic wells.  Southwestern’s entry into to this play may increase competition for rigs and oil field services as well as create competition for lease acquisitions, thus potentially driving prices upward.  There is no guarantee that Southwestern will develop the proper drilling and development strategies to economically develop the Niobrara on a wider scale.
 
Our ability to sell any production and/or receive market prices for our production may be adversely affected by lack of transportation, capacity constraints and interruptions.  The marketability of any production from the Buck Peak prospect or any other interests that we may acquire depends in part upon the availability, proximity and capacity of third-party refineries, natural gas gathering systems and processing facilities.  We expect to deliver any crude oil and natural gas produced from our properties through trucking services and pipelines that we do not own.  The lack of availability or capacity of these systems and facilities could reduce the price offered for any production or result in the shut-in of producing wells or the delay or discontinuance of development plans for properties.
We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.  As an “emerging growth company,” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to the following:
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reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and from holding a vote for stockholder approval of any golden parachute payments not previously approved.
We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock if such a market develops, and our stock price may be more volatile.
We are not required to obtain an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 until we are no longer an emerging growth company.  For so long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to obtain the auditor attestation of our assessment of our internal controls. Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting. We will remain an “emerging growth company” until the earliest to occur of (1) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion (subject to adjustment for inflation), (2) the last day of the fiscal year during which occurs the fifth anniversary of our initial public offering, (3) the date on which we have, during the  previous three-year period, issued more than $1 billion in non-convertible debt, or (4) the date on which we are deemed a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Once we are no longer an emerging growth company, compliance with Section 404(b) will be costly.
Our financial statements may not be comparable to other public companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b) of the JOBS Act.  This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.  As a result of this election, if the PCAOB adopts new or revised accounting standards and we decide to delay adoption of such changes, our financial statements may not be comparable to companies that comply with public company effective dates and the price of our common stock may be adversely affected.
While we believe we have adequate internal controls over financial reporting, we will be required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have a material adverse effect on the price of our common stock.  Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will likely be required to furnish a report by our management on internal controls for the fiscal year ending December 31, 2015.  Such a report must contain, among other matters, an assessment of the effectiveness of our internal controls over financial reporting, including a statement as to whether or not our internal controls are effective. This assessment must include disclosure of any material weaknesses in our internal controls over financial reporting identified by our management.  While we believe our internal controls over financial reporting are effective, we are still constructing the system, processing documentation and performing the evaluations needed to comply with Section 404, which is both costly and challenging.  Constructing and operating an effective system of internal controls can be especially challenging for companies like ours with limited personnel. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. If we are unable to assert that our internal controls over financial reporting are effective, or if we disclose significant deficiencies or material weaknesses in our internal controls, investors could lose confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on our stock price.
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We may not be required to register our common stock under the Exchange Act, which would reduce the disclosure we are required to provide to our investors compared to other public companies and may adversely affect the price of our stock in any market that may develop.   Our securities are not presently registered under the Exchange Act, and we may not be required or may not choose to register under that Act in the future.  Registration under the Exchange Act would be required if we meet certain minimum asset and shareholder requirements or if any of our securities were to be listed on a national securities exchange.  Since we do not believe that we will meet the minimum requirements for mandatory registration immediately following completion of this offering, and we do not expect that our common stock will be listed on an exchange in the foreseeable future, we may not be subject to certain reporting requirements imposed by that Act.  Among other consequences, we will not be required to comply with the proxy solicitation rules of the Exchange Act and our directors and officers will not be required to file reports of their trading activity in our stock under Section 16 of the Exchange Act. As a result, there will be less information available to the public regarding our corporate affairs and insider transactions in our common stock than other companies that have registered common stock under the Exchange Act.   
Our business is substantially dependent on our senior executive officers and the loss of service of any of these individuals would adversely affect our business.  Stephen J. Foley is our Chief Executive Officer and responsible for overseeing our business, developing our business plan and the strategic vision of our company.  Frederick Witsell is our President and responsible for identifying and managing our properties.  Each of these individuals is critical to the perceived success of our business.  The loss of service of either of these individuals would adversely affect our business, as we have very limited personnel and expect to rely on contractors for a majority of services that we require.  There is no assurance we would be able to replace either of such individuals, or if so, on terms that were acceptable to our company.  We have no key man life insurance on either of these individuals.
Because we do not have an audit or compensation committee, shareholders will have to rely on our Board of Directors, which includes only one “independent” director as defined by a national securities exchange, to perform these functions.  We do not presently maintain an audit or compensation committee. These functions are performed by our Board of Directors as a whole and only one of the members of our Board meets the definition of “independent” under the rules of any national securities exchange.  Since two of our current Board members are also part of our management team, there is a potential conflict where these individuals participate in discussions concerning management compensation and audit issues that may affect management decisions.  This lack of independence may adversely affect our corporate governance and the operation of our business.
Colorado law and our Articles of Incorporation may protect our directors from certain types of lawsuits at the expense of the shareholdersThe laws of the State of Colorado provide that directors of a corporation shall not be liable to the corporation or its shareholders for monetary damages for all but limited types of conduct.  Our Articles of Incorporation permit us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law.  The exculpation provisions may have the effect of preventing shareholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances.
Risks Relating to the Energy Production and/or Distribution Industry.
Crude oil and natural gas exploration and development are affected by fluctuations in crude oil and natural gas prices, and low prices could have a material adverse effect on the future of our business.  If exploration efforts are successful in identifying economic amounts of crude oil and natural gas, our future success will depend largely on the prices received for any crude oil or natural gas production.  Prices received also will affect the amount of future cash flow available for capital expenditures and may affect the ability to raise additional capital.  Lower prices may also affect the amount of crude oil and natural gas that can be commercially produced from reserves either discovered or acquired.  Lower prices may also make it uneconomical to drill in certain areas.

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Prices for crude oil and natural gas fluctuate widely. For example, the price of West Texas Intermediate (WTI) Crude Oil, as quoted on NYMEX, has ranged from a high of $101 per barrel to a low of $44 per barrel in the twelve months ended January 13, 2015. Factors that can cause price fluctuations include:

The level of consumer product demand;

Weather conditions;

Domestic and foreign governmental regulations;

Actions by other producers, including the Organization of the Petroleum Exporting Countries (OPEC);
 
The price and availability of alternative fuels;

Political and ethnic conflicts in crude oil and natural gas producing regions;

The domestic and foreign supply of crude oil and natural gas;

The price of foreign imports; and

Overall economic conditions.
The cost of crude oil and natural gas exploration is extremely volatile and may adversely affect our operations.  The costs of crude oil and natural gas exploration, such as the costs of drilling rigs, casing, cement, and pumps, and the fuel and parts necessary to keep the rigs and pumps operating and the costs of the oil field service crews have been volatile over the past few years in direct proportion to the amount of ongoing crude oil and natural gas exploration.  As with most other companies involved in resource exploration and development, we may be adversely affected by future increases in the costs of conducting exploration, development and resource extraction that may not be fully offset by increases in the price received on sales of crude oil or natural gas.

Our operations are subject to health, safety and environmental laws and regulations which may expose us to significant costs and liabilities and which may not be covered by insurance.  Our crude oil and natural gas exploration will be subject to stringent and complex federal, state and local laws and regulations governing health and safety aspects of our operations, the discharge of materials into the environment and the protection of the environment.  These laws and regulations may impose on our operations numerous requirements, including the obligation to obtain a permit before conducting drilling or underground injection activities; restrictions on the types, quantities and concentration of materials that may be released into the environment; limitations or prohibitions of drilling activities on certain lands lying within wilderness, wetlands and other protected areas; specific health and safety criteria to protect workers; and the responsibility for cleaning up any pollution resulting from operations.  Numerous governmental authorities such as the U.S. Environmental Protection Agency, or the EPA, and analogous state agencies have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly actions.  Failure to comply with these laws and regulations may result in the assessment of administrative, civil or criminal penalties; the imposition of investigatory or remedial obligations; the issuance of injunctions limiting or preventing some or all of our proposed operations; and delays in granting permits and cancellation of leases.
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There is an inherent risk of incurring significant environmental costs and liabilities in the performance of our operations, some of which may be material, due to our handling of petroleum hydrocarbons and wastes, our emissions to air and water, the underground injection or other disposal of our wastes, the use of hydraulic fracturing fluids and historical industry operations and waste disposal practices.  Under certain environmental laws and regulations, we may be liable regardless of whether we were at fault for the full cost of removing or remediating contamination, even when multiple parties contributed to the release and the contaminants were released in compliance with all applicable laws.  In addition, accidental spills or releases on our properties may expose us to significant liabilities that could have a material adverse effect on our financial condition or results of operations and which may not be covered by insurance.  Aside from government agencies, the owners of properties where our wells are located, the operators of facilities where our petroleum hydrocarbons or wastes are expected to be taken for reclamation or disposal and other private parties may be able to sue us to enforce compliance with environmental laws and regulations, collect penalties for violations or obtain damages for any related personal injury or property damage.  Some sites are located near current or former third-party crude oil and natural gas operations or facilities, and there is a risk that contamination has migrated from those sites to ours.  Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly material handling, emission, waste management or cleanup requirements could require us to make significant expenditures to attain and maintain compliance or may otherwise have a material adverse effect on our own results of operations, competitive position or financial condition.  We may not be able to recover some or any of these costs from insurance.

Federal, state, and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as government reviews of such activities, could result in increased costs, additional operating restrictions or delays, and adversely affect our production and/or ability to book future reserves.  Hydraulic fracturing involves the injection of water, sand, and chemical additives under pressure into a targeted subsurface formation.  The water and pressure create fractures in the rock formations, which are held open by the grains of sand, enabling the crude oil or natural gas to flow to the wellbore.  The process is typically regulated by state oil and natural gas commissions; however, the EPA asserted federal regulatory authority over certain hydraulic-fracturing activities involving diesel fuel under the Safe Drinking Water Act.  In addition, the COGCC has adopted (and other states have adopted or are considering adopting) regulations that impose more stringent permitting, disclosure and well construction requirements on hydraulic fracturing operations.  Further, on February 23, 2014, Colorado’s Air Quality Control Commission fully adopted EPA’s Standards of Performance for Crude Oil and Natural Gas Production, Transmission, and Distribution; adopted corresponding revisions to its emissions reporting and permitting framework; and adopted complimentary oil and gas control measures.  These regulations will affect our operations, increase our costs of exploration and production and limit the quantity of crude oil and natural gas that we can economically produce to the extent that we use hydraulic fracturing.

Certain cities in Colorado have implemented bans on hydraulic fracturing, some of which are subject to a lawsuit with the Colorado Oil and Gas Association.  In addition, several ballot initiatives were proposed and subsequently withdrawn in Colorado in 2014 seeking to impose additional restrictions on fracturing and crude oil and natural gas development.  In the event that a new regulation or legal restriction at the federal, state or local level is adopted related to hydraulic fracturing or other development activities in the areas in which we currently or in the future plan to operate, we may incur additional costs to comply with such requirements that may be significant in nature, and also could become subject to additional permitting requirements and cause us to experience added delays or curtailment in the pursuit of exploration, development, or production activities. Furthermore, these additional costs may put us at a competitive disadvantage compared to larger companies in the industry which can spread such additional costs over a greater number of wells and larger operating staff.

Competition in the crude oil and natural gas industry is intense, and many of our competitors have resources that are substantially greater than ours.  We operate in the highly competitive environment to acquire producing prospects and productive properties, marketing crude oil and natural gas and securing equipment and trained personnel.  As a small crude oil and natural gas company, most competitors, including major and large independent crude oil and natural gas companies, possess and employ financial, technical and personnel resources substantially greater than ours.  Those companies may be able to develop and acquire more prospects and productive properties than our financial or personnel resources permit.  Our ability to acquire additional prospects and discover reserves in the future will depend on our ability to evaluate and select suitable properties and consummate transactions in a highly competitive environment.  Also, there is substantial competition for capital available for investment in the crude oil and natural gas industry.  Larger competitors may be better able to withstand sustained periods of unsuccessful drilling and absorb the burden of changes in laws and regulations more easily than we can, which would adversely affect our competitive position.  We may not be able to compete successfully in the future in acquiring prospective properties, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital.

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Seasonal weather conditions, lease stipulations, and permit restrictions adversely affect our ability to conduct drilling activities where we expect to operate.  Crude oil and natural gas operations in the Rocky Mountains are sometimes adversely affected by seasonal weather conditions and lease stipulations designed to protect various wildlife and surface interests.  These restrictions may limit our ability to operate in those areas and can potentially intensify competition for drilling rigs, oil field equipment, services, supplies and qualified personnel, which may lead to periodic shortages.  These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs.  For example, we currently operate in an area that is (a) considered an Elk Winter Concentration Area, which means we must cease operations, except for certain production and emergency operations, from December 1 through April 15 of each year; and (b) accessed by a county road that is considered a “No Winter Maintenance” section, which means that the county will not maintain or plow the road from approximately November 1 through June 1 or later depending upon conditions of each year.

We may incur losses as a result of title deficiencies.  We own working and revenue interests in crude oil and natural gas leasehold interests.  The existence of a material title deficiency can render a lease worthless and can adversely affect our results of operations and financial condition.  Title insurance covering mineral leaseholds is not generally available and, in all instances, we forego the expense of retaining lawyers to examine the title to the mineral interest to be placed under lease or already placed under lease until the drilling block is assembled and ready to be drilled.  As is customary in our industry, we rely upon the judgment of crude oil and natural gas lease brokers, in-house landmen or independent landmen who perform the field work in examining records in the appropriate governmental offices and abstract facilities before attempting to acquire or place under lease a specific mineral interest.  We do not always perform curative work to correct deficiencies in the marketability of the title to us.  In cases involving serious title problems, the amount paid for affected crude oil and natural gas leases can be lost, and the target area can become undrillable.  We may be subject to litigation from time to time as a result of title issues.

The crude oil and natural gas business involves many operating risks that can cause substantial lossesThe crude oil and natural gas business involves a variety of operating risks, including:

Fires;

Explosions;

Blow-outs and surface cratering;

Uncontrollable flows of underground natural gas, crude oil or formation water;

Natural disasters;

Pipe and cement failures;

Casing collapses;

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Embedded oilfield drilling and service tools;

Abnormal pressure formations; and

Environmental hazards such as natural gas leaks, oil spills, pipeline ruptures or discharges of toxic gases.

If any of these events occur, we could incur substantial losses as a result of:

Injury or loss of life;

Severe damage to and destruction of property, natural resources or equipment;

Pollution and other environmental damage;

Clean-up responsibilities;

Regulatory investigation and penalties;

Suspension of our operations; or

Repairs necessary to resume operations.

If we were to experience any of these problems, it could affect well bores, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations.  We may be affected by any of these events more than larger companies, since we have limited working capital.  We currently have general liability insurance with a combined single limit per occurrence of not less than $1,000,000 for bodily injury and property damage and a combined occurrence limit of $2,000,000 and control of well insurance with limits of $5,000,000 for any one occurrence.  For other risks, however, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented.  In addition, pollution and environmental risks generally are not fully insurable.  If a significant accident or other event occurs and is not fully covered by insurance, it could adversely affect operations and/or our financial condition.  Moreover, we cannot assure shareholders that we will be able to maintain adequate insurance in the future at rates considered reasonable.

Extensive state and federal regulation may be costly to comply with and result in significant fines and penalties.  Companies that explore for and develop, produce and sell crude oil and natural gas in the United States are subject to extensive federal, state, local and tribal laws and regulations, including complex tax and environmental laws and the corresponding regulations, and are required to obtain various permits and approvals from federal, state, local and tribal agencies and authorities.  Our ability to obtain, sustain and renew the necessary permits and approvals from federal, state, local and tribal agencies and authorities on acceptable terms and without unfavorable restrictions or conditions is subject to a change in regulations and policies and to the discretion of the applicable governmental agencies or authorities, among other factors.  Possible regulation related to global warming and climate change could have an adverse effect on our operations and demand for crude oil and natural gas.

Risks Related to the Offering and Our Common Stock
The initial price of our common stock in this offering has been arbitrarily determined and bears no necessary relationship to our lack of earnings, the book value of our common stock or any other traditional criteria of value.  The initial offering price has been determined by negotiations between representatives of our management and certain selling shareholders and is based in part on the recent sales price of our common stock.  However, since no underwriter has been involved in the offering of our common stock in the past and no underwriter is involved in this offering, the price has not been negotiated at arm’s length as might otherwise be the case.  Purchasers of our common stock in this offering have no assurance that they will be able to sell the common stock for a profit, or at all.
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Our offering is being conducted on a “best efforts” basis, and there is no assurance that we will obtain the funding we need to explore our property, pay our administrative expenses or further our business plan.  No person or entity has agreed to purchase any or all of our common stock in this offering.  We will use our best efforts to find purchasers for the stock offered by us during the offering period.  There is no provision for creating an escrow or trust account or other similar arrangement for the proceeds of this offering.  All funds from the offering received by us will be immediately deposited into our bank account and available for all valid corporate purposes.  If we do not find qualified investors to purchase all of the stock offered under this prospectus, we may be forced to seek capital from other sources or curtail our business plan.  Investors in this offering have no assurance that the funding that we accept will be adequate for the purposes for which we have budgeted it.
Since no broker or dealer has committed to create or maintain a market in our stock, there is no assurance that our stock will be quoted in the OTC Bulletin Board or OTC Markets, and purchasers of our common stock may have difficulty selling their shares, should they desire to do so.  It is our intention to seek one or more broker-dealers to apply for quotation of our common stock on the OTC Bulletin Board or OTC Markets following the date of this prospectus.  However, we have no agreement with any broker-dealer at this time, and there is no assurance that we will be successful in finding one in the future. In addition, we believe that our stock will be characterized as a “micro-cap” security and therefore subject to increased scrutiny by FINRA.  A micro-cap security is generally a low priced security issued by a small company, or the stock of a company with low capitalization. If we are unable to obtain quotation of our common stock on the OTC Bulletin Board or OTC Markets, trading in our stock will be limited, and purchasers of our common stock may have difficulty selling their shares, should they desire to do so.
Our stock price may be volatile and as a result you could lose all or part of your investment. In addition to volatility associated with over-the-counter securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock:
 
failure to successfully implement our business plan;
 
 
failure to meet our revenue or profit goals or operating budget;
 
 
decline in demand for our common stock;
 
 
sales of additional amounts of common stock;
 
 
downward revisions in securities analysts’ estimates or changes in general market conditions;
 
 
investor perception of our industry or our prospects; and
 
 
general economic trends.

In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to resell their shares at a fair price.
 
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Investors in this offering will experience immediate substantial dilution of their investment. As of September 30, 2014, our shareholders had acquired and retain a total of 16,984,753 shares of common stock for an aggregate investment of $3,441,002, including cash and the value assigned to certain assets transferred to our Company, or an average price of $0.20 per share. In October 2014, the Company issued 23,438 shares to a former officer of our company in connection with his separation from the company; following which the average purchase price per share remained $0.20. This compares to a price of $1.00 per share for investors in this offering. On a pro forma basis, after giving effect to the 23,438 shares issued to the former officer, our as-adjusted net tangible book value as of September 30, 2014 would have been $2,391,198, or approximately $0.14 per share. After giving effect to the sale of shares of our common stock in this offering and after deducting estimated offering expenses payable by us, our adjusted pro forma net tangible book value as of September 30, 2014 would have been $6,891,198 or $0.32 per share. Investors in this offering will therefore experience immediate dilution of their investment of $0.68 or 68% of their investment.
 
A small number of existing shareholders own a significant amount of our common stock, which could limit your ability to influence the outcome of any shareholder vote. Our executive officers and directors beneficially own approximately 44% of our common stock as of the date of this prospectus. Under our Articles of Incorporation and Colorado law, the vote of a majority of the shares outstanding is generally required to approve most shareholder action. As a result, these individuals shall strongly influence the outcome of shareholder votes for the foreseeable future, including votes concerning the election of directors, amendments to our Articles of Incorporation or proposed mergers or other significant corporate transactions. We have no existing agreements or plans for mergers or other corporate transactions that would require a shareholder vote at this time. However, shareholders should be aware that they may have limited ability to influence the outcome of any vote in the future.
 
The sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.  It is likely that market sales of large amounts of common stock (or the potential for those sales even if they do not actually occur) could cause the market price of our common stock to decline, if a trading market is ever established, which may make it difficult to sell our common stock in the future at a time and price which we deem reasonable or appropriate and may also cause you to lose all or a part of your investment. (SeeSHARES ELIGIBLE FOR FUTURE SALE”).
Since our common stock is not presently listed, nor expected to be listed, on a national securities exchange, trading in our shares will likely be subject to rules governing “penny stocks,” which will impair trading activity in our shares.  Our common stock may be subject to rules adopted by the SEC regulating broker-dealer practices in connection with transactions in penny stocks.  Those disclosure rules applicable to penny stocks require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized disclosure document required by the SEC.  These rules also require a cooling off period before the transaction can be finalized.  These requirements may have the effect of reducing the level of trading activity in any secondary market for our common stock.  Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares. (SeeMARKET INFORMATION”).
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.  In addition to the penny stock rules promulgated by the SEC, which are discussed in the immediately preceding risk factor, FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the ability to buy and sell our stock and have an adverse effect on the market value for our shares.

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Issuance of our stock in the future could dilute existing shareholders and adversely affect the market price of our common stock, if a public trading market develops.  We have the authority to issue up to 110,000,000 shares of stock, including 100,000,000 shares of common stock and 10,000,000 shares of preferred stock, and to issue options and warrants to purchase shares of our stock without shareholder approval.  Because our common stock is not currently listed on an exchange, we are not required to solicit shareholder approval prior to issuing large blocks of our stock.  These future issuances could be at values substantially below the price paid for our common stock by investors in this offering.  In addition, we could issue large blocks of our stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval.  Because there is presently no trading market for our common stock, the issuance of our stock may have a disproportionately large impact on its price compared to larger companies.

The issuance of preferred stock in the future could adversely affect the rights of the holders of our common stock.  An issuance of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over the common stock and could, upon conversion or otherwise, have all of the rights of our common stock.  Our Board of Directors’ authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve.
We have never paid dividends on our common stock and we do not anticipate paying any in the foreseeable future. We have not paid dividends on our common stock to date, and we may not be in a position to pay dividends for the foreseeable future. Our ability to pay dividends will depend on our ability to successfully develop our business plan and generate revenue from operations. Further, our initial earnings, if any, will likely be retained to finance our operations. Any future dividends will depend upon our earnings, our then-existing financial requirements and other factors, and will be at the discretion of our Board of Directors. (SeeDividend Policy”).
Forward-Looking Statements
This prospectus contains statements that plan for or anticipate the future. Forward-looking statements include statements about our future business plans and strategies, statements about future revenue, profit and the receipt of working capital, and most other statements that are not historical in nature. In this prospectus, forward-looking statements are often identified by the words “anticipate,” “plan,” “intend,” “believe,” “expect,” “estimate,” and similar words or expressions. All statements other than statements of historical fact are forward-looking statements within the meanings of applicable securities laws. Because forward-looking statements involve future risks and uncertainties, there are factors that could cause actual results to differ materially from those expressed or implied. Prospective investors are urged not to put undue reliance on these forward-looking statements.
A few of the uncertainties that could affect the accuracy of forward-looking statements, besides the specific Risk Factors identified above, include:
Changes in the general economy affecting the disposable income of the public;

Changes in environmental law, including federal, state and local legislation;

18

 
Changes in drilling requirements imposed by state or local laws or regulations;

Terrorist activities within and outside the United States;

Technological changes in the crude oil and natural gas industry;

Acts and omissions of third parties over which we have no control;

Inflation and the costs of goods or services used in our operation;

Access and availability of materials, equipment, supplies, labor and supervision, power and water;

Interpretation of drill hole results and the uncertainty of reserve estimates;

The availability of sufficient pipeline and other transportation facilities to carry our production and the impact of these facilities on price;

The level of demand for the production of crude oil and natural gas; and

Changes in our business strategy.

The Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for similar statements by existing public companies, does not apply to our offering, as we are not previously registered as a public company.

USE OF PROCEEDS


We estimate that our gross proceeds from this offering will be a maximum of $4,600,000.  However, since there is no minimum number of shares that must be sold to complete the offering, we have illustrated various amounts.  There is no assurance that we will sell any or all of the shares.  We intend to use the estimated gross proceeds as follows:
  
 
Amount of Gross Proceeds
 
Proposed Use
 
$
1,000,000
   
$
2,000,000
   
$
3,000,000
   
$
4,600,000
 
 
                               
Future Drilling and Leasing Activity
 
$
-
   
$
1,000,000
   
$
2,000,000
   
$
3,600,000
 
 
                               
General and Administrative Expenses
 
$
800,000
   
$
800,000
   
$
800,000
   
$
800,000
 
 
                               
Working Capital 
 
$
100,000
   
$
100,000
   
$
100,000
   
$
100,000
 
 
                               
Estimated legal, accounting, printing, and travel expenses
 
$
100,000
   
$
100,000
   
$
100,000
   
$
100,000
 
 
                               
The foregoing represents our current intentions based upon our current plans and business condition.  Management will have broad discretion in the application of our net proceeds from this offering, and the occurrence of unforeseen events or changes in business conditions could result in the application of our net proceeds from this offering in a manner other than as described in this prospectus.

19

 
 
Pending application in accordance with our plan of operation, the proceeds of this offering may be invested in temporary interest-bearing investments such as checking accounts, time deposits, certificates of deposit and short-term government obligations.  We do not intend to invest the proceeds of this offering in a manner that would subject us to regulation as an investment company for purposes of United States securities laws.

We will not receive any proceeds from the sale by the selling shareholders of shares of common stock pursuant to this prospectus.

MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER INFORMATION

Market Information
 
There currently exists no public trading market for our common stock.  However, following the date of this prospectus, we intend to identify one or more registered broker-dealers that might be interested in making application to FINRA to quote our common stock on the OTC Bulletin Board or OTC Markets. There can be no assurance that a public trading market will develop at that time, or be sustained in the future.  Without an active public trading market, you may not be able to liquidate your shares without considerable delay, if at all.  If a market does develop, the price for our securities may be highly volatile and may bear no relationship to our actual financial condition or results of operations.  Factors that we discuss in this prospectus, including the many risks associated with an investment in our stock, may have a significant impact on the market price of our common stock.  Also, because of the relatively low expected initial trading price of our common stock, many brokerage firms may be unwilling to effect transactions in the common stock.

Any market which may develop for our common stock will be affected by the offer and sale of securities by the selling shareholders, as well as future sales of securities. We currently have outstanding 17,008,191 shares of our common stock which may be sold under Rule 144 of the Securities Act.  See “SHARES ELIGIBLE FOR FUTURE SALE” for additional information.

Holders of our Common Stock

As of January 13, 2015, we had approximately 105 record holders of our common stock who collectively own 17,008,191 shares.
 
Penny Stock Rules

Due to the price of our common stock, as well as the fact that we do not expect our stock to be listed on a national securities exchange, our stock may be characterized as a “penny stock” under applicable securities regulations.  If our stock is or becomes a penny stock, we will be subject to rules adopted by the SEC and FINRA regulating broker-dealer practices in connection with transactions in penny stocks.  The broker or dealer proposing to effect a transaction in a penny stock must furnish the customer with a document containing information prescribed by rule and obtain from the customer an executed acknowledgment of receipt of that document.

The broker or dealer must also provide the customer with pricing information regarding the security prior to the transaction and with the written confirmation of the transaction.  The broker or dealer must also disclose the aggregate amount of any compensation received or receivable by him in connection with such transaction prior to consummating the transaction and with the written confirmation of the trade.  The broker or dealer must also send an account statement to each customer for which he has executed a transaction in a penny stock each month in which such security is held for the customer’s account.  The existence of these rules may have an adverse effect on the price of our stock, and the willingness of certain brokers to effect transactions in our stock.

20

 
Transfer Agent

We have appointed Corporate Stock Transfer, Inc. of Denver, Colorado to be our transfer agent.  Its address is 3200 Cherry Creek Drive South, #430, Denver, CO 80209 and its telephone number is 303-282-4800. 

Securities Authorized for Issuance Under Equity Compensation Plans
 
Our Equity Incentive Plan (also as referred to as the “Plan”) was adopted to be effective November 30, 2012.  The Plan terminates by its terms on November 30, 2022.  Under the Plan, a total of 5,000,000 shares of common stock are reserved for issuance thereunder.  Set forth below is information as of December 31, 2014, with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.

Equity Incentive Plan Information
Plan Category
 
Number of securities
to be issued
upon exercise of
outstanding options, warrants and rights
(a)
   
Weighted-average exercise
price of outstanding
options, warrants and rights
(b)
   
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column (a))
(c)
 
           
Equity Incentive Plan
   
2,000,000
   
 
$0.25
     
3,000,000
 
                       

Under the Plan, incentive or non-qualified stock options and/or grants of restricted or non-restricted common stock may be issued to key persons.  Key persons include officers, directors, employees, consultants and others providing service to us.  The Plan was established to advance the interests of our company and our shareholders by affording key persons, upon whose judgment, initiative and efforts we may rely for the successful conduct of our businesses, an opportunity for investment in our company and the incentive advantages inherent in stock ownership in our company.  This Plan gives our Board of Directors broad authority to grant options and make stock grants to key persons selected by the board while considering criteria such as employment position or other relationship with us, duties and responsibilities, ability, productivity, length of service or association, morale, interest in us, recommendations by supervisors, and other matters, and to set the option price, term of option, and other broad authorities.  Options may be granted at a price determined by our Board of Directors in its sole discretion and may have a term up to 10 years.

Options granted under the Plan may generally be exercised by paying the exercise price to us in cash at the time of exercise.  In the event the exercise price is expected to exceed $2,000 in the aggregate, the Board of Directors may allow the option holder to surrender shares already owned by him or her in satisfaction of the exercise price, or by “attestation,” where a portion of the shares underlying the option are surrendered in payment.

Options granted under the Plan give rise to taxable income to the recipient if the fair market value of the common stock on the date of grant is more than exercise price.  In that event, we would receive a corresponding deduction for tax purposes.  When a non-qualified option is exercised, the holder is subject to tax on the difference between the exercise price of the option and the fair market value of the stock on the date of exercise at ordinary rates.  We receive a corresponding deduction for income tax purposes in that case as well.  Recipients of stock grants are subject to tax on the fair market value of the stock on the date of grant and we receive a corresponding deduction.

21

 
Shares issued upon exercise of options or upon stock grants under the Plan are “restricted securities” as defined under the Securities Act unless a registration statement covering such shares is effective.  Restricted shares cannot be freely sold and must be sold pursuant to an exemption from registration (such as Rule 144) which exemptions typically impose conditions on the sale of the shares.

Federal Income Tax Consequences of the Grant and Exercise of Options

Certain of the federal income tax consequences applicable to the grant and exercise of non-qualified options and incentive options are as follows:

Non-Qualified Options.  There are no income tax consequences to the participant or to us when a non-qualified option is granted. When a non-qualified stock option is exercised, in general, the participant recognizes compensation, subject to wage withholding and income tax, equal to the excess of the fair market value of the common stock on the date of exercise over the exercise price. We are generally entitled to a deduction equal to the compensation recognized by the participant, assuming that the compensation satisfies the ordinary, necessary and reasonable compensation requirements for deductibility and that the deduction is not limited by Section 162(m) of the Code.

Incentive Options.  When an incentive option is granted, there are no income tax consequences for the participant or us. When an incentive option is exercised, the participant does not recognize income and we do not receive a deduction. The participant, however, must treat the excess of the fair market value of our common stock on the date of exercise over the exercise price as an item of adjustment for purposes of the alternative minimum tax. If the participant makes a “disqualifying disposition” of the common stock (described below) in the same taxable year the incentive option was exercised, there are no alternative minimum tax consequences.

If the participant disposes of our common stock after the participant has held it for at least two years after the incentive option was granted and at least one year after the incentive option was exercised, the amount the participant receives upon the disposition over the exercise price is treated as capital gain. We are not entitled to a deduction for this amount. If the participant makes a “disqualifying disposition” of common stock by disposing of common stock before it has been held for at least two years after the date the incentive option was granted and at least one year after the date the incentive option was exercised, the participant recognizes compensation income equal to the excess of:

the fair market value of common stock on the date the incentive option was exercised or, if less, the amount received on the disposition, over

the exercise price.

We are not required to withhold income or other taxes in connection with a “disqualifying disposition.” We are generally entitled to a deduction equal to the compensation recognized by the participant, assuming that the compensation satisfies the ordinary, necessary and reasonable compensation requirements for deductibility and that the deduction is not limited by Section 162(m) of the Code.

22

 
Code Section 409A.  Section 409A of the Code provides that all amounts deferred under a nonqualified deferred compensation plan are currently includible in gross income to the extent they are not subject to a substantial risk of forfeiture and have not been taxed previously unless the plan satisfies both the plan document and operational requirements specified in Section 409A of the Code. If the deferred compensation plan fails to satisfy the requirements of Section 409A, all amounts deferred for the year of the failure and all preceding years (to the extent they are not subject to a substantial risk of forfeiture) are included in the gross income of the participant(s) affected by the failure. The amount included in gross income is also subject to an additional tax equal to 20% of that amount and to interest. Incentive options are not subject to Section 409A. We have structured the Plan and expect to administer the Plan with the intention that non-qualified options will qualify for an exemption from Section 409A of the Code.

Code Section 162(m).  Under Section 162(m) of the Code, we may be limited as to federal income tax deductions to the extent that total annual compensation in excess of $1 million is paid to our chief executive officer or any one of the four highest paid executive officers who were employed by us on the last day of the taxable year. However, certain “performance-based compensation,” the material terms of which are disclosed to and approved by our shareholders, is not subject to this limitation on deductibility. We have structured the Plan with the intention that compensation resulting from options granted under the plan would be deductible without regard to the limitations otherwise imposed by Section 162(m) of the Code.
 
Dividend Policy

We have never declared or paid dividends on our common stock.  Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including the terms of any credit arrangements, our financial condition, operating results, current and anticipated cash needs and plans for expansion.  At the present time, we are not party to any agreement that would limit our ability to pay dividends.

Dilution

If you invest in our common stock, you will experience dilution to the extent of the difference between the price you pay per share in this initial public offering and the pro forma as adjusted net tangible book value of our common stock immediately after this offering.  Our net tangible book value as of September 30, 2014 was $2,391,198, or approximately $0.14 per share. Net tangible book value per share is determined by dividing our total tangible assets, less total liabilities, by the number of outstanding shares of our common stock.  On a pro-forma basis, after giving effect to the issuance of 23,438 shares to a former officer of our Company subsequent to September 30, 2014, our as-adjusted net tangible book value as of September 30, 2014 remained unchanged, without taking into effect any other changes in book value subsequent to that date.
 
After giving effect to the sale of all of the shares of our common stock in this offering, of which there is no assurance, and after deducting estimated offering expenses payable by us, our adjusted pro forma net tangible book value as of September 30, 2014 would have been $6,891,198, or $0.32 per share. This amount represents an immediate increase in our pro forma net tangible book value of $0.18 per share to our existing stockholders and an immediate dilution in our adjusted pro forma net tangible book value of approximately $0.68 per share to new investors purchasing shares of our common stock in this offering. We determine dilution by subtracting the adjusted pro forma net tangible book value per share after the offering from the amount of cash that a new investor paid for a share of common stock.
 
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Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution:
 
 
 
 
   
 
 
Public offering price per share
 
 
   
$
1.00
 
 
 
 
         
Historical net tangible book value per share as of September 30, 2014
 
$
0.14
         
Pro forma increase in historical net tangible book value per share attributable to share issuance in October 2014
 
$
         
 
               
Increase in pro forma net tangible book value per share attributable to this offering
 
$
0.18
         
 
               
Adjusted net tangible book value per share after this offering
         
$
0.32
 
Dilution per share to new investors
         
$
0.68
 
  

The following table summarizes, on a pro forma basis as of September 30, 2014, the differences between the number of shares of common stock acquired from us, the total consideration and the average price per share paid by existing stockholders and by investors participating in this offering, after deducting estimated offering expenses, at an assumed initial public offering price of $1.00 per share, the price set forth on the cover of this prospectus.

 

 
 
Shares Acquired
   
Total Consideration
   
Average price/
 
 
 
Number
   
Percent
   
Amount
   
Percent
   
share
 
Existing stockholders
   
17,008,191
     
79
%
 
$
3,441,002
     
43
%
 
$
0.20
 
New investors
   
4,600,000
     
21
%
   
4,600,000
     
57
%
   
1.00
 
Total
   
21,608,191
     
100
%
 
$
8,041,002
     
100
%
 
$
0.37
 
 
                                       
The above discussion and tables are based on 17,008,191 shares of common stock issued and outstanding as of September 30, 2014, on a pro forma basis, after giving effect to 23,438 shares issued to a former officer subsequent to September 30, 2014 and excludes the effect of 2,000,000 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 2014 at an exercise price of $0.25 per share.

 
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BUSINESS AND PROPERTIES

Our History

We were organized in September 2012 under the laws of the State of Colorado to investigate, acquire and develop crude oil and natural gas properties in the Rocky Mountain and mid-continent region of the United States.  Since our inception, we have assembled a management team, raised operating capital, completed the acquisition of our first property and commenced our first drilling program.  See “Description of Properties,” below, for a description of our first prospect.   The PetroShare management team includes an individual with significant experience in the crude oil and natural gas industry and other individuals with many years of executive experience in a variety of businesses.  See “MANAGEMENT.”

We hold an interest in approximately 7,777 gross (1,060 net) leased acres in Moffat County, Colorado, which is known as the Buck Peak prospect.  We are the operator of two recently completed crude oil and/or natural gas wells on the Buck Peak Prospect. We have generated only nominal revenue related to the sale of crude oil collected during our testing efforts to date.

Current and Proposed Operations
 
In 2013, we completed the acquisition of one undeveloped crude oil and natural gas prospect, known as the Buck Peak prospect.  The prospect consists of interests in various parcels totaling approximately 7,777 gross acres, of which we acquired approximately 1,060 net acres.  The majority of the net acres are located in Section 25 of Township 6 North, Range 90 West, Moffat County, Colorado and the leases in that section currently are held by current production and/or drilling and completion efforts.  Our largest working interest position is concentrated in one 672 acre section located at what we believe to be the crest of the Buck Peak Field structural feature.  That is where the two drilled wells, described below, are located.
 
In December 2013, we successfully completed drilling and casing of two new wells on our Buck Peak prospect.  We sold a majority of the working interest in those wells and currently own a 25% working interest.  We are the operator of the wells pursuant to participation agreements and standard form AAPL Form 610 Operating Agreement with our working interest partners.  Three other companies, not affiliated with us, are participating in the drilling operations. 
 
As of September 30, 2014, we and our working interest partners had spent approximately $6.7 million on the two wells, road access, location construction, and surface facilities.  We commenced stimulation and completion efforts in May 2014.  Fracture stimulations on some of the lower zones and an additional prospective zone in the Upper Niobrara section in both wells were completed in November 2014. We put the first well into production on November 26, 2014 and put the second well into production on December 12, 2014. We have installed permanent surface production facilities and weatherproofed pipes and equipment.  As of January 13, 2015 and based on preliminary test results, the first well was producing at a rate of up to five to seven bbls of crude oil per day; we have not yet received adequate data to determine a production rate for the second well.  We plan to monitor the rate of production of the wells and reservoir pressure data during the winter. In spring 2015, we likely will fracture stimulate the upper zone on our first well and will determine whether the second well will require additional fracture stimulation.
 
Our plan of operation for early 2015 is to monitor the production rate of each of the two wells on the Buck Peak prospect, investigate drilling of additional wells on that prospect, and investigate and evaluate acquisitions of other crude oil and natural gas acreage.  Any cash flow that may result from the initial drilling program will be used to offset general and administrative expenses and fund additional capital programs.
 
25

 


The two wells in which we have participated to date represent the first of what we originally expected would be an extended program on the Buck Peak prospect.  Our objective for the first two wells was to employ modern drilling and logging practices in order to define potential Niobrara production zones, determine reservoir pressures and well bore spacing, and employ modern completion techniques.  Our ultimate goal is to develop incremental crude oil and natural gas reserves as we endeavor to build our portfolio.

We plan to analyze geophysical, production and pressure data from the recently completed wells to determine if additional infill wells are warranted and if so, determine if the current 80 acre spacing pattern for the Niobrara will optimize reserve recoveries.  In addition, if any other productive zones are delineated, we plan to address the appropriate spacing pattern at that time.  Under the current spacing pattern for the Niobrara, we may have up to six additional wells (eight total) that could be drilled in the targeted section. Current oil prices and initial production indications from the wells may cause us to reconsider any additional development in the Buck Peak area.
 
We have additional minor working interests in acreage (less than 10%) that is governed by a joint operating agreement designating Southwestern Energy as successor to Quicksilver Resources, Inc. and/or SWEPI LP as the operator.  It is a portion of these leases that were scheduled to expire beginning in fall 2013, and which we are currently evaluating.  Under the provisions of this agreement, Southwestern is the operator and is permitted to propose one or more wells on the acreage covered by the agreement, following which we would be permitted to participate at our election.  If we elect to participate, we would be required to pay our proportionate share of the costs and expenses, and would be entitled to a proportionate share of any production from those wells.  No wells have been proposed by Southwestern under this agreement as of the date of this prospectus.
 
If the rate of production on our two existing wells on the Buck Peak prospect does not improve significantly, we may refocus our efforts in other areas of the Rocky Mountains where the Niobrara is prevalent.  The Niobrara shale formation is undergoing significant development in both Wyoming and parts of northern Colorado, and we hope to encounter opportunities in this region.  Our objective will be to acquire leaseholds and properties with a 24 to 36 month development timeline.  Depending on opportunities presented to us, we may endeavor to acquire additional undeveloped acreage or one or more producing properties. In November 2014, we executed an agreement with a local lease broker affiliated with a local mineral interest owner that we hope will lead to the acquisition of Niobrara and Codell leases in the Wattenberg Field of northeast Colorado. We also may consider opportunities in other areas of the Rocky Mountain region.  However, due to our limited personnel and working capital, such opportunities may be limited.
 
The Niobrara formation is a calcareous shale rock formation varying from approximately 200 to 1,500 feet in thickness and extending from Canada to New Mexico, but the vast majority of the crude oil and natural gas concentration is in Colorado and Wyoming.  The formation generally slopes downward from east to west, from Kansas to western Colorado, from depths of approximately 1,500 feet to 12,000 feet below the surface.  The Codell formation is a crude oil and natural gas producing tight sandstone formation generally found at depths of approximately 7,000 to 8,000 feet below the surface in the greater Wattenberg area and is located at the base of the Niobrara – Fort Hays limestone member. Crude oil and natural gas companies have been producing resources from the Niobrara and Codell formations for over 40 years, but horizontal drilling techniques and hydraulic fracturing have only recently opened up increased production opportunities in the Niobrara and Codell formations.
 
We anticipate that we will need to raise additional funding in the next 12 months to continue our business operations. Since our capital resources have been significantly depleted by drilling and completion of our first two wells, we will require additional capital to continue paying our general and administrative expenses, and for anticipated future drilling and leasing activities.  The amount we invest in drilling and leasing will depend on, among other factors, opportunities presented to us and the success of this offering.  The most significant of our future capital requirements include (i) costs to acquire additional acreage; (ii) cost to drill additional wells; (iii) approximately $52,500 per month for salaries and other corporate overhead; (iv) legal and accounting fees for the filing of the registration statement of which this prospectus is a part; and (v) approximately $16,000 per month in legal and accounting fees associated with our anticipated status as a public company required to file reports with the SEC.  We anticipate funding these projected expenses through proceeds from the sales of our common stock via our most recent private placement, this offering or from additional private equity offerings or anticipated revenue from drilling activities.
 
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Joint Operating Agreement and Participation Agreements

We are the designated operator of the acreage in Section 25 and are registered with the COGCC as an operator of crude oil and natural gas wells and properties in the State of Colorado and have posted the appropriate bonds to support our activities.  We have entered into operating agreements with our working interest partners that stipulate, among other things, that each partner is responsible for paying its proportionate share of costs and expenses in connection with drilling the two wells.  As operator, we are an independent contractor not subject to the control or direction of our other working interest partners except as to the type of operation to be undertaken as provided in the operating agreement.  Further, we are responsible for hiring employees or contractors to conduct operations, taking custody of funds for the account of all working interest partners, keeping books and records relating to operations, and filing operational notices, reports or applications required to be filed with governmental bodies having jurisdiction over operations.  Our liability to the other working interest partners for losses sustained or liabilities incurred are limited to losses incurred as a result of our gross negligence or willful misconduct.

Certain participation agreements that we have with our working interest partners establish an area of mutual interest (“AMI”) surrounding the drill sites.  If either party to a participation agreement acquires one or more leases within the AMI, such partner is required to offer the other party the right to participate in the lease in proportion to the percentage specified in the agreement.  Such right continues for a period of two years and so long thereafter as crude oil and/or natural gas are produced in paying quantities from the wells.
 
On May 5, 2014 we entered into a Settlement Agreement and Mutual General Release (“Settlement Agreement”) with one of our former working interest partners that was delinquent in its obligations to pay for drilling and completing the two wells that we have started.  Under the Settlement Agreement, the delinquent partner agreed to surrender its working interest for total payment of $1,142,237 by us. We made a non-refundable payment of $100,000 upon entering into the Settlement Agreement and the final payment of $1,042,237 on June 16, 2014.  Under the terms of the Settlement Agreement, the delinquent partner surrendered its rights under the participation agreement and the joint operating agreement after final payment was made by us.  In connection with this Settlement Agreement, we and our three remaining working interest partners purchased additional interests in the two wells such that these three partners now own 75% of the working interest in the two wells and we retain 25%.  Under the Settlement Agreement, neither party admitted liability to the other and agreed to mutual releases that became effective upon delivery of the final payment.

Buck Peak Acquisition

We completed the acquisition of the Buck Peak prospect in April 2013.  We paid $565,310 in cash and issued 67,000 shares of our common stock valued at $67,000 for this acreage.  We paid the entire purchase price from our working capital.
 
Our original acquisition covered approximately 8,400 gross acres and 1,100 net acres.  The prospect is located in northwest Colorado, south of the town of Craig, in Moffat County.  Access to the leases is by paved and dirt country roads and private road access. We believe a majority of these leaseholds are held under “paid-up” fee leases.  All of the acreage is held by crude oil and natural gas leases with varying expiration dates, some with options to extend ranging from one to five years, and landowner and other royalties ranging from 20 to 22-1/2%.  The leases covering Section 25, where our drilling efforts are currently focused, are held by current production and/or drilling and completion efforts and are burdened with total royalties of approximately 22%.  However, the leases can be held indefinitely by production.
 
Unless production is established within the spacing units covering the undeveloped acreage, the leases for such acreage will eventually expire.  These leases are scheduled to expire, including potential extensions, at various times through 2019.  If our leases expire in areas we intend to explore, we or our working interest partners will have to negotiate the price and terms of lease renewals with the lessors. The costs to renew such leases may increase significantly and we may not be able to renew such leases on commercially reasonable terms, or at all.
 
The Buck Peak prospect is located in and around wells drilled in the Buck Peak Field area discovered in the late 1950s and developed off and on through the early 1970s.  The Buck Peak field has produced over 6.0 MMBOE from the Niobrara since its discovery and still has active wells producing that are over 40 years old.  The original discovery and development wells drilled in the late 1950s and early 1960s on the prospect acreage have been plugged and abandoned.  Production records for these old wells maintained by the COGCC indicate they were still capable of producing economic amounts of crude oil and natural gas at the time they were abandoned in 1994.

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The following map illustrates the general location of the Buck Peak prospect in the State of Colorado and in relation to the estimated extent of the Niobrara Shale formation:
 
 
The primary drilling objective in this area is crude oil production from the fractured Niobrara Formation. The area has seen a renewed interest in drilling activity over the past 36 months in conjunction with drilling success in the Niobrara in the DJ Basin, on the front range of Colorado. Active operators in the area have included SWEPI, Gulfport Energy Corp (NYSE GPOR), Axia Energy Partners and others. However, in August 2013, Shell announced its decision to monetize its assets in the Sand Wash Basin in Moffat and Routt Counties, Colorado as well as other assets in the United States by marketing those assets for sale. Southwestern Energy Co. announced in March 2014 that it completed its purchase of 312,000 acres jointly owned by SWEPI and Quicksilver in the Sand Wash Basin.
 
Secondary objectives in the Buck Peak prospect consist of coal bed methane and conventional natural gas from the Iles formation and the deeper Morapas Sand.

There are existing active natural gas gathering lines in the Prospect area. These lines connect to a processing plant in the Buck Peak area. The condition and capacity of these lines and the processing facility is uncertain at this time. However, initial investigations indicate that capacity exists in these facilities.

The availability of a ready market for our crude oil and natural gas depends upon numerous factors beyond our control, including the extent of domestic production and importation of crude oil and natural gas, the relative status of the domestic and international economies, the proximity of our properties to gas pipeline systems, the capacity of those systems, the marketing of other competitive fuels, fluctuations in seasonal demand and governmental regulation of production, refining, transportation and pricing of crude oil, natural gas and other fuels.

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Regulatory Environment

The production and sale of crude oil and natural gas is subject to various federal, state and local governmental regulations, which may be changed from time to time in response to economic or political conditions.  Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties, taxation and environmental protection.  Many laws and regulations govern the location of wells, the method of drilling and casing wells, the plugging and abandoning of wells, the restoration of properties upon which wells are drilled, temporary storage tank operations, air emissions from flaring, compression, the construction and use of access roads and the disposal of fluids used in connection with operations.  From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of crude oil and natural gas wells below actual production capacity in order to conserve supplies of crude oil and natural gas.  Changes in these regulations could have a material adverse effect on the company.

The failure to comply with any such laws and regulations can result in substantial penalties.  In addition, the effect of all these laws and regulations may limit the amount of crude oil and natural gas we can produce from our wells and may limit the number of wells or the locations at which we can drill.  Although we believe we are in substantial compliance with current applicable laws and regulations relating to our crude oil and natural gas operations, we are unable to predict the future cost or impact of complying with such laws and regulations because such laws and regulations are frequently amended or reinterpreted.
 
As the operator of Buck Peak prospect, we are responsible for obtaining all permits and government permission necessary to operate the property.  We must obtain permits for any new wells that are drilled.  However, we do not expect that such permits or other regulations will be a material impediment to the operation of our business.
 
In February 2013, the COGCC passed extensive rule changes providing perhaps the most stringent crude oil and natural gas regulations in the country, including statewide requirements, commonly known as setbacks, from wells and production facilities, to various structures.  In addition, certain Colorado cities, including Fort Collins, Boulder, and Lafayette, have voted to ban hydraulic fracturing.  At one time in 2014, there were several proposed ballot initiatives that could have subjected the crude oil and natural gas industry to even greater restrictions and regulatory uncertainty.  The ballot initiatives included statewide setback distances greater than those currently mandated by the COGCC, as well as proposals for local government control of crude oil and natural gas operations.  In exchange for withdrawing these potential ballot initiatives, Governor John Hickenlooper appointed a commission to study the issues and make recommendations regarding any additional regulation.

Any additional regulations that may result from these efforts may increase our costs of exploration and production and limit the quantity of crude oil and natural gas that we can economically produce to the extent that we use hydraulic fracturing.
 
Competition

The crude oil and natural gas industry is highly competitive.  Our competitors and potential competitors include major oil companies and independent producers of varying sizes which are engaged in the acquisition of producing properties and the exploration and development of prospects.  Most of our competitors have greater financial, personnel and other resources than we do and therefore have greater leverage with respect to acquiring prospects and producing crude oil and natural gas.  We believe a high degree of competition in this industry will continue for the foreseeable future.

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Intense competition in the industry is not limited to the acquisition of crude oil and natural gas properties but also extends to the technical expertise to find, advance, and operate such properties, the labor to operate the properties, and the capital for the purpose of funding such properties.  Our inability to compete with other companies for these resources may have a material adverse effect on our results of operation and business.

Company Facilities

Our executive and administrative offices are currently located at 7200 South Alton Way, Suite B-220, Centennial, CO 80112, where we lease approximately 1,400 square feet.  Rent is payable at the rate of $1,933 per month with contractual annual escalations for a term which extends until June 2016.  We believe this space is adequate for our needs for the foreseeable future.

Employees

PetroShare currently has three employees, including its Chief Executive Officer and President.  It also engages a number of independent contractors to supplement the services of its employees, including geologic, marketing and software development consultants, drilling contractors, attorneys and accountants.  We believe our relations with our employees and vendors are outstanding.

Legal Proceedings

Neither the Company nor any of its officers or directors in their capacity as such is a party to any pending legal proceeding and no such proceeding is contemplated to the best of their knowledge and belief.
 
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
The following discussion summarizes our plan of operation for the next twelve months.  It also analyzes (i) our financial condition at September 30, 2014 and December 31, 2013, and compares it to December 31, 2013 and December 31, 2012, respectively, and (ii) our results of operations for the three and nine months ended September 30, 2014 and 2013 and the year ended December 31, 2013 and the period ended December 31, 2012.  This discussion and analysis of financial condition and results of operation should be read in conjunction with the financial statements and related notes included in this prospectus and with the understanding that the actual future results may be materially different from what we currently expect.

We were organized in September 2012 under the laws of the State of Colorado to investigate, acquire and develop crude oil and natural gas properties in the Rocky Mountain and mid-continent region of the United States. Since our inception, we have assembled a management team, raised operating capital, completed the acquisition of our first prospect property, drilled and completed two wells, and have put both wells into production.  From inception through April 1, 2014, our activities had been accounted for as those of a “Development Stage Enterprise” as set forth in Accounting Standards Codification No. 915 “Development Stage Entities” (“ASC 915”), which defined a development stage entity as one that had not commenced planned principal operations or one in which planned principal operations had commenced but had not generated significant revenue therefrom.  Beginning in the fiscal quarter ended June 30, 2014, we elected to apply ASU No. 2014-10 which, in addition to removing the definition of a development stage entity from ASC 915, allows us to terminate the presentation of inception-to-date information.
 
On November 26, 2014, the first well (Kowach #3-25) went online. On December 12, 2014, the second well (Voloshin #3-25) went online. During fall 2014, we completed the construction of permanent production surface facilities at the well site. With the completion of the two initial wells, we and our working interest partners plan to analyze geophysical, production and pressure data to determine if additional infill wells are warranted on the property and if so, determine if the current 80 acre spacing pattern for the property will optimize reserve recoveries. In addition, if any productive zones besides the Niobrara are delineated, we plan to address the appropriate spacing pattern at that time. Under the current spacing pattern for the property, we may have up to six additional wells (eight total) that could be drilled in the targeted section.
 
As of January 13, 2015, we have generated only nominal revenues related to the sale of crude oil collected during our testing efforts. We account for our crude oil and natural gas costs using the successful efforts accounting method. Under the successful efforts method, lease acquisition costs, intangible drilling and development costs on successful wells, and development of dry holes are capitalized. Costs of drilling exploratory wells are initially capitalized, but charged to expense if and when a well is determined to be unsuccessful.
 
As described in the notes to our financial statements, there is substantial doubt about our ability to continue as a going concern. This qualification is based on our minimal operating revenue and limited working capital, among other things. We remain dependent on receipt of capital from outside sources, and ultimately, generating revenue from operations to continue as a going concern.
 
Plan of Operation
 
Our plan of operation for the next 12 months includes monitoring the production capabilities of the two wells that we completed in the fall of 2014 in the Buck Peak Prospect, fracture stimulating the Kowach well, and evaluating opportunities to acquire other interests in crude oil and natural gas properties in the Rocky Mountain region. Of the two wells we drilled, the first well was drilled vertically and the other well directionally to allow a reasonable offset distance and test what we believe to be separate, undrained, fractured reservoir zones. The first well was put on production on November 26, 2014 the second was put on production on December 12, 2014. We financed the drilling and completion costs for the two wells through the sale of working interests and three private placements of our equity.

We initially sold all but 10% of the working interests in the first two wells to four working interest partners, including a 30% working interest to a third party with which we contemplated a merger. If the contemplated merger did not close, the counterparty’s interest decreased to 25%, with our interest in the wells increasing to 15%. On March 10, 2014, we notified the counterparty to the proposed merger that it owed certain funds for its share of the drilling and/or completion costs of the two wells. Shortly thereafter, we notified the counterparty in writing that we terminated the Letter of Intent and all negotiations for the proposed merger. Subsequently, the counterparty alleged claims against us regarding the proposed merger and costs owed for completion of the wells.

Pursuant to the Settlement Agreement, we paid the counterparty a total of $1,142,237, with the final payment of $1,042,237 on June 16, 2014, for the surrender of its working interest in the two wells. Concurrently with this Settlement Agreement, we and our three remaining working interest partners purchased additional interests in the two wells such that these three partners own 75% of the working interest in the two wells and we retain 25%.  The Company received $935,537 from these three partners for the purchase of these additional working interests as well as their additional pro-rata share of drilling and completion costs.
 
With the Kowach well going online in November 2014 and the Voloshin going online in December 2014, we started producing during the fourth quarter of 2014, although production to date has been limited. Under the terms of the participation agreements, we are required to pay our proportionate share of the costs of the wells and are entitled to share in a proportionate amount of the net revenue. Accordingly, the ultimate success of our business plan depends on our ability to generate sufficient revenue from the sale of produced crude oil and natural gas to cover fixed and variable expenses. Moving forward, we believe the major components of our fixed expenses will include executive and other administrative compensation, general office expenses, and legal and accounting fees, which we anticipate will be similar to our fixed expenses for the quarter ended September 30, 2014 (see further discussion in “Liquidity and Capital Resources”). We anticipate the variable expenses will primarily include acquiring acreage and costs of drilling activities. Any cash flow that may result from the initial drilling program likely will be used to offset general and administrative expenses and fund additional drilling programs and acquisitions. We are unable to predict whether we will have any cash flow from operations unless and until both wells have produced for a longer period of time, and even then it may be difficult to predict with a high degree of accuracy.

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Assuming the receipt of cash flow from the initial two wells on the Buck Peak Prospect and the delineation of economic Niobrara zones and spacing, we anticipate evaluating production results to determine whether additional drilling on the prospect is warranted. Our plan is subject to the continued positive economic results of those wells and may be modified substantially to redirect capital into new opportunities we believe may yield better value for our shareholders. We plan to finance these activities through the sale of private or publicly financed equity and the sale of working interests, as we intend to retain no more than 25% working interest in any well drilled.

Based on our presence in the Buck Peak Prospect area, we also may participate as a non-operator in the drilling of additional wells by virtue of our working interest position in the Buck Peak Prospect area.  Other operators known to be active in the area include Southwestern Energy, Peakview Oil Co., and Axia Resources.

In addition, we may have acquisition opportunities in other areas undergoing active development of the Niobrara formation, including but not limited to areas in Wyoming and the northern DJ Basin in Colorado. In November 2014, we executed an agreement with a local lease broker affiliated with a local mineral interest owner that we hope will lead to the acquisition of Niobrara and Codell leases in the Wattenberg Field of northeast Colorado. We also may consider opportunities in other areas of the Rocky Mountain region.  Our objective will be to acquire leasehold and properties with a 24 to 36 month development timeline.  However, without sufficient cash flow from the initial wells on the Buck Peak Prospect or sufficient proceeds from this offering, there may be an absence of working capital to fund future expenditures.  Thus, funding for further exploration and/or development activities may come from additional equity offerings, although no specific commitments have been made.  If we are unable to obtain such financing, we may be forced to forego participation in an opportunity for continued development activity or to acquire an interest in other crude oil and natural gas properties in the future.

We have additional minor working interests in acreage offsetting the Buck Peak Prospect (less than 10%), which is governed by a Joint Operating Agreement designating Southwestern Energy as successor to Quicksilver Resources, Inc. as the operator. If and when the operator decides to drill on the acreage in which we own these working interests, we would make a decision whether to incur the costs of participation.
 
As of September 30, 2014, we had working capital of $626,632. Although difficult to anticipate our exact capital requirements, we will require additional capital in the next 12 months for our general and administrative expenses and to participate in other acquisition opportunities. We intend to use the proceeds of this offering to finance those expenses.

Company Development Philosophy.  As a general rule, we do not intend to pursue projects that require extensive research and development activities as they relate to drilling and completion practices.  However, we will undertake what we believe are cost efficient efforts to understand the potential producing zones in the Niobrara with an ultimate objective of delineating a regional resource play similar to those being developed in the Power River Basin of Wyoming and Colorado Front Range.  We will endeavor to monitor and evaluate the drilling and completion techniques of larger operators in the area and to emulate those techniques that appear to be yielding the best economic results, optimizing them where management believes there is an opportunity.  We plan to utilize modern, high resolution 2D and 3D seismic surveys and other available data to define target area drilling locations where warranted.  We intend to be environmentally responsible and minimize our development footprint while maximizing shareholder value.

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Prospect Acquisition & Growth Philosophy.  Our philosophy is to utilize knowledge of target areas that we believe to be geographically desirable based on our in-house and other available data.  Acquisitions from third parties of production and/or exploration and development acreage positions will be considered. We expect to then pursue options to acquire small, focused acreage positions (5,000 to 20,000 acres), rather than amassing large, roaming acreage holdings.  Prospect acquisitions will be delineated by geologic and other available data.  We believe this strategy will promote the drilling of economically productive wells. Third-party opportunities must be reviewed by our management team and meet the criteria that our own internally generated prospects must meet.

The following summarizes the general criteria expected to be used for acquisitions:

Initial identification of acreage positions will be from past knowledge, our existing database and new area activities;

Any decision to pursue or abandon a particular prospect will be based on a review of the available information such as surface and subsurface geological parameters, reservoir quality, proximity to production facilities, hydrocarbon quality, proximity and quality of crude oil and natural gas shows, accessibility to the market, as well as the size of the project;

The next step will be to determine the availability of additional public or proprietary data that may be purchased or obtained, such as existing seismic and geochemical data, historical production and well log interpretations;

Next we will make an economic analysis to determine feasibility and economic return potential, using a sensitivity analysis varying costs and recoverable reserves scenarios, applying various discounts to the then current commodity price strip, factoring in area basis differentials and transportation costs; and

If deemed economical, we will pursue the acquisition of the land by lease, seismic option or by tendering offers for qualifying properties.

We expect we will take steps to reduce our risk in any one particular property by syndicating a portion of the prospect areas to our Area of Mutual Interest partners, and/or other independent third parties.

Liquidity and Capital Resources

Overview
 
All of our capital resources to date have been provided through the sale of equity securities, prospect fees received from working interest partners, and drilling advances from working interest partners. Through January 13, 2015, we received $3,374,002 in sale of our common stock to accredited investors including $12,000 from our founders in exchange for common stock. From inception through September 30, 2014, we received $450,000 in prospect fees from the sale of working interests, $3,842,191 in drilling advances from these partners, and $935,537 from these partners for the purchase of the additional 15% working interests as well as their additional pro-rata share of drilling and completion costs. To date we have generated only nominal revenue from operations, and we have relied on the sale of equity as well as the sale of working interests and associated drilling advances to fund all of our capital needs .
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We anticipate that we will need to raise additional funding in the next 12 months to continue our business operations. Since our capital resources have been significantly depleted by drilling and completion of our first two wells, we will require additional capital to continue paying our general and administrative expenses, and for anticipated future drilling and leasing activities.  The amount we invest in drilling and leasing will depend on, among other factors, opportunities presented to us and the success of this offering. The most significant of our future capital requirements include (i) costs to acquire additional acreage; (ii) cost to drill additional wells; (iii) approximately $52,500 per month for salaries and other corporate overhead; (iv) legal and accounting fees for the filing this registration statement; and (v) approximately $16,000 per month in legal and accounting fees associated with our anticipated status as a public company required to file reports with the SEC.  We anticipate funding these projected expenses through proceeds from the sales of our shares of common stock via our most recent private placement, this offering or from additional private equity offerings or anticipated revenue from drilling activities.
 
Working Capital

September 30, 2014.  As of September 30, 2014, we had working capital of $626,632 comprised of current assets of $746,592 and current liabilities of $119,960.  Working capital decreased by $495,524 from $1,122,156 as of December 31, 2013. Our cash decreased significantly from December 31, 2013 to September 30, 2014, as we paid costs associated with drilling and completing our first two wells. Joint interest billing receivables also decreased significantly. Liabilities accrued during the quarter for drilling costs decreased for the same reason.
December 31, 2013.  As of December 31, 2013, our working capital totaled $1,122,156, consisting of $3,682,773 of current assets and $2,560,617 of current liabilities.  This represents a substantial increase from the $5,182 of working capital existing at December 31, 2012, shortly after our initial organization.  Cash at December 31, 2013 increased significantly due to a private placement of our common stock completed during the year in which we raised $2,252,000, and from drilling advances received prior to year end that had not yet been expended.  Joint interest billings arose from amounts due from our working interest partners in the Buck Peak Prospect.
Accounts payable and accrued expenses at December 31, 2013 arose primarily from drilling activities prior to year end.  Drilling advances that existed at that date related to amounts collected from our working interest partners but not yet spent on drilling and/or completion efforts.
As of the date of this prospectus, our working capital subsequent to September 30, 2014 has been further depleted, and we remain dependent on generating cash flow from operations and receipt of additional capital to implement our business plan.

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Cash Flows
 
Nine Months Ended September 30, 2014 Compared to September 30, 2013

Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2014 was $2,397,957 compared to $414,791 during the nine months ended September 30, 2013, representing an increase of $1,983,166. The increase in net cash used by operating activities is attributable to the costs associated with drilling and completing our first two wells and certain prepaid drilling costs offset by cash generated from the collection of joint interest billing receivables. We had no drilling activity in the 2013 period.

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2014 was $794,869 compared to $541,882 during the nine months ended September 30, 2013, representing an increase of $252,987. During the 2014 period, we paid $385,863 for our share of the development of our properties and $202,306 for the acquisition of additional working interest in our wells. Pursuant to the Settlement Agreement, we paid the counterparty a total of $1,142,237 for the surrender of its working interest in the two wells. Concurrently with this Settlement Agreement, we and our three remaining working interest partners purchased additional interests in the two wells such that these three partners own 75% of the working interest in the two wells and we retain 25%.  We received $935,537 from these three partners for the purchase of these additional working interests as well as their additional pro-rata share of drilling and completion costs. During the 2013 period, we paid $537,497 for the acquisition of properties with no development activity.

Financing Activities
During the nine months ended September 30, 2014, we sold 2,220,003 shares of our common stock at $0.50 per share for gross proceeds of $1,110,002.  Offering costs related to the sale of our common shares totaled $11,230, resulting in net proceeds of $1,098,772. This compares to the sale of 3,433,000 shares of our common stock at a price of $0.50 per share for gross proceeds of $1,716,500 during the nine months ended September 30, 2013.
Year Ended December 31, 2013 Compared to December 31, 2012
Operating Activities
 
Net cash provided by operating activities during the year ended December 31, 2013 was $1,041,564.  This represents an increase of $1,048,382 from the net use of $6,818 during the prior period.  The net cash provided by operating activities in 2013 is attributable to our receipt of drilling advances of $663,560 and an increase in accounts payable of $1,876,094. However, this increase in cash from operating activities was offset by increases in our joint interest billing receivable of $981,575. For the prior period we had no accounts payable, drilling advances, or joint interest billing receivable.
 
Investing Activities

Net cash used in investing activities during the year ended December 31, 2013 was $609,735.  We did not have any investing activities in 2012 as we only commenced operations in September 2012.  During 2013, we spent $605,350 on acquisition and development of our crude oil and natural gas properties including the acquisition of our interest in the Buck Peak Prospect for which we paid $565,310 in cash and stock and payments of $40,040 for the development of that prospect.

Financing Activities

During the year ended December 31, 2013, we received $2,252,000 from the sale of 4,504,000 shares of our common stock at a price of $0.50 per share.  During the prior period, we received $12,000 from our founders for 12,000 shares of our common stock.

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Capital Resources
 
As of September 30, 2014, we did not have any material commitments for capital expenditures.  As our capital resources are primarily dependent on the results of this offering and future equity and/or debt financings, we have not established a specific capital expenditures budget for 2015.

Results of Operations

Three Months Ended September 30, 2014 Compared to September 30, 2013

Overview: For the three months ended September 30, 2014, we reported a net loss of $171,488, or $0.01 per share, compared to a loss during the three months ended September 30, 2013 of $112,152, or $0.01 per share.  During the three months ended September 30, 2014, we reported nominal revenue of $6,314 from the sale of crude oil collected from our testing efforts.  We did not generate any revenue during the prior period.  Other than the second quarter of 2014 when we recorded the recovery of a bad debt expense and generated net income, we have incurred losses in each reported period since our inception.  We began operations on September 4, 2012, thus our activities were limited during the prior period to activities such as fundraising, formulating our business plan and investigating crude oil and natural gas properties.

Lease operating and production tax expenses: During the three months ended September 30, 2014, we incurred lease operating expense and production tax of $9,594 compared to $nil in the three months ended September 30, 2013.

General and administration expenses: We incurred general and administrative expenses of $167,981 during the three months ended September 30, 2014 compared to $110,655 in the three months ended September 30, 2013, representing an increase of $57,326. This increase is attributable to increases in salary and wage expenses, legal expenses, and accounting fees during the current period compared to the prior period.
 
Depreciation, depletion, amortization, and accretion expense: During the three months ended September 30, 2014, we incurred depreciation expense of $241 compared to $1,385 in the three months ended September 30, 2013 related to the depreciation of our property, plant, and equipment assets.

Exploration costs: During the three months ended September 30, 2014, we incurred no exploration costs compared to $113 in the three months ended September 30, 2013. The expenses in the prior period related to investigation of the Buck Peak prospect. 
 
Nine Months Ended September 30, 2014 Compared to September 30, 2013

Overview: For the nine months ended September 30, 2014, we reported a net loss of $527,681, or $0.03 per share, compared to a loss during the nine months ended September 30, 2013 of $292,266, or $0.02 per share. During the nine months ended September 30, 2014, we reported nominal revenue of $6,314 from the sale of crude oil collected from our testing efforts.  We did not generate any revenue during the prior period.  We began operations on September 4, 2012, thus our activities were limited during the prior period to activities such as fundraising, formulating our business plan and investigating crude oil and natural gas properties.

Lease operating and production tax expenses: During the nine months ended September 30, 2014, we incurred lease operating expense and production tax of $12,572 compared to $nil in the nine months ended September 30, 2013.

General and administration expenses: We incurred general and administrative expenses of $520,731 during the nine months ended September 30, 2014 compared to $253,224 in the nine months ended September 30, 2013, representing an increase of $267,507. This increase is attributed to increases in salary and wage expenses, legal expenses, and accounting fees during the current period compared to limited activity in the prior period as we were commencing operations.

Depreciation, depletion, amortization, and accretion expense: During the nine months ended September 30, 2014, we incurred depreciation expense of $722 compared to $1,385 in the nine months ended September 30, 2013 related to the depreciation of our property, plant, and equipment assets.

Exploration costs: During the nine months ended September 30, 2014, we incurred no exploration costs compared to $37,658 in the nine months ended September 30, 2013. The expenses in the prior period related to investigation of the Buck Peak prospect.


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Year Ended December 31, 2013 Compared to December 31, 2012

Overview:  For the year ended December 31, 2013, we reported a net loss of $504,075, or $0.04 per share, compared to a loss from inception through December 31, 2012 of $699,658, or $0.40 per share.  We did not report any revenue in either period.  We did not begin operations until September 4, 2012, thus we reported only a partial year of operating activity during 2012.  Our activities during that time were limited to raising money, formulating our business plan and investigating crude oil and natural gas properties.
 
Lease operating and production tax expenses:  During the year ended December 31, 2013, we incurred lease operating expense and production tax of $253 compared to $nil in the prior period.
 
General and administration expenses:  We incurred general and administrative expenses of $473,668 during the year ended December 31, 2013 compared to $699,658 in the prior period, representing a decrease of $225,990.  This improvement is attributed to non-cash stock based compensation expense of $692,840 in 2012 with no similar expense recognized in 2013, offset by increases in 2013 of salary and wage expenses, legal expenses, and accounting fees.  The legal and accounting fees in 2013 included significant expenses associated with the proposed business combination that was terminated on March 12, 2014 and the subsequently negotiated Settlement Agreement.

Depreciation, depletion, amortization, and accretion expense:  During the year ended December 31, 2013, we incurred depreciation expense of $631 compared to $nil in the prior period related to the depreciation of our property, plant, and equipment assets.

Exploration costs:  During the year ended December 31, 2013, we incurred exploration costs of $29,537 compared to $nil in the prior period.

Interest income:  During the year ended December 31, 2013, we recognized interest income of $14 compared to $nil in the prior period.

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Off-Balance Sheet Arrangements

As of September 30, 2014, we had no off-balance sheet arrangements of the type required to be disclosed by Item 303(a)(5) of Regulation S-K.

JOBS Act Emerging Growth Company

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (1) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion (subject to adjustment for inflation), (2) the last day of the fiscal year during which occurs the fifth anniversary of our initial public offering, (3) the date on which we have, during the  previous three-year period, issued more than $1 billion in non-convertible debt, or (4) the date on which we are deemed a “large accelerated filer” under the Exchange Act.

As an “emerging growth company,” we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to the following:

not being required to obtain an auditor attestation under Section 404(b) of the Sarbanes Oxley Act;

reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements;

exemptions from the requirements of holding a non-binding advisory vote on executive compensation and from holding a vote for stockholder approval of any golden parachute payments not previously approved;

presenting not more than two years of audited financial statements to make our registration statement effective with respect to an initial public offering;

delaying adoption of new and revised accounting standards until those standards would otherwise apply to private companies; and

providing executive compensation disclosure under Item 402 of Regulation S-K to the extent required by smaller reporting companies as defined by rule of the SEC.
 
Certain exemptions described above are also available to us as a smaller reporting company.  Specifically, the reduced disclosure obligation regarding executive compensation under Item 402 of Regulation S-K, presenting not more than two years of audited financial statements, and not being required to obtain an auditor attestation under Section 404(b) of the Sarbanes Oxley Act are the same for an “emerging growth company” such as ours that qualifies as a “smaller reporting company.”
 
Section 102(b) of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period and, as a result, we are not required to adopt any new or revised accounting standards on the relevant dates when adoption of such standards are required for other public companies.  While we are not required to adopt any new or revised accounting standards on the relevant dates, we may elect to do so.

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Critical Accounting Policies

Certain of our accounting policies are important to the portrayal of our financial condition and results of operation, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain.  Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances.
 
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards, if new or revised accounting standards are adopted in the future.
 
We believe that application of the following accounting policies, which are critical to our financial position and results of operations, requires significant judgments and estimates on the part of management.  Our accounting policies are discussed in detail in Note 1 of the Notes to Financial Statements included in this prospectus.

Crude Oil and Natural Gas Properties

Proved.  The Company follows the successful efforts method of accounting for its crude oil and natural gas properties.  Under this method of accounting, all property acquisition costs and development costs are capitalized when incurred and depleted on a units-of-production basis over the remaining life of proved reserves and proved developed reserves, respectively.  Costs of drilling exploratory wells are initially capitalized but are charged to expense if the well is determined to be unsuccessful.

We assess our proved crude oil and natural gas properties for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable.  The impairment test compares undiscounted future net cash flows to the assets’ net book value.  If the net capitalized costs exceed estimated future net cash flows, then the cost of the property is written down to fair value.  Fair value for crude oil and natural gas properties is generally determined based on discounted estimate of future net cash flows.  Impairment expense for proved properties is reported in exploration and impairment expense.
 
Net carrying values of retired, sold or abandoned properties that constitute less than a complete unit of depreciable property are charged or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-production amortization rate, in which case a gain or loss is recognized in the statement of operations..  Gains or losses from the disposal of complete units of depreciable property are recognized in earnings.

Unproved.  Unproved properties consist of costs to acquire undeveloped leases as well as costs to acquire unproved reserves.  Undeveloped lease costs and unproved reserve acquisitions are capitalized, and individually insignificant unproved properties are amortized on a composite basis, based on past success, past experience and average lease-term lives.  We evaluate significant unproved properties for impairment based on remaining lease term, drilling results, reservoir performance, seismic interpretation or future plans to develop acreage.  When successful wells are drilled on undeveloped leaseholds, unproved property costs are reclassified to proved properties and depleted on a unit-of-production basis.  Impairment expense for unproved properties is reported in exploration and impairment expense.

Exploratory.  Geological and geophysical costs, including exploratory seismic studies, and the costs of carrying and retaining unproved acreage are expensed as incurred.  Costs of seismic studies that are utilized in development drilling within an area of proved reserves are capitalized as development costs.  Amounts of seismic costs capitalized are based on only those blocks of data used in determining development well locations.  To the extent that a seismic project covers areas of both developmental and exploratory drilling, those seismic costs are proportionately allocated between development costs and exploration expense.

39

 
Costs of drilling exploratory wells are initially capitalized, pending determination of whether the well has found proved reserves.  If an exploratory well has not found proved reserves, the costs of drilling the well and other associated costs are charged to expense.  Cost incurred for exploratory wells that find reserves, which cannot yet be classified as proved, continue to be capitalized if (a) the well has found a sufficient quantity of reserves to justify completion as a producing well, and (b) the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project.  If either condition is not met, or if we obtain information that raises substantial doubt about the economic or operational viability of the project, the exploratory well costs, net of any salvage value, are expensed.

Enhanced Recovery Activities.  We may carry out tertiary recovery methods on certain of its crude oil and natural gas properties in order to recover additional hydrocarbons that are not recoverable from primary or secondary recovery methods.  Acquisition costs of tertiary injectants, such as purchased CO 2 , for enhanced oil recovery (“EOR”) activities that are used during a project’s pilot phase, or prior to a project’s technical and economic viability (i.e. prior to the recognition of proved tertiary recovery reserves) are expensed as incurred.  After a project has been determined to be technically feasible and economically viable, all acquisition costs of tertiary injectants are capitalized as development costs and depleted, as they are incurred solely for obtaining access to reserves not otherwise recoverable and have future economic benefits over the life of the project.  As CO 2  is recovered together with crude oil and natural gas production, it is extracted and re-injected, and all the associated CO 2 recycling costs are expensed as incurred.  Likewise costs incurred to maintain reservoir pressure are also expensed.

Recent Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 addresses the diversity in practice that exists for the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU No. 2013-11 is effective for our fiscal quarter ending June 30, 2014. ASU 2013-11 impacts balance sheet presentation only. The adoption of ASU No 2013-11 did not have a material impact on the Company’s financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic No. 605, “Revenue Recognition,” most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
 
In June 2014, the FASB issued ASU No. 2014-10 “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation” (“ASU 2014-10”). ASU 2014-10 addresses the cost and complexity associated with the incremental reporting requirements for development stage entities, such as startup companies, without compromising the availability of relevant information and eliminates an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The Company elected to apply ASU 2014-10 for our fiscal quarter ended June 30, 2014. ASU 2014-10 impacts financial statement presentation only and removes the requirement to present additional inception-to-date information.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period”. The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition, and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption is permitted.  The Company does not anticipate any impact from the adoption on its financial statements.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There have been no changes in or disagreements with our independent registered public accounting firm on accounting or financial disclosure.
40


MANAGEMENT

Directors and Officers

The following individuals presently serve as our officers and directors:

Name
Age
Positions With the Company
Board Position
Held Since
Bill M. Conrad
58
Chairman of the Board and Director
November 2012
Stephen J. Foley
61
Chief Executive Officer and Director
November 2012
Frederick J. Witsell
56
President, Secretary and Director
November 2012

Each of our directors is serving a term which expires at the next annual meeting of our shareholders and until his successor is elected and qualified or until he resigns or is removed.  Our officers serve at the will of our Board of Directors.

Stephen J. Foley should be considered a founder of our company, as he has taken initiative in the organization of our business.

The following information summarizes the business experience of each of our officers and directors for at least the last five years:

Bill M. Conrad, Chairman.  Mr. Conrad has served as Chairman of the Board of PetroShare since inception.  He is presently an independent consultant, providing financial and management services.  From 1990 until December 2012, Mr. Conrad served as Vice-President of MCM Capital Management, Inc., a privately-held financial and management consulting firm.  MCM assisted other companies in developing and implementing their business plans and capital formation strategies.  In that capacity, Mr. Conrad participated in the organization or development of a number of companies in industries as diverse as oil and gas, real estate, and technology.  Mr. Conrad also currently serves (2006 to present) as a director, and since January 1, 2014, as the Chairman of Gold Resource Corporation, a publicly traded gold mining and exploration company with securities listed on the NYSE MKT.  Mr. Conrad also currently serves (2005 to present) as a director of Synergy Resources Corporation, a publicly traded oil and gas company with securities listed on the NYSE MKT.  Our Board of Directors believes that the management and corporate finance experience developed by Mr. Conrad over many years serving as an executive officer and director of numerous publicly-traded companies, as well as his familiarity with relevant accounting principles and financial statement presentation, make him well-qualified to serve on our Board of Directors.

Stephen J. Foley, Chief Executive Officer.   Mr. Foley has served as the Chief Executive Officer of PetroShare since its inception.  Prior to entering private business, Mr. Foley had a successful pro football career as a safety with the Denver Broncos football organization of the National Football League where he played for 11 seasons, from 1976 to 1986.  In 1991, Mr. Foley founded and continues to serve as the president of FSI Development Inc., a privately-held construction and development company engaged in residential development and construction, where he devotes a minor portion of his time.  In 2000, he founded and continues to serve as a manager of FS Land, LLC, another privately-held real estate development company.  He holds a BS in Business Administration from Tulane University and serves on the Board of The Denver Street Schools.  Our Board of Directors believes that Mr. Foley’s experience founding and operating his own business, relationships in the oil and gas industry, significant participation in the development of business strategy and decision-making for the company since its inception provides him with the appropriate experience and qualifications to serve as a member of our Board of Directors.

41

 
 
Frederick J. Witsell, President and Secretary.  Mr. Witsell became our President in November 2012 and assumed the role of Secretary in August 2013.  Mr. Witsell has over 32 years’ experience in several facets of the oil and gas industry, including prospect development, conventional and horizontal drilling and completion operations, project management, gathering and compression systems, and marketing and risk management.  From 2010 to 2011, Mr. Witsell served as Vice-President and General Manager of Monroe Gas Storage, an affiliate of High Sierra Energy Partners, and led the organization’s projects and eventual divestiture in 2011.  From 1999 to 2003, he was with Markwest Hydrocarbons (NYSE) in the capacity of Vice-President of the Rocky Mountain Business Unit and responsible for the growth thru capital programs and financial performance of the company’s oil and gas operations in the US and Canada.  Mr. Witsell led the acquisition and eventual divestiture process of Markwest oil and gas assets.  Prior to 1999 and at various times between 2003 and 2010 and in 2012, Mr. Witsell also served as an executive and co-founder of a series of small, privately-funded oil and gas companies with properties in North Dakota, Wyoming, Utah and Colorado.  He was responsible for the growth and execution of capital programs, utilizing modern horizontal / directional drilling and completion technologies.  He led the divestiture of these oil and gas companies.  Mr. Witsell has a BA in Geology from Colorado College, an MBA in Energy Management from the University of Denver, and is a member of Society of Petroleum Engineers, the American Association of Petroleum Geologists and the Rocky Mountain Association of Geologists.  Our Board of Directors believes that Mr. Witsell is well-qualified to serve as a director and executive officer of the company as a result of his extensive oil and gas industry experience including in areas of executive management and operations developed by serving as an executive officer of other oil and gas companies throughout his career.

Director Independence

We have elected to apply the standards of the NYSE MKT for determining the “independence” of our directors.  Our Board of Directors has determined that Bill M. Conrad qualifies as “independent” in accordance with Section 803(A) of the NYSE MKT Company Guide.  During the review, our Board of Directors considered relationships and transactions during 2013 and during the past three fiscal years between each director or any member of his immediate family, on the one hand, and our company and our affiliates, on the other hand.  The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent. The only compensation or remuneration that we provide to Mr. Conrad during his tenure as a director is compensation as a non-employee director.  Neither Mr. Conrad nor any members of his family have participated in any transaction with us that would disqualify him as an “independent” director under the standard described above.  Stephen J. Foley and Frederick J. Witsell do not qualify as “independent” because they are our executive officers.

Committees

Audit Committee.  We presently do not have an audit committee and the Board of Directors as a whole will perform the tasks that an audit committee would otherwise perform, including engaging our independent registered public accountants and reviewing their performance and approving their fees, planning the scope and reviewing the results of the audit of our financial statements, and reviewing our accounting and financial reporting procedures and controls.  Although we may form an audit committee in the future, there is no assurance as to when or whether we will be able to do so.

Compensation Committee.  We presently do not have a compensation committee and the Board of Directors as a whole will approve the compensation of our executive officers.  Executive officers who also serve on the Board of Directors do not vote on matters pertaining to their own personal compensation.  Although we may form a compensation committee in the future, there is no assurance as to when or whether we will be able to do so.

42

 
 
Director Compensation

Bill M. Conrad, our sole independent director, is paid a director’s fee in the amount of $6,500 per month beginning November 2013.  None of our other directors are compensated in their capacities as such.  We do, however, reimburse all of our directors for reasonable and necessary expenses incurred by them in that capacity.

Further, in December 2012, our board granted options to purchase our common stock to the directors under the Equity Incentive Plan.  The options are exercisable at a price of $0.25 per share for a period of 10 years.  (See “Certain Relationships and Related Transactions”)

We will review our compensation arrangements periodically in the future and may change our compensation policies as our business needs dictate and our resources permit.

Executive Compensation

Stephen J. Foley, our Chief Executive Officer, and Frederick J. Witsell, our President, are each compensated by us at the rate of $12,500 per month, or $150,000 per annum under the terms of their respective employment agreements.  We also reimburse our officers for reasonable and necessary expenses incurred by them on our behalf.  Each individual is also entitled to a severance payment in the event his employment is terminated without cause by our company, Mr. Foley in the amount of 12 months’ compensation and Mr. Witsell in an amount equal to the compensation remaining under his then-existing agreement.  Both Mr. Foley’s and Mr. Witsell’s employment agreements contain provisions requiring each of them to perform their duties in good faith, with diligence and to the best of their abilities and prohibiting them from disclosing the company’s confidential information.  In addition, Mr. Foley’s employment agreement includes non-compete and non-solicitation provisions.

The following table summarizes the total compensation of our named executive officers for the two years ended December 31, 2014:
 

Summary Compensation Table
Name and
Principal Position
 
Year
 
Salary
 
 
Bonus
 
 
Stock
Awards
 
 
Option
Awards
 
 
Non-Equity
Incentive Plan
Compensation
 
 
All
Other
Compensation
 
 
Total
 
Stephen J. Foley(1)
 
2014
 
$
150,000
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
150,000
 
Chief Executive Officer and Director
 
2013
 
 
31,250
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31,250
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Frederick J. Witsell(2)
 
2014
 
$
150,000
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
150,000
 
President, Director of Operations and Geosciences and Director
 
2013
 
 
137,500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
137,500
 
___________________

  
(1)  Mr.   Foley’s salary is pursuant to his November 1, 2013 employment agreement.
(2)  Mr. Witsell’s salary is pursuant to his March 1, 2013 employment agreement.
 
 
43

 
 
Outstanding Equity Awards at Year End
 
The following table sets forth outstanding stock option awards as of December 31, 2014.  As of December 31, 2014, the Company had not granted any stock awards.

 
 
Option awards
Name
 
Number of securities underlying unexercised options (#) exercisable
   
Number of securities underlying unexercised options (#) unexercisable
   
Number of securities underlying unexercised unearned options (#)
   
Option exercise price ($)
 
Option expiration date
 
 
   
   
   
 
      
Bill M. Conrad
   
500,000
 (1)    
-
     
-
     
0.25
 
12/15/2022
 
                               
      
Stephen J. Foley
   
500,000
 (1)    
-
     
-
     
0.25
 
12/15/2022
 
                               
      
Frederick J. Witsell
   
1,000,000
 (1)    
-
     
-
     
0.25
 
12/15/2022
 
                               
      
___________________
(1) Represents stock options granted on December 15, 2012 pursuant to the Equity Incentive Plan.  These options vested immediately.

Director Compensation
 
The following table sets forth with respect to the named directors, compensation information inclusive of equity awards and payments made during the year ended December 31, 2014 in the director’s capacity as a director.

 
       
 
   
 
   
 
   
 
   
 
 
Name
   
Year
   
Fees Earned or Paid in Cash ($)
   
Stock Awards ($)
   
Option Awards ($)
   
All Other Compensation ($)
   
Total ($)
 
Bill M. Conrad
   
2014
     
78,000
     
-
     
-
     
-
     
78,000
 
                                                   
Stephen J. Foley
   
2014
     
-
     
-
     
-
     
-
     
-
 
                                                   
Frederick J. Witsell
   
2014
     
-
     
-
     
-
     
-
     
-
 

 

44

 
 
 
Certain Relationships and Related Transactions

Initial Capitalization.  On November 30, 2012, we issued a total of 7,600,000 shares of our common stock to our existing officers and directors for an aggregate price of $7,600 or $0.001 per share.  The shares were issued to the following individuals and in the following amounts:
 
 
Bill M. Conrad 
2,200,000 shares
 
Stephen J. Foley 
2,200,000 shares
 
Frederick J. Witsell
3,200,000 shares

In December 2012, we granted options to purchase a total of 2,000,000 additional shares of our common stock to the foregoing individuals under our Equity Incentive Plan.  The options are exercisable at a price of $0.25 per share for a period of 10 years.  Of the total number of options granted, Mr. Witsell received options to purchase 1,000,000 shares and each of the other individuals received options to purchase 500,000 shares.

At the time of these transactions, Messrs. Conrad, Foley, Witsell, and two other individuals who have since resigned their positions, were the only members of our Board of Directors.

Acquisition of Buck Peak Prospect.  Mr. Witsell is the manager and a member of Premier Energy Partners (I) LLC from which we acquired certain working interests in the Buck Peak prospect.  Mr. Witsell received $50,480 for his share of the proceeds payable to Premier.  Mr. Witsell abstained from voting on this transaction as a member of the Board of Directors.

Indemnification and Limitation on Liability of Directors

Our Articles of Incorporation and Bylaws provide that we may indemnify, to the fullest extent permitted by Colorado law, any of our directors, officers, employees or agents made or threatened to be made a party to a proceeding, by reason of the person serving or having served in a capacity as such, against judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met.  At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted.  Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

The Colorado Business Corporation Act (the “CBCA”) allows indemnification of directors, officers, employees and agents of a company against liabilities incurred in any proceeding in which an individual is made a party because he was a director, officer, employee or agent of the company if such person conducted himself in good faith and reasonably believed his actions were in, or not opposed to, the best interests of the company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.  A person must be found to be entitled to indemnification under this statutory standard by procedures designed to assure that disinterested members of the Board of Directors have approved indemnification or that, absent the ability to obtain sufficient numbers of disinterested directors, independent counsel or shareholders have approved the indemnification based on a finding that the person has met the standard.  Indemnification is limited to reasonable expenses.

45

 
Our Articles of Incorporation limit the liability of our directors to the fullest extent permitted by the CBCA.  Specifically, our directors will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for:

any breach of the duty of loyalty to our company or our stockholders;

acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law;

dividends or other distributions of corporate assets that are in contravention of certain statutory or contractual restrictions;

violations of certain laws; or

any transaction from which the director derives an improper personal benefit.

Liability under federal securities law is not limited by the Articles.

46

 
 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
As of January 13, 2015, there were a total of 17,008,191 shares of our common stock outstanding, our only class of voting securities currently outstanding.  The following table describes the ownership of PetroShare voting securities by: (i) each of our officers and directors; (ii) all of our officers and directors as a group; and (iii) each shareholder known us to own beneficially more than 5% of our common stock.  Unless otherwise stated, the address of each of the individuals is our address, 7200 South Alton Way, Suite B-220, Centennial, CO 80112.
 
In calculating the percentage ownership for each shareholder, we assumed that any options owned by an individual and exercisable within 60 days are exercised, but not the options owned by any other individual.
 
 
 
Shares Beneficially Owned 
Name and Address of
Beneficial Owner
 
Number
   
  Percentage (%) Before
Offering
   
Percentage (%) After
Offering(5) 
Bill M. Conrad(1)
   
2,500,000
 (2)    
14.3
     
11.3
 
Stephen J. Foley(1)
   
2,095,000
 (2)    
12.0
     
9.5
 
Frederick J. Witsell(1)
   
3,850,000
 (3)    
21.4
     
17.0
 
All officers and directors as a group (3 persons)
   
8,445,000
 (4)    
44.4
      35.8  
__________________________
(1) Officer and director of PetroShare.
(2) Includes options to acquire 500,000 shares of common stock which are presently exercisable.
(3) Includes options to acquire 1,000,000 shares of common stock which are presently exercisable.
(4) Includes options to acquire 2,000,000 shares of common stock which are presently exercisable.
(5) Assumes that all shares offered by us hereunder are sold. Excludes issuance of common stock underlying the broker warrants, of which there is no assurance .
 
Changes in Control

We are aware of no circumstances that may give rise to a change in control of our company.
 
47

SELLING SHAREHOLDERS

We have agreed to file the registration statement which contains this prospectus on behalf of our selling shareholders. We have also agreed to use our best efforts to keep the registration statement effective and update the prospectus until the securities owned by the selling shareholders have been sold or may be sold without registration or prospectus delivery requirements under the Securities Act. We will pay the costs and fees of registering the shares, but the selling shareholders will pay any brokerage commissions, discounts or other expenses relating to the sale of the shares.

The registration statement which we have filed with the SEC, of which this prospectus forms a part, covers the resale of our common stock by the selling shareholders from time to time under Rule 415 of the Securities Act. Our agreement with the selling shareholders is designed to provide those shareholders some liquidity in their ownership of common stock and to permit secondary public trading of our securities. The selling shareholders may offer our securities covered under this prospectus for resale from time to time. The selling shareholders may also sell, transfer or otherwise dispose of all or a portion of our securities in transactions exempt from the registration requirements of the Securities Act. (SeePLAN OF DISTRIBUTION”).
 
The table below presents information as of January 13, 2015 regarding the selling shareholders and our common stock that the selling shareholders may offer and sell from time to time under this prospectus. The table is prepared based on information supplied to us by those shareholders. Except as otherwise noted, the individuals listed in the table below have sole voting and investment power over the shares.  Although we have assumed, for purposes of the table below, that the selling shareholders will sell all of the securities offered by this prospectus, because they may offer all or some of the securities in transactions covered by this prospectus or in another manner, no assurance can be given as to the actual number of shares that will be resold by the selling shareholders. Information covering the selling shareholders may change from time to time, and changed information will be presented in a supplement to this prospectus if and when required. If we are advised of a change in selling shareholders and the new selling shareholders, any pledges, donees or transferees wish to rely upon this prospectus in the resale of their shares, we will file an amendment to the registration statement of which this prospectus is a part. Except as described above, there are no agreements, arrangements or understandings with respect to resale of any of the securities covered by this prospectus.

 
 
 
Number of Shares
Owned Prior to
the Offering and
   
Shares Owned
After the Offering1
 
Name of Selling Shareholder
 
to be Offered
   
Number
   
Percent
 
 
 
   
   
 
Kingdom Building Leadership Ministries2
   
1,000,000
     
0
     
0
 
Dave Preston
   
10,000
     
0
     
0
 
Trent and Natalie Wiesen
   
150,000
     
0
     
0
 
Jeanne David
   
10,000
     
0
     
0
 
Steven Barrios
   
110,000
     
0
     
0
 
David and Tiffany Foley
   
150,000
     
0
     
0
 
Joseph Kimmel
   
10,000
     
0
     
0
 
Pat and Bernie Hyland
   
10,000
     
0
     
0
 
Al Foley
   
150,000
     
0
     
0
 
Hugh Jessiman
   
10,000
     
0
     
0
 
_____________________________
(1) Assumes that all the shares offered hereby are sold, of which there is no assurance.
(2) The selling shareholder has identified Derek Fullmer as the individual with the power to vote and dispose of these shares.
 
48


 
Anita Marshall
   
10,000
     
0
     
0
 
Nancy J. Foley
   
10,000
     
0
     
0
 
Carol A. Foley
   
10,000
     
0
     
0
 
Dewey L. Williams Profit Sharing Plan & Trust 3
   
50,000
     
0
     
0
 
Dewey L. Williams
   
10,000
     
0
     
0
 
William E. Skeith
   
40,000
     
0
     
0
 
Robert M. and Jane M. Igo
   
40,000
     
0
     
0
 
Mark McGinnis Trust 4
   
70,000
     
0
     
0
 
Verne P. Collier
   
250,000
     
0
     
0
 
Avery Ellis LLC 5
   
200,000
     
0
     
0
 
Theresa & Jerry Goergen
   
50,000
     
0
     
0
 
Kevin Hennings
   
50,000
     
0
     
0
 
Gary C. Huber
   
150,000
     
0
     
0
 
Cynthia G. Jones
   
100,000
     
0
     
0
 
Anthony and Jean McGinnis
   
25,000
     
0
     
0
 
Curtis D. Miller
   
50,000
     
0
     
0
 
Stephen C. Palmer
   
50,000
     
0
     
0
 
NFSC, Inc. PSP 6
   
20,000
     
0
     
0
 
David Limpert
   
150,000
     
0
     
0
 
Allison J. West
   
40,000
     
0
     
0
 
Brian M. Conrad
   
60,000
     
0
     
0
 
Thomas P. Brennan
   
100,000
     
0
     
0
 
A M Gas Marketing Corp.7
   
100,000
     
0
     
0
 
Randy Scholl
   
200,000
     
0
     
0
 
Gregory A. Patterson and Julia K. Patterson
   
250,000
     
0
     
0
 
Frostbridge Fund I LLC 8
   
54,000
     
0
     
0
 
Jason Reid
   
300,000
     
0
     
0
 
John Reid
   
100,000
     
0
     
0
 
Astute Enterprises, LLC 9
   
100,000
     
0
     
0
 
_________________________________________
(3) The selling shareholder has identified Dewey Williams as the individual with the power to vote and dispose of these shares.
(4) The selling shareholder has identified Mark McGinnis as the individual with the power to vote and dispose of these shares.
(5) The selling shareholder has identified Andrew Scherr as the individual with the power to vote and dispose of these shares.
(6) The selling shareholder has identified Tom Golden as the individual with the power to vote and dispose of these shares.
(7) The selling shareholder has identified Barton Levin as the individual with the power to vote and dispose of these shares.
(8) The selling shareholder has identified David Wersebe as the individual with the power to vote and dispose of these shares.
(9) The selling shareholder has identified Mark Huisinger as the individual with the power to vote and dispose of these shares.
 
 
49

 

 
Pensco Trust Company FBO Richard Morean10
   
100,000
     
0
     
0
 
William W. Reid
   
300,000
     
0
     
0
 
Denney & Denney Capital, LLLP 11
   
80,000
     
0
     
0
 
Scott C. Chandler
   
100,000
     
0
     
0
 
Victor E. Loitz
   
50,000
     
0
     
0
 
Robert C. Lombardi and Cyndy L. Kraft
   
100,000
     
0
     
0
 
DR-par Solutions, LLC 12
   
100,000
     
0
     
0
 
Henry A. Mora and Catherine A. Mora
   
200,000
     
0
     
0
 
William Daron Ball and Abra Suzanne Ball
   
145,024
     
0
     
0
 
Milton D. McKenzie
   
661,000
     
0
     
0
 
Robin Reed
   
400,000
     
0
     
0
 
Victory Fund, LLC 13
   
100,000
     
0
     
0
 
CHARLESCLAY, LLC 14
   
50,000
     
0
     
0
 
John Carpenter
   
22,500
     
0
     
0
 
David Witsell
   
177,000
     
0
     
0
 
Kyle Worsham
   
27,500
     
0
     
0
 
Fredo P. Killing
   
100,000
     
0
     
0
 
Shirley H. Witsell
   
50,000
     
0
     
0
 
Deborah A. Golden
   
50,000
     
0
     
0
 
Ryan J. Witsell
   
25,000
     
0
     
0
 
Kellen F. Witsell
   
25,000
     
0
     
0
 
Jean Staiano
   
30,000
     
0
     
0
 
John Wilson
   
10,000
     
0
     
0
 
Lon Garrison
   
10,000
     
0
     
0
 
Parker Garrison
   
10,000
     
0
     
0
 
Leyton Garrison
   
10,000
     
0
     
0
 
Maclain Garrison
   
10,000
     
0
     
0
 
William Asbury
   
10,000
     
0
     
0
 
Edgar Arthur Brown
   
200,000
     
0
     
0
 
Ted and Andrea Bull
   
30,000
     
0
     
0
 
Gregory S. Callanan
   
150,000
     
0
     
0
 
Robert M. Chevalier and Elizabeth M. Chevalier
   
9,000
     
0
     
0
 
Judah Regenstreif
   
70,000
     
0
     
0
 
David Reid
   
300,000
     
0
     
0
 
Dennis Arends
   
122,000
     
0
     
0
 
Steven J. Borelli
   
50,000
     
0
     
0
 
Robert C. Fay
   
50,000
     
0
     
0
 

 
________________________________________________
(10) The selling shareholder has identified Richard D. Morean as the individual with the power to vote and dispose of these shares.
(11) The selling shareholder has identified Arthur J. Denney as the individual with the power to vote and dispose of these shares.
(12) The selling shareholder has identified as David Robey as the individual with the power to vote and dispose of these shares.
(13) The selling shareholder has identified Dan Rudden as the individual with the power to vote and dispose of these shares.
(14) The selling shareholder has identified William Lackey as the individual with the power to vote and dispose of these shares.
 
50


 

Gary K. Guilford
   
10,000
     
0
     
0
 
Janelle L. Henderson & Stephen C. Palmer, JTWROS
   
50,000
      0       0  
Investment Ministries, LLC 15
   
150,000
       0       0  
Noteworthy Financial, Inc.16
   
20,000
       0        0  
Mitchel Lucero
   
100,000
       0        0  
A and WP Living Trust 17
   
40,000
       0        0  
David A. Patterson
   
10,000
       0        0  
Richard S. Hensley
   
50,000
       0        0  
William L. Pell
   
90,000
       0        0  
Quest IRA, Inc. FBO J. Warren Padgett 18
   
24,000
       0        0  
Quest IRA, Inc. FBO Ann M. Padgett 19
   
24,000
       0        0  
Lifetime Partners, LLC 20
   
50,000
       0        0  
Joe P. Gallegos and Marianne Gallegos
   
20,000
       0        0  
Chris C. Edwards
   
10,000
       0        0  
Larry Douglas
   
100,000
       0        0  
Quest IRA, Inc. FBO David K. Kennedy 21
   
20,000
       0        0  
David Kennedy
   
20,000
       0        0  
Pensco Trust Company FBO Abby Ball 22
   
16,424
       0        0  
Pensco Trust Company FBO William Ball 23
   
38,555
       0        0  
Paul Davis SEP IRA
   
50,000
       0        0  
CFI Fund, LLC 24
   
50,000
       0        0  
Russ Jones
   
100,000
       0        0  
Daron Ball
   
200,000
       0        0  
 
                   
TOTAL
   
9,426,003
       0        0  
 
Except as otherwise noted in the table above and to the best of our knowledge, the selling shareholders are not associated with or affiliates of United States broker-dealers, and at the time of purchase the selling shareholders purchased the securities in the ordinary course of business and did not have any agreements or understandings, directly or indirectly, with any persons to distribute or dispose of the securities. Further, except as otherwise stated, none of the selling shareholders have any relationship to our company, except as a shareholder.
______________________________
(15) The selling shareholder has identified Terry Tyson as the individual with the power to vote and dispose of these shares.
(16) The selling shareholder has identified David Kennedy as the individual with the power to vote and dispose of these shares.
(17) The selling shareholder has identified Ann Padgett as the individual with the power to vote and dispose of these shares.
(18) The selling shareholder has identified Warren Padgett as the individual with the power to vote and dispose of these shares.
(19) The selling shareholder has identified Ann Padgett as the individual with the power to vote and dispose of these shares.
(20) The selling shareholder has identified Doyle McAlister as the individual with the power to vote and dispose of these shares.
(21)
The selling shareholder has identified David Kennedy as the individual with the power to vote and dispose of these shares.
(22) The selling shareholder has identified Abby Ball as the individual with the power to vote and dispose of these shares.
(23) The selling shareholder has identified William Ball as the individual with the power to vote and dispose of these shares.
(24) The selling shareholder has identified Donald Lester as the individual with the power to vote and dispose of these shares. 

 
51

PLAN OF DISTRIBUTION

Our Distribution
 
We are offering a total of 4,600,000 shares of common stock on a “best efforts” basis at an offering price of $1.00 per share. The shares are being offered by us through our officers and directors. No commission will be paid by us to our officers or directors for sales of shares made by them. However, we may retain broker-dealers or other intermediaries to assist in the sale of our shares, and we reserve the right to pay a commission up to 10% of the offering price for sales effectuated through these intermediaries, along with a compensation warrant to purchase our common stock.
 
Any broker warrant issued by us would be exercisable to purchase up to 460,000 shares of our common stock (representing 10% of the total offering) and be exercisable at a price of $1.10 per share. As is customary, the exercise price would be subject to adjustments in certain events, including stock splits, stock dividends and recapitalizations. The warrant would be exercisable for a period of five years from the date of issuance. The warrant and the shares of common stock underlying the warrant would be deemed compensation by the Financial Industry Regulatory Authority, or FINRA, and would be subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The broker (or permitted assignees under Rule 5110) would not be able to sell, transfer, assign, pledge or hypothecate the warrant or the shares of the common stock underlying the warrant, nor would they be able to engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the warrant or the common stock underlying the warrant for a period of 180 days after the effective date of the registration statement of which this prospectus is a part. The terms and or number of shares underlying the warrant shall be modified if necessary to comply with FINRA rules or regulations. We are registering the warrant and the shares issuable upon the exercise of the warrant under the registration statement of which this prospectus is a part.

No one, including us, or our officers and directors, has made any commitment to purchase any or all of the shares.  Rather, we will use our best efforts to find purchasers for the shares for a period of 60 days from the date of this prospectus, subject to any extension in our discretion for up to an additional 90 days. There is no minimum number of shares which must be sold, or sales proceeds which must be received, to complete this offering.  As a result, all proceeds will be immediately deposited in our bank account and available for all corporate purposes.  Purchasers in this offering will not be entitled to a return of their investment following receipt by us.
We anticipate offering the shares to individuals or entities whom we believe may be interested or who have contacted us with an interest in purchasing the shares.  We may sell the shares to a person or entity if they are resident in a state in which we may legally offer and sell the shares. We may also offer the shares to non-residents of the United States.  However, we are not obligated to sell the shares to anyone.  Due to the restrictions on resale imposed by applicable securities laws, it is not anticipated that any individual or entity will purchase 10% or more of the amount of our stock outstanding at the time of the sale.
In the view of the SEC, any broker-dealer participating in this offering that sells more than 5% of the securities offered would be deemed an “underwriter” as defined in Section 2(11) of the Securities Act of 1933 and any commission paid to such broker would be deemed underwriting compensation.  Further, prior to the participation of any broker-dealer, we may be required to obtain the consent of FINRA to the underwriting compensation and arrangements.  As of the date of this prospectus, we have not retained any broker or dealer to assist in selling the shares.
The offering price of the shares was determined by us primarily with reference to recent sales prices of our common stock.  We also considered factors such as our history and nominal revenue, our assets and the anticipated expenses of exploring and developing our properties.  However, the offering price of the common stock should not be used as an indication of the value of the securities or an assurance that purchasers will be able to resell the securities for an amount equal to the offering price or an amount in excess thereof.

Inasmuch as we are offering the common stock directly, and we have not retained an underwriter as might be the case in other offerings, our determination of the offering price has not been determined through negotiation with an underwriter.  To the extent that an underwriter has not been involved in determining the price of our securities, investors are subject to an increased risk that the price of our securities have been arrived at arbitrarily.
The fact that we have agreed to register the proposed sales of our common stock on behalf of the selling shareholders may affect our ability to sell stock in this offering.  Due to the absence of a trading market for our stock and the concurrent lack of visibility for our company, we will appeal to a limited number of individuals or entities who might be interested in purchasing our stock.  To the extent that selling shareholders may attempt to sell stock during the same time, they may appeal to the same individuals or entities and compete with us.  Furthermore, the selling shareholders may sell their shares at market prices if our common stock is accepted for quotation on the OTC Bulletin Board or other automated quotation system while we will offer our shares at a fixed price of $1.00.  This may affect the amount of stock that we are able to sell in this offering and reduce the proceeds which we might otherwise receive.  However, we do not expect that the selling shareholders will offer their securities until we are successful in developing a market for our common stock.

52

 
 
Selling Shareholder Distributions
 
The selling shareholders and their pledgees, donees, transferees or other successors in interest may offer the shares of our common stock from time to time after the date of this prospectus and will determine the time, manner and size of each sale in the over the counter market, in privately negotiated transactions or otherwise.  The shares may be offered at a fixed price of $1.00 per share until such time, if ever, our shares are quoted on the OTC Bulletin Board or the OTC Markets, following which the shares may be offered at prices prevailing in the market or at privately negotiated prices.  The selling shareholders may negotiate, and may pay, brokers or dealers commissions, discounts or concessions for their services.  In effecting sales, brokers or dealers engaged by the selling shareholders may allow other brokers or dealers to participate.  However, the selling shareholders and any brokers or dealers involved in the sale or resale of the shares may qualify as “underwriters” within the meaning of Section 2(a)(11) of the Securities Act. In addition, the brokers’ or dealers’ commissions, discounts or concessions may qualify as underwriters’ compensation under the Securities Act.
 
The methods by which the selling shareholders may sell the shares of our common stock include:
A block trade in which a broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block, as principal, in order to facilitate the transaction;
 
 
Sales to a broker or dealer, as principal, in a market maker capacity or otherwise and resale by the broker or dealer for its account;
 
 
Ordinary brokerage transactions and transactions in which a broker solicits purchases;
 
 
Privately negotiated transactions;
 
 
Short sales;
 
 
Any combination of these methods of sale; or
 
 
Any other legal method.

53

 
In addition to selling their shares under this prospectus, the selling shareholders may transfer their shares in other ways not involving market makers or established trading markets, including directly by gift, distribution, or other transfer, or sell their shares under Rule 144 of the Securities Act rather than under this prospectus, if the transaction meets the requirements of Rule 144.  Any selling shareholder who uses this prospectus to sell his shares will be subject to the prospectus delivery requirements of the Securities Act.

Regulation M under the Exchange Act provides that during the period that any person is engaged in the distribution of our shares of common stock, as defined in Regulation M, such person generally may not purchase our common stock.  The selling shareholders are subject to these restrictions, which may limit the timing of purchases and sales of our common stock by the selling shareholders.  This may affect the marketability of our common stock.

The selling shareholders may use agents to sell the shares.  If this happens, the agents may receive discounts or commissions.  The selling shareholders do not expect these discounts and commissions to exceed what is customary for the type of transaction involved. If required, a supplement to this prospectus will set forth the applicable commission or discount, if any, and the names of any underwriters, brokers, dealers or agents involved in the sale of the shares.  The selling shareholders and any underwriters, brokers, dealers or agents that participate in the distribution of our common stock offered hereby may be deemed to be “underwriters” within the meaning of the Securities Act, and any profit on the sale of shares by them and any discounts, commissions, concessions or other compensation received by them may be deemed to be underwriting discounts and commissions under the Securities Act. The selling shareholders may agree to indemnify any broker or dealer or agent against certain liabilities relating to the selling of the shares, including liabilities arising under the Securities Act.

Upon notification by the selling shareholders that any material arrangement has been entered into with a broker or dealer for the sale of the shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, we will file a supplement to this prospectus, if required, pursuant to Rule 424(b) under the Securities Act, disclosing the material terms of the transaction.

DETERMINATION OF OFFERING PRICE

Our common stock is being offered by the selling shareholders at a price of $1.00 per share, until such time, if ever as our common stock is listed on the OTC Bulletin Board or OTC Markets.  The price of the shares was determined by us in negotiation with certain of our selling shareholders and primarily with reference to recent sales prices of our common stock.  We also considered factors such as our history and limited revenue and other factors which our management considered in determining, in their best judgment, the fair market value of our common stock.  However, the offering price of the common stock should not be used as an indication of the value of the securities or an assurance that purchasers will be able to resell the securities for an amount equal to the offering price or an amount in excess thereof.

DESCRIPTION OF CAPITAL STOCK
 
Our authorized capital consists of 100,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.01 per share.  As of January 13, 2015, we had 17,008,191 shares of common stock issued and outstanding, and no shares of preferred stock outstanding .

The following discussion summarizes the rights and privileges of our capital stock.  This summary is not complete, and you should refer to our Articles of Incorporation, as amended, filed with the Colorado Secretary of State.

54

 
Common Stock

The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to stockholders, including the election of directors.  Cumulative voting for directors is not permitted.  Except as provided by special agreement, the holders of common stock are not entitled to any preemptive rights and the shares are not redeemable or convertible.  All outstanding common stock is, and all common stock offered hereby will be, when issued and paid for, fully paid and non-assessable.  The number of authorized shares of common stock may be increased or decreased (but not below the number of shares then outstanding or otherwise reserved under obligations for issuance by us) by the affirmative vote of a majority of shares cast at a meeting of our shareholders at which a quorum is present.

Our Articles of Incorporation and Bylaws do not include any provision that would delay, defer or prevent a change in control of our company.  However, as a matter of Colorado law, certain significant transactions would require the affirmative vote of a majority of the shares eligible to vote at a meeting of shareholders which requirement could result in delays to or greater cost associated with a change in control of our company.

The holders of our common stock are entitled to dividends if, as and when declared by our Board of Directors from legally available funds, subject to the preferential rights of the holders of any outstanding preferred stock.  Upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of our common stock are entitled to share, on a pro rata basis, all assets remaining after payment to creditors and prior to distribution rights, if any, of any series of outstanding preferred stock.

Preferred Stock

Our Articles of Incorporation vest our Board of Directors with authority to divide the preferred stock into series and to fix and determine the relative rights and preferences of the shares of any such series so established to the full extent permitted by the laws of the State of Colorado and our Articles of Incorporation in respect to, among other things:

(i) the number of shares to constitute such series and the distinctive designations thereof;

(ii) the rate and preference of dividends, if any, the time of payment of dividends, whether dividends are cumulative and the date from which any dividend shall accrue;

(iii) whether preferred stock may be redeemed and, if so, the redemption price and the terms and conditions of redemption;

(iv) the liquidation preferences payable on preferred stock in the event of involuntary or voluntary liquidation;

(v) sinking fund or other provisions, if any, for redemption or purchase of preferred stock;

(vi) the terms and conditions by which preferred stock may be converted, if the preferred stock of any series are issued with the privilege of conversion; and

(vii) voting rights, if any.

As of the date of this registration statement, we have not designated or authorized any preferred stock for issuance.
 
55

 

Broker Warrant
 
Please see the “Plan of Distribution” beginning on page 52 for a description of the warrant we may issue to participating broker-dealers in this offering, subject to approval of the compensation provisions by FINRA.
 
Restrictions on Future Sales of Our Common Stock

All of our common stock currently outstanding is subject to restrictions on resale.  The shares being offered have not been registered under the Securities Act or under any state securities laws or regulations.  Purchasers of the shares may not offer, sell or otherwise dispose of the common stock in the absence of (i) an effective registration for such securities under the Securities Act, or (ii) an opinion of Company’s counsel that such registration is not required.

 
SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of common stock (including shares issued upon the exercise of outstanding options) in the public market after this offering could cause the market price of our common stock to decline.  Those sales also might make it more difficult for us to sell equity-related securities in the future or reduce the price at which we could sell any equity-related securities.

Rule 144

In general, under Rule 144 as currently in effect, a person who is not an affiliate of our company holding restricted securities that were not acquired from us or an affiliate of our company within the previous year would be entitled to sell those shares free of any restrictions.  An affiliate of our company would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:

1% of the then outstanding shares of our common stock, or

the average weekly trading volume of our common stock during the four calendar weeks preceding the date of proposed sale.

Sales by affiliates under Rule 144 are also subject to requirements relating to manner of sale and filing of notice with the SEC.


WHERE YOU CAN FIND MORE INFORMATION

You may read and copy any document we file at the SEC’s Public Reference Rooms at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Rooms. You can also obtain copies of our SEC filings by going to the SEC’s website at http://www.sec.gov.

We have filed with the SEC a registration statement on Form S-1 to register the shares of our common stock. This prospectus is part of that registration statement and, as permitted by the SEC’s rules, does not contain all of the information set forth in the registration statement. For further information about us or our common stock, you may refer to the registration statement and to the exhibits filed as part of the registration statement. The description of all agreements or the terms of those agreements contained in this prospectus are specifically qualified by reference to the agreements, filed or incorporated by reference in the registration statement.

We will provide copies of our reports and other information which we file with the SEC without charge to each person who receives a copy of this prospectus. Your request for this information should be directed in writing to our secretary, Frederick Witsell, at our corporate office in Colorado. You can also review this information at the public reference rooms of the SEC and on the SEC’s website as described above.

56

 
 
LEGAL MATTERS

We have been advised on the legality of the shares included in this prospectus by Dufford & Brown, P.C., of Denver, Colorado.

EXPERTS

Our financial statements as of December 31, 2013 and 2012, the period September 4, 2012 (inception) through December 31, 2012, the year ended December 31, 2013 and the period September 4, 2012 (inception) through December 31, 2013 included in this prospectus have been included in reliance on the report of StarkSchenkein, LLP, our independent registered public accounting firm. These financial statements have been included on the authority of this firm as an expert in auditing and accounting.


57

FINANCIAL STATEMENTS

Table of Contents

 

Interim Financial Statements – September 30, 2014 and 2013
 
Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013
F-2
 
 
Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)
F-3
 
 
Statements of Cash Flows for the three and nine months ended September 30, 2014 and 2013 (unaudited)
F-4
 
 
Statements of Changes in Shareholders’ Equity for the period January 1, 2014 through September 30, 2014 (unaudited)
F-5
 
 
Notes to the Financial Statements (unaudited)
F-6
 
 
Audited Financial Statements – December 31, 2013 and 2012
 
 
 
Report of the Independent Registered Public Accounting Firm
F-16
 
 
Balance Sheets as of December 31, 2013 and 2012
F-17
 
 
Statements of Operations for the year ended December 31, 2013, the period from September 4, 2012 through December 31, 2012, and the period from September 4, 2012 through December 31, 2013
F-18
 
 
Statements of Cash Flows for the year ended December 31, 2013, the period from September 4, 2012 through December 31, 2012, and the period from September 4, 2012 through December 31, 2013
F-19
 
 
Statements of Changes in Shareholders’ Equity for the period September 4, 2012 through December 31, 2013
F-20
 
 
Notes to the Financial Statements
F-21

 

F-1

 
PetroShare Corp.
 
Balance Sheets
 
 
 
September 30, 2014
   
December 31, 2013
 
 
 
(unaudited)
   
 
ASSETS
 
   
 
Current Assets:
 
   
 
Cash and cash equivalents
 
$
594,957
   
$
2,689,011
 
Joint interest billing receivable
   
105,011
     
981,575
 
Prepaid expenses and other assets
   
11,787
     
12,187
 
Deferred offering costs
   
34,837
     
-
 
Total current assets
   
746,592
     
3,682,773
 
 
               
Crude Oil and Natural Gas Properties-using successful efforts method
               
Unproved crude oil and natural gas properties
   
452,780
     
250,474
 
Wells in progress
   
1,304,904
     
439,873
 
Crude oil and natural gas properties, net
   
1,757,684
     
690,347
 
 
               
Property, plant and equipment, net
   
3,032
     
3,754
 
Other assets
   
3,850
     
3,850
 
 
               
Total Assets
 
$
2,511,158
   
$
4,380,724
 
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current Liabilities:
               
Accounts payable and accrued liabilities
 
$
74,385
   
$
1,894,091
 
Accounts payable – related parties
   
19,117
     
2,966
 
Accounts payable – other owners
   
26,458
     
-
 
Drilling advances
   
-
     
663,560
 
Total current liabilities
   
119,960
     
2,560,617
 
Total liabilities
   
119,960
     
2,560,617
 
 
               
Shareholders' Equity:
               
Preferred stock-$.01 par value 10,000,000 shares authorized; 0 shares issued and outstanding
   
-
     
-
 
Common stock-$.001 par value: 100,000,000 and
100,000,000  shares authorized; 16,984,753
shares and 14,764,750 shares issued and outstanding, respectively
   
16,985
     
14,765
 
Additional paid in capital
   
4,105,627
     
3,009,075
 
Accumulated deficit
   
(1,731,414
)
   
(1,203,733
)
Total Shareholders' Equity
   
2,391,198
     
1,820,107
 
 
               
Total Liabilities and Shareholders' Equity
 
$
2,511,158
   
$
4,380,724
 

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

 
F-2

PetroShare Corp.
 
Statements of Operations
 
(unaudited)
 
 
 
   
   
   
 
 
 
For the three months ended
   
For the nine months ended
 
 
 
September 30, 2014
   
September 30, 2013
   
September 30, 2014
   
September 30, 2013
 
 
 
   
   
   
 
 
 
   
   
   
 
Revenues
 
   
   
   
 
Crude oil and natural gas revenue
 
$
6,314
   
$
-
   
$
6,314
   
$
-
 
Total Revenues
   
6,314
     
-
     
6,314
     
-
 
 
                               
Costs and Expenses
                               
Lease operating expense and production taxes
   
9,594
     
-
     
12,572
     
-
 
General and administrative expense
   
167,981
     
110,655
     
520,731
     
253,224
 
Depreciation, depletion, amortization and accretion
   
241
     
1,385
     
722
     
1,385
 
Exploration costs
   
-
     
113
     
-
     
37,658
 
Total Costs and Expenses
   
177,816
     
112,153
     
534,025
     
292,267
 
 
                               
Operating  (Loss)
   
(171,502
)
   
(112,153
)
   
(527,711
)
   
(292,267
)
 
                               
Other Income
                               
Other income (expense)
   
14
     
1
     
30
     
1
 
Total Other Income
   
14
     
1
     
30
     
1
 
 
                               
Net (Loss)
 
$
(171,488
)
 
$
(112,152
)
 
$
(527,681
)
 
$
(292,266
)
 
                               
Net (Loss) per Common Share - Basic and Diluted
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.03
)
 
$
(0.02
)
 
                               
Weighted Average Number of Common Shares Outstanding
                               
Basic and Diluted
   
16,926,874
     
13,670,228
     
15,642,554
     
13,761,982
 


The accompanying notes are an integral part of these condensed financial statements.
 
F-3

PetroShare Corp.
 
Statements of Cash Flows
 
(unaudited)
 
 
 
For the nine months ended
 
 
 
September 30, 2014
   
September 30, 2013
 
Cash flows from operating activities
 
   
 
Net (loss) for the period
 
$
(527,681
)
 
$
(292,266
)
Adjustments to reconcile net loss to net cash (used ) in
operating activities
               
Depreciation expense
   
722
     
1,385
 
Bad debt (recovery)
   
(424,591
)
   
-
 
Changes in operating assets and liabilities
               
Joint interest billing receivable
   
1,197,959
     
-
 
Due from working interest partner
   
-
     
(187,500
)
Prepaid expenses and other assets
   
400
     
(13,549
)
Deferred offering costs
   
(34,837
)
   
-
 
Accounts payable and accrued liabilities
   
(1,988,978
)
   
45,887
 
Accounts payable - related parties
   
16,151
     
31,252
 
Royalty payable
   
26,458
     
-
 
Drilling advances
   
(663,560
)
   
-
 
Net cash (used) in operating activities
   
(2,397,957
)
   
(414,791
)
 
               
Cash flows from investing activities
               
Additions of furniture fixtures and equipment
   
-
     
(4,385
)
Development of crude oil and natural gas properties
   
(385,863
)
   
-
 
Acquisitions of crude oil and natural gas properties
   
(202,306
)
   
(537,497
)
Buyout of working interest partner
   
(1,142,237
)
   
-
 
Proceeds from working interest partners
   
935,537
     
-
 
Net cash (used) in investing activities
   
(794,869
)
   
(541,882
)
 
               
Cash flows from financing activities
               
Common stock issued for cash, net of offering costs
   
1,098,772
     
1,716,500
 
Net cash provided by financing activities
   
1,098,772
     
1,716,500
 
 
               
Net (decrease) increase in cash
   
(2,094,054
)
   
759,827
 
 
               
Cash
               
Beginning of period
   
2,689,011
     
5,182
 
End of period
 
$
594,957
   
$
765,009
 
 
               
Supplemental disclosure for cash flow information
               
Cash paid for interest
 
$
-
   
$
-
 
Cash paid from income taxes
 
$
-
   
$
-
 
 
               
Non-cash investing and financing transactions
               
Exchange of information for lease interests
 
$
-
   
$
17,997
 
Issuance of common stock for Asset Purchase Agreement
 
$
-
   
$
67,000
 
Cancellation of shares
 
$
-
   
$
1,806
 
 
The accompanying notes are an integral part of these condensed financial statements.
 
F-4






PetroShare Corp.
Statements of Changes in Shareholders' Equity
For the period January 1, 2014 through September 30, 2014
 
 
 
 
Common Stock
   
Additional
Paid in
    Accumulated    
 
 
 
Shares
   
Amount
   
Capital
   
 Deficit
   
Total
 
 
 
   
   
   
   
 
Balance, December 31, 2013
   
14,764,750
   
$
14,765
   
$
3,009,075
   
$
(1,203,733
)
 
$
1,820,107
 
Issuance of Common Shares for Cash at $0.50 per share, net of offering costs
   
2,220,003
     
2,220
     
1,096,552
     
-
     
1,098,772
 
Net (Loss) from January 1, 2014 through September 30, 2014
   
-
     
-
     
-
     
(527,681
)
   
(527,681
)
Balance, September 30, 2014 (unaudited)
   
16,984,753
   
$
16,985
   
$
4,105,627
   
$
(1,731,414
)
 
$
2,391,198
 

The accompanying notes are an integral part of these condensed financial statements.
 
 
F-5

 

PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014


NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS


PetroShare Corp. (“PetroShare” or the “Company”) is a corporation that was organized under the laws of the State of Colorado on September 4, 2012 to investigate, acquire and develop crude oil and natural gas properties in the Rocky Mountain or mid-continent portion of the United States. Since its inception, PetroShare has focused on financing activities and the acquisition, exploration and development of crude oil and natural gas prospects located in Moffat County, Colorado known as the Buck Peak Prospect, which it believes is prospective for crude oil and natural gas.  As of September 30, 2014, two exploratory wells have been drilled and are in the process of completion.  Subsequent to September 30, 2014, the Company put its first of two wells online on November 26, 2014. Based on preliminary testing results, this well is capable of producing at a rate of five to seven barrels (bbls) of crude oil per day. The Company put its second well online on December 12, 2014.  The Company continues to monitor the two wells to determine anticipated production rates.  Subsequent to September 30, 2014, the Company completed construction of permanent production surface facilities on the well site .

From its inception through April 1, 2014, PetroShare’s activities had been accounted for as those of a “Development Stage Enterprise” as set forth in Accounting Standards Codification No. 915 “Development Stage Entities” (“ASC 915”) which defined a development stage entity as one that had not commenced planned principal operations or one in which planned principal operations had commenced but had not generated significant revenue therefrom.  Beginning in the fiscal quarter ended June 30, 2014, the Company elected to apply ASU No. 2014-10 which, in addition to removing the definition of a development stage entity from ASC 915, allowed it to terminate the presentation of inception-to-date information.


NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements of the Company have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“US GAAP”) and applicable rules of the SEC regarding interim financial reporting. Accounting policies conform to US GAAP. Significant policies are discussed below. Certain information and note disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. Except as noted below, there have been no material changes to the footnotes from those accompanying the audited financial statements contained in this prospectus.

The interim unaudited financial statements have been prepared by the Company. In the opinion of management, the interim unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full fiscal year. You should read these interim financial statements in conjunction with the audited financial statements and notes thereto included in this prospectus.
 
Going Concern
 
As of September 30, 2014, the Company had cash and cash equivalents of $594,957 and working capital of $626,632 comprised of current assets of $746,592 and current liabilities of $119,960.  As of September 30, 2014, its accumulated deficit totaled $1,731,414.  For the three and nine months ended September 30, 2014, the Company generated net losses of $171,488 and $527,681, respectively.  During the nine months ended September 30, 2014, the Company used cash from operating activities of $2,397,957.
 
The Company has not achieved profitable operations to date, and its cash requirements are subject to numerous contingencies and risks beyond its control, including operational and development risks, competition from well-funded competitors, and its ability to manage growth. The Company can offer no assurance that it will generate cash flow sufficient to achieve profitable operations or that expenses will not exceed its projections.
 
The Company will need to raise equity or borrow capital to fund further participation in drilling activities. If additional financing is not available, the Company may be compelled to reduce the scope of its business activities. If the Company is unable to fund its operating cash flow needs and planned capital investments, it may be necessary to reduce general and administrative expenses and or sell a portion of the Company’s interests in its crude oil and natural gas properties. These factors among others may indicate that the Company may be unable to continue in existence. The Company's financial statements do not include any 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. Management believes that it can be successful in obtaining equity and or debt financing which will enable the Company to continue in existence and establish itself as a going concern.
 
While the Company is in the process of registering shares of its common stock for sale in the public markets through this prospectus, the Company can make no assurance that it will sell any or all of the shares offered.

 
F-6




PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014

 

Use of Estimates

The preparation of financial statements in conformity with US GAAP 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 amounts of expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 addresses the diversity in practice that exists for the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU No. 2013-11 was effective for PetroShare’s fiscal quarter ending June 30, 2014. ASU 2013-11 impacts balance sheet presentation only. The adoption of ASU No. 2013-11 did not have a material impact on the Company’s financial statements.
 
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic No. 605, “Revenue Recognition,” most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.
 
In June 2014, the FASB issued ASU No. 2014-10 “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation” (“ASU 2014-10”). ASU 2014-10 addresses the cost and complexity associated with the incremental reporting requirements for development stage entities, such as startup companies, without compromising the availability of relevant information and eliminates an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The Company elected to apply ASU 2014-10 for its fiscal quarter ended June 30, 2014. ASU 2014-10 impacts financial statement presentation only and removes the requirement to present additional inception-to-date information.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period”. The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition, and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption is permitted.  The Company does not anticipate any impact from the adoption of this standard on its financial statements.

Various other accounting pronouncements have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries, and are not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.

(Loss) per Common Share

(Loss) per share attributable to PetroShare shareholders is computed by dividing net (loss) attributable to PetroShare shareholders by the weighted average number of common shares outstanding during the period. Diluted (loss) per share attributable to PetroShare shareholders is computed by dividing the net (loss) attributable to PetroShare shareholders by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities.  During the three and nine months ended September 30, 2014 and 2013, the Company did not include 2,000,000 stock options outstanding and exercisable for purposes of calculating diluted net loss per share, as the effect of their inclusion would be anti-dilutive.

Joint Interest Billing Receivable
 
The Company’s accounts receivable consists primarily of joint interest billings, which are recorded at the invoiced and to-be-invoiced amounts. Collateral is not required for such receivables, nor is interest charged on past due balances. Joint interest billing receivables are collateralized by the pro rata revenue attributable to the joint interest holders and further by the interest itself.  As of September 30, 2014, three partners totaled 100% of the Company’s total joint interest billing receivable with no allowance for collectability indicated during the period.  As of December 31, 2013, four partners totaled 100% of the Company’s total joint interest billing receivables with no allowance for collectability indicated during the period. 
 
 
F-7




PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014


Deferred Offering Costs
 
The Company defers as other current assets the direct incremental costs of raising capital through equity offerings until such time as the offering is completed. At the time of the completion of the offering, the costs are charged against the capital raised. Should the offering be terminated, deferred offering costs are charged to operations during the period in which the offering is terminated.  As of September 30, 2014, the Company’s deferred offering costs totaled $34,837 with no comparable amount recorded as of December 31, 2013.

Crude Oil and Natural Gas Properties

Proved. PetroShare follows the successful efforts method of accounting for its crude oil and natural gas properties. Under this method of accounting, all property acquisition costs and development costs are capitalized when incurred and depleted on a units-of-production basis over the remaining life of proved reserves and proved developed reserves, respectively. Costs of drilling exploratory wells are initially capitalized but are charged to expense if the well is determined to be unsuccessful.

PetroShare assesses its proved crude oil and natural gas properties for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. The impairment test compares estimated undiscounted future net cash flows to the assets’ net book value. If the net capitalized costs exceed estimated future net cash flows, then the cost of the property is written down to fair value. Fair value for crude oil and natural gas properties is generally determined based on estimated discounted future net cash flows. Impairment expense for proved properties is reported in exploration and impairment expense.  The Company did not recognize any impairment expense during the three and nine months ended September 30, 2014 or 2013.

Net carrying values of retired, sold or abandoned properties that constitute less than a complete unit of depreciable property are charged or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-production amortization rate, in which case a gain or loss is recognized in the statement of operations. Gains or losses from the disposal of complete units of depreciable property are recognized in earnings (loss).

Unproved. Unproved properties consist of costs to acquire undeveloped leases as well as costs to acquire unproved reserves. Undeveloped lease costs and unproved reserve acquisitions are capitalized, and individually insignificant unproved properties are amortized on a composite basis, based on past success, past experience and average lease-term lives. PetroShare evaluates significant unproved properties for impairment based on remaining lease term, drilling results, reservoir performance, seismic interpretation or future plans to develop acreage. When successful wells are drilled on undeveloped leaseholds, unproved property costs are reclassified to proved properties and depleted on a unit-of-production basis. Impairment expense for unproved properties is reported in exploration and impairment expense.  The Company did not recognize any impairment expense during the three and nine months ended September 30, 2014 or 2013.

Exploratory. Geological and geophysical costs, including exploratory seismic studies, and the costs of carrying and retaining unproved acreage are expensed as incurred. Costs of seismic studies that are utilized in development drilling within an area of proved reserves are capitalized as development costs. Amounts of seismic costs capitalized are based on only those blocks of data used in determining development well locations. To the extent that a seismic project covers areas of both developmental and exploratory drilling, those seismic costs are proportionately allocated between development costs and exploration expense.

Costs of drilling exploratory wells are initially capitalized, pending determination of whether the well contains proved reserves. If an exploratory well does not contain proved reserves, the costs of drilling the well and other associated costs are charged to expense. Costs incurred for exploratory wells that contain reserves, which cannot yet be classified as proved, continue to be capitalized if (a) the well has found a sufficient quantity of reserves to justify completion as a producing well, and (b) PetroShare is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met, or if PetroShare obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well costs, net of any salvage value, are expensed.

 
 
F-8




PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014


Enhanced Recovery Activities. PetroShare may carry out tertiary recovery methods on certain of its crude oil and natural gas properties in order to recover additional hydrocarbons that are not recoverable from primary or secondary recovery methods. Acquisition costs of tertiary injectants, such as purchased CO2, for enhanced oil recovery (“EOR”) activities that are used during a project’s pilot phase, or prior to a project’s technical and economic viability (i.e. prior to the recognition of proved tertiary recovery reserves) are expensed as incurred. After a project has been determined to be technically feasible and economically viable, all acquisition costs of tertiary injectants are capitalized as development costs and depleted, as they are incurred solely for obtaining access to reserves not otherwise recoverable and have future economic benefits over the life of the project. As CO2 is recovered together with crude oil and natural gas production, it is extracted and re-injected, and all the associated CO2 recycling costs are expensed as incurred. Likewise costs incurred to maintain reservoir pressure are also expensed.
 
Drilling Advances

The Company’s drilling advances consist of cash provided to the Company from its joint interest partners for planned drilling activities. Advances are applied against the joint interest partner’s share of expenses incurred. As of September 30, 2014 and December 31, 2013, drilling advances totaled $nil and $663,560, respectively.

Income Taxes
 
PetroShare recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates that are expected to be in effect when the differences are expected to be recovered. PetroShare provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.


NOTE 3 – ACQUISITIONS AND BUSINESS COMBINATIONS

Asset Purchases

In April 2013, PetroShare acquired working interests in undeveloped acreage located in Moffat County, Colorado known as the Buck Peak Prospect (the “Prospect”) consisting of approximately 1,100 net acres. PetroShare acquired the Prospect from two entities: (1) Premier Energy LLC, an entity affiliated with Frederick J. Witsell, the Company’s President and Director of Operations/Geosciences and (2) an unaffiliated entity.

·
On April 9, 2013, PetroShare acquired 463.29 net acres from the unaffiliated entity for cash consideration of $341,430.

·
On April 18, 2013, PetroShare acquired 623.65 net acres from Premier Energy, LLC for a total purchase price of $223,880 in cash and 67,000 shares of common stock valued at $1.00 per share (Note 9).

Asset Exchange

In June and August 2013, PetroShare acquired 17.876 net acres in the Prospect from unaffiliated entities in exchange for certain daily prospective drilling and completion information on one of its two wells (“Asset Exchange,” Notes 4 and 5).
 
Proposed Business Combination

On September 12, 2013, PetroShare entered into a letter of intent (the “Letter of Intent”) with a third party (the “Counterparty”) outlining the terms and conditions of a transaction between PetroShare and the Counterparty in which (1) the two companies would undertake a business combination in which the existing shareholders of PetroShare would obtain 70% of the Counterparty’s common stock issued and outstanding after the transaction and the existing shareholders of the Counterparty would retain 30% of the common stock issued and outstanding after the transaction and (2) PetroShare would grant the Counterparty an option to participate with PetroShare in the drilling activities of one or both of the wells on the Prospect in an amount equal to 30% of 100% of the working interest. Completion of the business combination was subject to a number of contingencies, including negotiation and execution of a definitive agreement and approval of each company’s shareholders.
 
F-9




PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014

On September 30, 2013, PetroShare and the Counterparty entered into a participation agreement whereby the Counterparty agreed to pay 30% of the total cost and expense of at least one and up to two wells for a 30% working interest thereafter having a net revenue interest of not less than 23.509% in the wells. In the event that the acquisition contemplated in the Letter of Intent was not completed, the Counterparty’s interests in the wells would be reduced to 25% and the net revenue interest would be proportionately reduced. At the same time, the parties executed a Joint Operating Agreement related to the wells.

On March 10, 2014, the Company notified the Counterparty that it owed certain funds for its share of the drilling and/or completion costs of the two wells under the Joint Operating Agreement. The Company also indicated that it would suspend the Counterparty’s rights under the Joint Operating Agreement for the two wells if it failed to pay its share of the costs by April 9, 2014, and that such failure may be considered to be the Counterparty’s election not to participate in the completion of the wells. Shortly thereafter, on March 12, 2014, the Company notified the Counterparty in writing that it terminated the Letter of Intent and all negotiations for the proposed business combination. The Counterparty then notified PetroShare that it disputed the alleged default under the Joint Operating Agreement and raised other claims against the Company.

On May 5, 2014, the parties entered into a Settlement Agreement to settle their claims which required the Company to make a payment to the Counterparty of $1,142,237 by June 16, 2014 (the Company paid $100,000 of this amount on May 6, 2014). The Settlement Agreement also included mutual releases that became effective upon receipt of the final payment. The Settlement Agreement acknowledges that neither party admits any liability to the other.  The Company made the final payment of $1,042,237 on June 16, 2014, and, pursuant to the Settlement Agreement, the Counterparty waived any rights under the Participation Agreement and Joint Operating Agreement.

Concurrently with this Settlement Agreement and after the performance of the Settlement Agreement, the Company and its three remaining working interest partners purchased interests in the two wells such that these three partners own 75% of the working interest in the two wells and the Company retains 25%.  During the nine months ended September 30, 2014, the Company received $935,537 from these three partners for the purchase of these additional working interests as well as their additional pro-rata share of drilling and completion costs.


NOTE 4 – CRUDE OIL AND NATURAL GAS PROPERTIES

Aggregate Capitalized Costs. The Company has recorded aggregate capitalized costs relating to its crude oil and natural gas activities as shown below:

 
 
September 30, 2014
   
December 31, 2013
 
 
 
(unaudited)
   
 
Proved
 
$
-
   
$
-
 
Wells in progress
   
1,304,904
     
439,873
 
Unproved
   
452,780
     
250,474
 
Total capitalized costs
 
$
1,757,684
   
$
690,347
 

Costs Incurred in Crude Oil and Natural Gas Activities.  Costs incurred in connection with PetroShare’s crude oil and natural gas acquisition, exploration and development activities for each of the periods are shown below:

 
For three months ended
September 30,
2014
   
For three months ended
September 30,
2013
 
For nine months ended
September 30,
2014
   
For nine months ended
September 30,
2013
 
 
(unaudited)
 
(unaudited)
 
Lease operating expense and production taxes
 
$
9,594
   
$
-
   
$
12,572
   
$
-
 
Exploration costs
   
-
     
113
     
-
     
37,658
 
Total operations
 
$
9,594
   
$
113
   
$
12,752
   
$
37,658
 

 
F-10




PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014


In April 2013, PetroShare acquired working interests in undeveloped acreage located in Moffat County, Colorado known as the Buck Peak Prospect (the “Prospect”) consisting of approximately 1,100 net acres.  PetroShare acquired the Prospect from two entities: (1) Premier Energy LLC, an entity affiliated with Frederick J. Witsell, the Company’s President and Director of Operations/Geosciences and (2) an unaffiliated entity.

·
On April 9, 2013, PetroShare acquired 463.29 net acres from the unaffiliated entity for cash consideration of $341,430.
 
·
On April 18, 2013, PetroShare acquired 623.65 net acres from Premier Energy, LLC for a total purchase price of $223,880 in cash and 67,000 shares of common stock valued at $1.00 per share (Note 9).

In June and August 2013, PetroShare acquired 17.876 additional net acres in the Prospect from unaffiliated entities in exchange for certain daily prospective drilling and completion information on one of its two wells (Note 5).

Through September 30, 2014, PetroShare entered into certain participation agreements with third parties in which these parties agreed to participate in the drilling and development of certain of PetroShare’s wells. These agreements are detailed below:

·
On August 1, 2013, PetroShare entered into a participation agreement whereby it granted a 10% working interest in certain of its wells in exchange for a prospect fee of $75,000 and the participant’s agreement to pay its proportionate share of the costs of the wells.

·
On September 30, 2013, PetroShare entered into a participation agreement whereby it granted a 25% working interest in certain of its wells in exchange for a prospect fee of $187,500 and the participant’s agreement to pay its proportionate share of the costs of the wells.

·
On September 30, 2013, PetroShare, in association with a proposed business combination, entered into a participation agreement whereby the Counterparty agreed to pay 30% of the total cost and expense of at least one and up to two wells for a 30% working interest thereafter having a net revenue interest of not less than 23.509% in the wells. In the event that the proposed acquisition was not completed, the Counterparty’s interests in the wells would be reduced to 25% and the net revenue interest would be proportionately reduced. On March 10, 2014, the Company notified the Counterparty that it owed certain funds for its share of the drilling and/or completion costs of the two wells. On March 12, 2014, the Company notified the Counterparty in writing that it terminated the Letter of Intent and all negotiations for the proposed business combination. On May 5, 2014, the parties entered into a settlement agreement. (See full discussion in Note 3 “Business Combination”).

·
On November 1, 2013, PetroShare entered into a participation agreement whereby it granted a 25% working interest in certain of its wells in exchange for a prospect fee of $187,500 and the participant’s agreement to pay its proportionate share of the costs of the wells.

·
Concurrently with and after the performance of the Settlement Agreement (Note 3), three of the Company’s working interest partners collectively acquired an additional 15% working interest in the wells.  The Company received $935,537 from these three partners for the purchase of the additional working interests as well as their additional pro-rata share of drilling and completion costs.

During the three months ended September 30, 2014 and 2013, the Company collected drilling advances from its working interest partners of $nil and $nil, respectively. During the nine months ended September 30, 2014 and 2013, the Company collected drilling advances from its working interest partners of $1,538,926 and $nil, respectively.  As of the periods ended September 30, 2014 and December 31, 2013, the Company had unused portions of these advances totaling $nil and $663,560, respectively.

 
F-11

 

PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014


NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liability balances were comprised of trade accounts payable, drilling advances, deferred exploration expenses associated with the Asset Exchange, and accounts payable – related parties and are shown below:

 
 
September 30, 2014
   
December 31, 2013
 
 
 
(unaudited)
   
 
Trade payables
 
$
56,388
   
$
1,876,094
 
Accounts payable – other owners
   
26,458
     
-
 
Drilling advances
   
-
     
663,560
 
Deferred exploration expenses (1)
   
17,997
     
17,997
 
Accounts payable – related parties
   
19,117
     
2,966
 
Total accounts payable and accrued liabilities
 
$
119,960
   
$
2,560,617
 

(1)            See Note 3 for discussion of the Asset Exchange.


NOTE 6 - SHAREHOLDERS’ EQUITY

Common Stock

As of September 30, 2014 and December 31, 2013, PetroShare had 100,000,000 shares of common stock authorized with a par value of $0.001 per share.  As of September 30, 2014 and December 31, 2013, 16,984,753 and 14,764,750 shares were issued and outstanding, respectively. Holders of the common stock are entitled to one vote per share, and dividends may be paid on the common stock at the discretion of the Board of Directors.

During the period from January 1, 2014 through September 30, 2014, the Company had the following activity related to its common stock:

·
In May 2014, the Board of Directors authorized the sale of the Company’s common stock in a private placement which closed in July 2014.  On various dates during the nine months ended September 30, 2014, the Company sold 2,220,003 shares of common stock at $0.50 per share for gross proceeds of $1,110,002 and recognized $11,230 in offering costs for net proceeds of $1,098,772.

Preferred Stock

As of September 30, 2014 and December 31, 2013, PetroShare had 10,000,000 shares of preferred stock authorized with a par value of $0.01 per share. As of September 30, 2014 and December 31, 2013, there was no preferred stock issued or outstanding.



 
F-12


 

PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014


NOTE 7 - STOCK BASED COMPENSATION

On November 30, 2012, the Board of Directors of PetroShare adopted an Equity Incentive Plan (the “Plan”) reserving up to 5,000,000 shares of PetroShare’s common stock to be issued in the form of Incentive Options, Non-Qualified Options, Restricted Stock Awards, Stock Bonuses, or other stock grants to certain employees and consultants of PetroShare.
 
A summary of activity under the Plan through September 30, 2014 is as follows:

 
 
Number of Shares
   
Weighted Average Exercise Price
   
Remaining Contractual Term
 
Outstanding, December 31, 2012
   
3,000,000
   
$
0.25
     
9.96
 
Granted
   
-
     
-
     
-
 
Exercised
   
-
     
-
     
-
 
Forfeited
   
1,000,000
   
$
0.25
     
9.35
 
Outstanding, December 31, 2013
   
2,000,000
   
$
0.25
     
8.96
 
Exercisable, December 31, 2013
   
2,000,000
   
$
0.25
     
8.96
 
 
                       
Outstanding, December 31, 2013
   
2,000,000
   
$
0.25
     
8.96
 
Granted
   
-
     
-
     
-
 
Exercised
   
-
     
-
     
-
 
Forfeited
   
-
     
-
     
-
 
Outstanding, September 30, 2014
   
2,000,000
   
$
0.25
     
8.21
 
Exercisable, September 30, 2014
   
2,000,000
   
$
0.25
     
8.21
 


 
F-13




PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014


NOTE 8 - INCOME TAXES

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

PetroShare has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. No uncertain tax positions have been identified as of September 30, 2014.

PetroShare is in a position of cumulative reporting losses for the current and preceding reporting periods. The volatility of energy prices is not readily determinable by management. At this date, this fact pattern does not allow PetroShare to project sufficient sources of future taxable income to offset tax loss carryforwards and net deferred tax assets. Under these circumstances, it is management’s opinion that the realization of these tax attributes does not reach the “more likely than not criteria” under ASC 740 – Income Taxes. As a result, PetroShare’s deferred tax assets as of September 30, 2014 and December 31, 2013 are subject to a full valuation allowance.
 

NOTE 9 - RELATED PARTY TRANSACTIONS

Pursuant to ASC 850 “Related Party Disclosure”, management has evaluated related parties and all transactions associated with those and determined that no transactions exist which would require disclosure, except as disclosed below:

·
In April 2013, PetroShare acquired working interests in the Buck Peak Prospect from two entities: (1) Premier Energy LLC, an entity affiliated with Frederick J. Witsell, the Company’s President and Director of Operations/Geosciences and (2) an unaffiliated entity. As consideration for the purchase from Premier Energy LLC, PetroShare paid cash totaling $223,880 and 67,000 shares of common stock valued at $1.00 per share. Pursuant to the Asset Purchase Agreement, the total Purchase Price was allocated among the four members of Premier Energy LLC, including Mr. Witsell, who received $50,480 in cash and no shares of common stock (Note 3).


NOTE 10 - COMMITMENTS AND CONTINGENCIES

Operating leases and agreements

PetroShare leases its office facilities under a three-year non-cancelable operating lease agreement expiring in June 2016. During the three months ended September 30, 2014 and 2013, lease expense totaled $5,975 and $5,142, respectively.  During the nine months ended September 30, 2014, and 2013, lease expense totaled $17,579 and $8,475, respectively.  The table below summarizes future minimum rental payments required under the operating lease agreement:

Year ending December 31,
 
Amount
 
 
 
 
2014
 
$
5,976
 
2015
   
24,254
 
2016
   
12,302
 
Total
 
$
42,532
 

 
 
F-14





PETROSHARE CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2014


Employment agreements

On March 1, 2013, PetroShare executed an employment agreement with Frederick J. Witsell, PetroShare’s President and Director of Operations/Geosciences. The one-year agreement provides for an annual salary of $150,000 and can be terminated by PetroShare at any time with cause or with 30-days’ notice without cause in which latter case all consideration due under the agreement is payable immediately upon termination. Pursuant to the terms of the agreement, Mr. Witsell’s employment shall continue after the initial term on a year-to-year basis unless terminated pursuant to the terms of the contract.

On November 1, 2013, PetroShare executed an employment agreement with Stephen J. Foley, PetroShare’s Chief Executive Officer. The one-year agreement provides for an annual salary of $150,000 and can be terminated by PetroShare at any time with cause or with 30-days’ notice without cause in which latter case all consideration due under the agreement is payable immediately upon termination as well as severance payments equal to twelve months of base salary from the date of termination. Pursuant to the terms of the agreement, Mr. Foley’s employment shall continue after the initial term on a year-to-year basis unless terminated pursuant to the terms of the contract.


NOTE 11 - SUBSEQUENT EVENTS

Pursuant to ASC 855, management has evaluated all events and transactions that occurred from October 1, 2014 through the date of issuance of the financial statements. During this period, PetroShare did not have any significant subsequent events, except as disclosed below:

·
In October 2014, the Company issued 23,438 shares of common stock to a former officer in connection with a Separation Agreement dated August 16, 2013.
·
Subsequent to September 30, 2014, the Company put its first of two wells online on November 26, 2014. Based on preliminary testing results, this well is capable of producing at a rate of five to seven barrels (bbls) of crude oil per day. The Company put its second well online on December 12, 2014. The Company continues to monitor the two wells to determine anticipated production rates. Subsequent to September 30, 2014, the Company completed construction of permanent production surface facilities on the well site.

 
 
F-15



 






Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
PetroShare Corp.


We have audited the accompanying balance sheets of PetroShare Corp. as of December 31, 2012 and 2013, and the related statements of operations, shareholders’ equity, and cash flows for the period from September 4, 2012 (inception) to December 31, 2012, for the year ended as of December 31, 2013, and the period from September 4, 2012 (inception) to December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PetroShare Corp. as of December 31, 2012 and 2013, and the results of its operations and its cash flows for the period from September 4, 2012 (inception) to December 31, 2012, for the year ended as of December 31, 2013, and the period from September 4, 2012 (inception) to December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.


/s/ StarkSchenkein, LLP
StarkSchenkein, LLP
Denver, Colorado
July 2, 2014
 
 
 
 
3600 South Yosemite Street  |  Suite 600  |  Denver, CO  80237  |  P: 303.694.6700  |  TF: 888.766.3985  |  F: 303.694.6761  |  www.starkcpas.com
An Independent Member of BKR International
 
 
 
F-16

 
PetroShare Corp.
 
(A Development Stage Enterprise )
 
Balance Sheets
 
 
 
 
   
 
 
 
December 31, 2013
   
December 31, 2012
 
 
 
   
 
ASSETS
 
   
 
Current Assets:
 
   
 
Cash and cash equivalents
 
$
2,689,011
   
$
5,182
 
Joint interest billing receivable
   
981,575
     
-
 
Prepaid expenses and other assets
   
12,187
     
-
 
Total current assets
   
3,682,773
     
5,182
 
 
               
Oil and Gas Properties-using successful efforts method
               
Unproved oil and gas properties
   
250,474
     
-
 
Wells in progress
   
439,873
     
-
 
Oil and gas properties, net
   
690,347
     
-
 
 
               
Property, plant and equipment, net
   
3,754
     
-
 
Other assets
   
3,850
     
-
 
Total Assets
 
$
4,380,724
   
$
5,182
 
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable and accrued liabilities
 
$
1,894,091
   
$
-
 
Accounts payable – related parties
   
2,966
     
-
 
Drilling advances
   
663,560
     
-
 
Total current liabilities
   
2,560,617
     
-
 
Total liabilities
   
2,560,617
     
-
 
 
               
Shareholders’ Equity:
               
Preferred stock-$.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding.
   
-
     
-
 
Common stock-$.001 par value: 100,000,000 and 100,000,000 shares authorized; 14,764,750 shares and 12,000,000 shares issued and outstanding, respectively
   
14,765
     
12,000
 
Additional paid in capital
   
3,009,075
     
692,840
 
Deficit accumulated during the development stage
   
(1,203,733
)
   
(699,658
)
Total Shareholders’ Equity
   
1,820,107
   
$
5,182
 
 
               
Total Liabilities and Shareholders’ Equity
 
$
4,380,724
   
$
5,182
 
 
               
The accompanying notes are an integral part of these financial statements.
 
F-17

 
PetroShare Corp.
 
(A Development Stage Enterprise)
 
Statements of Operations
 
 
 
   
   
 
 
 
For the year ended
December 31,
2013
   
For the period from September 4, 2012 (inception) through December 31,
2012
   
For the period from September 4, 2012 (inception) through December 31,
2013
 
 
 
   
   
 
 
 
   
   
 
Revenues
 
   
   
 
Oil and gas production revenue
 
$
-
   
$
-
   
$
-
 
 
                       
 
                       
Costs and Expenses
                       
Lease operating expense
   
253
     
-
     
253
 
General and administrative expense
   
473,668
     
699,658
     
1,173,326
 
Depreciation, depletion, amortization and accretion
   
631
     
-
     
631
 
Exploration costs
   
29,537
     
-
     
29,537
 
Total Costs and Expenses
   
504,089
     
699,658
     
1,203,747
 
 
                       
Operating (Loss)
   
(504,089
)
   
(699,658
)
   
(1,203,747
)
 
                       
Other Income
                       
Interest income
   
14
     
-
     
14
 
 
                       
Net (Loss)
 
$
(504,075
)
 
$
(699,658
)
 
$
(1,203,733
)
 
                       
Net (Loss) per Common Share
                       
Basic and Diluted
 
$
(0.04
)
 
$
(0.40
)
 
$
(0.11
)
Weighted Average Number of Common Shares Outstanding
                       
Basic and Diluted
   
13,888,332
     
1,728,814
     
10,917,683
 
 
                       
 
                       
 
The accompanying notes are an integral part of these financial statements.
 
F-18

 
 
 
PetroShare Corp.
 
(A Development Stage Enterprise)
 
Statements of Cash Flows
 
 
 
   
   
 
 
 
For the year ended
December 31,
2013
   
For the period from September 4, 2012 (inception) through December 31,
2012
   
For the period from September 4, 2012 (inception) through December 31,
2013
 
Cash flows from operating activities
 
   
   
 
Net (loss) for the period
 
$
(504,075
)
 
$
(699,658
)
 
$
(1,203,733
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
                       
Depreciation expense
   
631
     
-
     
631
 
Share based compensation expense
   
-
     
692,840
     
692,840
 
Changes in operating assets and liabilities
                       
Joint interest billing receivable
   
(981,575
)
   
-
     
(981,575
)
Prepaid expenses and other assets
   
(16,037
)
   
-
     
(16,037
)
Accounts payable and accrued liabilities
   
1,876,094
     
-
     
1,876,094
 
Accounts payable – related parties
   
2,966
     
-
     
2,966
 
Drilling advances, net
   
663,560
     
-
     
663,560
 
Net cash provided by (used in) operating activities
   
1,041,564
     
(6,818
)
   
1,034,746
 
 
                       
Cash flows from investing activities
                       
Additions of furniture fixtures and equipment
   
(4,385
)
   
-
     
(4,385
)
Development of oil and gas properties
   
(40,040
)
   
-
     
(40,040
)
Acquisitions of oil and gas properties
   
(565,310
)
   
-
     
(565,310
)
Net cash (used in) investing activities
   
(609,735
)
   
-
     
(609,735
)
 
                       
Cash flows from financing activities
                       
Common stock issued for cash
   
2,252,000
     
-
     
2,252,000
 
Common shares issued to founders
   
-
     
12,000
     
12,000
 
Net cash provided by financing activities
   
2,252,000
     
12,000
     
2,264,000
 
 
                       
Net increase in cash
   
2,683,829
     
5,182
     
2,689,011
 
 
                       
Cash
                       
Beginning of period
   
5,182
     
-
     
-
 
End of period
 
$
2,689,011
   
$
5,182
   
$
2,689,011
 
 
                       
Non-cash investing and financing transactions
                       
Exchange of information for lease interests
 
$
17,997
   
$
-
   
$
17,997
 
Issuance of common stock for asset purchase agreement
 
$
67,000
   
$
-
   
$
67,000
 
Cancellation of shares
 
$
1,806
   
$
-
   
$
1,806
 
 
                       
 
The accompanying notes are an integral part of these financial statements.
 
F-19

 

PetroShare Corp.
 
(A Development Stage Enterprise)
 
Statements of Changes in Shareholders’ Equity
 
For the period September 4, 2012 (inception) through December 31, 2013
 
 
.
   
   
   
   
   
 
       
Common Stock
   
Additional Paid in
   
Deficit Accumulated During the Development
   
 
       
Shares
   
Amount
  Capital Stage  
Total
 
       
   
   
   
   
 
Balance, September 4, 2012 (Inception)
     
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Issuance of Founders’ Shares for cash
     
12,000,000
     
12,000
     
-
     
-
     
12,000
 
Stock Based Compensation Expense
     
-
     
-
     
692,840
     
-
     
692,840
 
Net Loss from Inception through December 31, 2012
     
-
     
-
     
-
     
(699,658
)
   
(699,658
)
Balance, December 31, 2012
     
12,000,000
     
12,000
     
692,840
     
(699,658
)
   
5,182
 
                                             
Issuance of Common Shares for Cash at $0.50 per share
     
4,504,000
     
4,504
     
2,247,496
     
-
     
2,252,000
 
Issuance of Common Shares in association with Asset Purchase Agreement at $1.00 per share
     
67,000
     
67
     
66,933
     
-
     
67,000
 
Cancellation of Certain Founders’ Shares in association with Separation Agreement
     
(1,806,250
)
   
(1,806
)
   
1,806
     
-
     
-
 
Net Loss from January 1, 2013 through December 31, 2013
     
-
     
-
     
-
     
(504,075
)
   
(504,075
)
Balance, December 31, 2013
     
14,764,750
   
$
14,765
   
$
3,009,075
   
$
(1,203,733
)
 
$
1,820,107
 
                                             
                                             
The accompanying notes are an integral part of these financial statements.
 

 


F-20

PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012

 
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS

PetroShare Corp. (“PetroShare” or the “Company”) is a corporation organized under the laws of the State of Colorado on September 4, 2012. PetroShare is a development stage enterprise organized to investigate, acquire and develop oil and gas properties in the Rocky Mountain or mid-continent portion of the United States. Since its inception, PetroShare has focused on financing activities and the acquisition, exploration and development of oil and gas prospects located in Moffat County, Colorado known as the Buck Peak Prospect, which PetroShare believes is prospective for oil and natural gas. As of December 31, 2013, two exploratory wells have been drilled and are awaiting completion.


NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements of the Company have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“US GAAP”). Accounting policies conform to US GAAP. Significant policies are discussed below.

Development Stage Enterprise

PetroShare has not earned any revenues from its principal operations. Accordingly, PetroShare’s activities have been accounted for as those of a “Development Stage Enterprise” as set forth in Accounting Standards Codification No. 915 “Development Stage Entities” (“ASC 915”). Among the disclosures required by ASC 915 are that PetroShare financial statements be identified as those of a development stage company, and that the statements of operations, stockholders’ equity and cash flows disclose activity since the date of PetroShare’s inception.

Use of Estimates

The preparation of financial statements in conformity with US GAAP 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 amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Loss Per Common Share

Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the periods presented. 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. During the years ended December 31, 2013 and 2012, the Company did not include 2,000,000 and 3,000,000 stock purchase options outstanding, respectively, for purposes of calculating diluted net loss per share, as their effect would be anti-dilutive. All shares issued from inception are considered outstanding for all periods presented, unless returned to treasury or cancelled.

F-21


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


Fair Value Measurement

ASC 820 clarifies that fair value is an exit price, representing the amount that would be received for the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants. As such, fair
value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted market prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Cash and Cash Equivalents

PetroShare considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. PetroShare’s bank accounts periodically exceed federally insured limits. PetroShare maintains its deposits with high quality financial institutions and, accordingly, believes its credit risk exposure associated with cash is remote.

Joint Interest Billing Receivable

The Company’s accounts receivable consists primarily of joint interest billings, which are recorded at the invoiced or to-be-invoiced amounts. Collateral is not required for such receivables, nor is interest charged on past due balances. Joint interest billing receivables are collateralized by the pro rata revenue attributable to the joint interest holders and further by the interest itself. The Company has not had any significant credit losses in the past and believes its joint interest billing accounts receivable are fully collectable. Accordingly, no allowance was indicated at December 31, 2013 or 2012. As of December 31, 2013, four partners totaled 100% of the Company’s total joint interest billing receivables. There was no joint interest billing receivable at December 31, 2012.

Oil and Gas Properties

Proved. PetroShare follows the successful efforts method of accounting for its oil and gas properties. Under this method of accounting, all property acquisition costs and development costs are capitalized when incurred and depleted on a units-of-production basis over the remaining life of proved reserves and proved developed reserves, respectively. Costs of drilling exploratory wells are initially capitalized but are charged to expense if the well is determined to be unsuccessful.

PetroShare assesses its proved oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. The impairment test compares undiscounted future net cash flows to the assets’ net book value. If the net capitalized costs exceed future net cash flows, then the cost of the property is written down to fair value. Fair value for oil and gas properties is generally determined based on discounted future net cash flows. Impairment expense for proved properties is reported in exploration and impairment expense. The Company did not recognize any impairment expense in 2013 or 2012.

Net carrying values of retired, sold or abandoned properties that constitute less than a complete unit of depreciable property are charged or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-production amortization rate, in which case a gain or loss is recognized in the statement of operations.. Gains or losses from the disposal of complete units of depreciable property are recognized in earnings.

F-22


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012

Unproved. Unproved properties consist of costs to acquire undeveloped leases as well as costs to acquire unproved reserves. Undeveloped lease costs and unproved reserve acquisitions are capitalized, and individually insignificant unproved properties are amortized on a composite basis, based on past success, past experience and average lease-term lives. PetroShare evaluates significant unproved properties for impairment based on remaining lease term, drilling results, reservoir performance, seismic interpretation or future plans to develop acreage. When successful wells are drilled on undeveloped leaseholds, unproved property costs are reclassified to proved properties and depleted on a unit-of-production basis. Impairment expense for unproved properties is reported in exploration and impairment expense. The Company did not recognize any impairment expense in 2013 or 2012.

Exploratory. Geological and geophysical costs, including exploratory seismic studies, and the costs of carrying and retaining unproved acreage are expensed as incurred. Costs of seismic studies that are utilized in development drilling within an area of proved reserves are capitalized as development costs. Amounts of seismic costs capitalized are based on only those blocks of data used in determining development well locations. To the extent that a seismic project covers areas of both developmental and exploratory drilling, those seismic costs are proportionately allocated between development costs and exploration expense.

Costs of drilling exploratory wells are initially capitalized, pending determination of whether the well has found proved reserves. If an exploratory well has not found proved reserves, the costs of drilling the well and other associated costs are charged to expense. Cost incurred for exploratory wells that find reserves, which cannot yet be classified as proved, continue to be capitalized if (a) the well has found a sufficient quantity of reserves to justify completion as a producing well, and (b) PetroShare is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met, or if PetroShare obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well costs, net of any salvage value, are expensed.

Enhanced Recovery Activities. PetroShare may carry out tertiary recovery methods on certain of its oil and gas properties in order to recover additional hydrocarbons that are not recoverable from primary or secondary recovery methods. Acquisition costs of tertiary injectants, such as purchased CO2, for enhanced oil recovery (“EOR”) activities that are used during a project’s pilot phase, or prior to a project’s technical and economic viability (i.e. prior to the recognition of proved tertiary recovery reserves) are expensed as incurred. After a project has been determined to be technically feasible and economically viable, all acquisition costs of tertiary injectants are capitalized as development costs and depleted, as they are incurred solely for obtaining access to reserves not otherwise recoverable and have future economic benefits over the life of the project. As CO2 is recovered together with oil and gas production, it is extracted and re-injected, and all the associated CO2 recycling costs are expensed as incurred. Likewise costs incurred to maintain reservoir pressure are also expensed.

Property, Plant and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using straight-line methods over the estimated useful lives of the related assets. Expenditures for renewals and betterments which increase the estimated useful life or capacity of the asset are capitalized; expenditures for repairs and maintenance are expensed when incurred.

Impairment of Long-Lived Assets

PetroShare has adopted ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. ASC 360 establishes a single auditing model for long-lived assets to be disposed of by sale. The Company did not recognize any impairment expense in 2013 or 2012.

F-23


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
 
Drilling Advances

The Company’s drilling advances consist of cash provided to the Company from its joint interest partners for planned drilling activities. Advances are applied against the joint interest partner’s share of expenses incurred. As of December 31, 2013 and 2012, drilling advances totaled $663,560 and $nil, respectively.

Income Taxes

PetroShare recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates that are expected to be in effect when the differences are expected to be recovered. PetroShare provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

Share Based Compensation

PetroShare uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards in accordance with ASC 718, “Compensation.” The option-pricing model requires the input of highly subjective assumptions, including the option’s expected life, the price volatility of the underlying stock, and the estimated dividend yield of the underlying stock. PetroShare’s expected term represents the period that stock-based awards are expected to be outstanding and is determined based on the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. As there was no historical data available to ascertain a forfeiture rate, the plain vanilla method was applied in calculating the expected term of the options. As PetroShare’s common stock is not currently publicly traded, the expected stock price volatility is based on the historical volatility of a group of publicly traded companies that share similar operating metrics and histories. PetroShare has never paid dividends on its common stock and currently does not intend to do so, and as such, the expected dividend yield is zero.

Recently Issued Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 addresses the diversity in practice that exists for the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU No. 2013-11 is effective for PetroShare’s fiscal quarter ending June 30, 2014. ASU 2013-11 impacts balance sheet presentation only. PetroShare is currently evaluating the impact of the new pronouncement but believes the balance sheet impact will not be material.

In June 2014, the FASB issued, ASU No. 2014-10 “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation” (“ASU 2014-10”). ASU 2014-10 addresses the cost and complexity associated with the incremental reporting requirements for development stage entities and eliminate an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. ASU 2014-10 is effective for PetroShare’s fiscal quarter ending June 30, 2014. ASU 2014-10 impacts financial statement presentation only. PetroShare is currently evaluating the impact of the new pronouncements but believes the balance sheet impact will not be material.


F-24


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


NOTE 3 –ACQUISITIONS AND BUSINESS COMBINATIONS

Asset Purchases

In April 2013, PetroShare acquired working interests in undeveloped acreage located in Moffat County, Colorado known as the Buck Peak Prospect (the “Prospect”)consisting of approximately 1,100 net acres. PetroShare acquired the Prospect from two entities: (1) Premier Energy LLC, an entity affiliated with Frederick J. Witsell, the Company’s President and Director of Operations/Geosciences and (2) an unaffiliated entity.

·
On April 9, 2013, PetroShare acquired 463.29 net acres from the unaffiliated entity for cash consideration of $341,430.
·
On April 18, 2013, PetroShare acquired 623.65 net acres from Premier Energy, LLC for a total purchase price of $223,880 in cash and 67,000 shares of common stock valued at $1.00 per share (See Notes 7 and 10).

Asset Exchange

In June and August 2013, PetroShare acquired 17.876 net acres in the Prospect from unaffiliated entities in exchange for certain daily prospective drilling and completion information on one of its two wells (“Asset Exchange,” see also Notes 5 and 6).

Business Combination

On September 12, 2013, PetroShare entered into a letter of intent (the “Letter of Intent”) with a third party (the “Counterparty”) outlining the terms and conditions of a potential transaction between PetroShare and the Counterparty in which (1) the two companies would undertake a business combination in which the existing shareholders of PetroShare would obtain 70% of the Counterparty’s common stock issued and outstanding after the transaction and the existing shareholders of the Counterparty would retain 30% of the common stock issued and outstanding after the transaction and (2) PetroShare would grant the Counterparty an option to participate with PetroShare in the drilling activities of one or both of the wells on the Prospect in an amount equal to 30% of 100% of the working interest. Completion of the business combination was subject to a number of contingencies, including negotiation and execution of a definitive agreement and approval of each company’s shareholders.

On September 30, 2013, PetroShare and the Counterparty entered into a participation agreement whereby the Counterparty agreed to pay 30% of the total cost and expense of at least one and up to two wells for a 30% working interest thereafter having a net revenue interest of not less than 23.509% in the wells. In the event that the acquisition contemplated in the Letter of Intent was not completed, the Counterparty’s interests in the wells would be reduced to 25% and the net revenue interest would be proportionately reduced. At the same time, the parties executed a Joint Operating Agreement related to the wells.

On March 10, 2014, the Company notified the Counterparty that it owed certain funds for its share of the drilling and/or completion costs of the two wells under the Operating Agreement. The Company also indicated that it would suspend the Counterparty’s rights under the Joint Operating Agreement for the two wells if it failed to pay its share of the costs by April 9, 2014, and that such failure may be considered to be the Counterparty’s election not to participate in the completion of the wells. Shortly thereafter, on March 12, 2014, the Company notified the Counterparty in writing that it terminated the Letter of Intent and all negotiations for the proposed business combination. The Counterparty then notified PetroShare that it disputed the alleged default under the Joint Operating Agreement and raised other claims against the Company.

On May 5, 2014, the parties entered into a Settlement Agreement to settle their claims which required the Company to make a payment to the Counterparty of $1,142,237 by June 16, 2014 (the Company paid $100,000 of this amount on May 6, 2014). The Settlement Agreement also included mutual releases that become effective upon receipt of the final payment. The Settlement Agreement acknowledges that neither party admits any liability to the other.
 
F-25


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


The Company made the final payment of $1,042,237 on June 16, 2014, and, pursuant to the Settlement Agreement, the Counterparty waived any rights under the Participation Agreement and joint Operating Agreement.

Concurrently with this Settlement Agreement and after the performance of the Settlement Agreement, we and our three remaining working interest partners purchased additional interests in the two wells such that these three partners own 75% of the working interest in the two wells and we retain 25%.


NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

Property and equipment balances were comprised of furniture, fixtures, and equipment and are shown below:

 
 
December 31, 2013
   
December 31, 2012
 
Property, Plant and Equipment
 
$
4,385
   
$
-
 
Accumulated Depreciation
   
(631
)
   
-
 
Total Property, Plant and Equipment, net
 
$
3,754
   
$
-
 


NOTE 5 – OIL AND GAS PROPERTIES

PetroShare’s oil and gas exploration and production activities are accounted for using the successful efforts method. Under this method, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has found proved reserves. If an exploratory well does not find proved reserves, the costs of drilling the well are charged to expense and included within cash flows from investing activities. The costs of development wells are capitalized whether productive or nonproductive. Lease acquisition costs are also capitalized. Interest cost is capitalized as a component of property cost for significant exploration and development projects that require greater than six months to be readied for their intended use.

Other exploration costs, including certain geological and geophysical expenses and delay rentals for oil and gas leases, are charged to expense as incurred. The sale of a partial interest in a proved property is accounted for as a cost recovery, and no gain or loss is recognized as long as this treatment does not significantly affect the unit of production amortization rate. A gain or loss is recognized for all other sales of proved properties and is classified in other operating revenues. Maintenance and repairs are charged to expense, and renewals and betterments are capitalized to the appropriate property and equipment accounts.

The unit-of-production method of depreciation, depletion, and amortization of gas properties under the successful efforts method of accounting will be applied pursuant to the simple multiplication of units produced by the costs per unit on a field by field basis. Leasehold cost per unit is calculated by dividing the total cost by the estimated total proved oil and gas reserves associated with that field. Well cost per unit is calculated by dividing the total cost by the estimated total proved developed oil and gas reserves associated with that field. The volumes or units produced and asset costs are known and while the proved reserves have a high probability of recoverability, they are based on estimates that are subject to some variability.
 
 
F-26


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


 
In April 2013, PetroShare acquired working interests in undeveloped acreage located in Moffat County, Colorado known as Buck Peak Prospect (the “Prospect”) consisting of approximately 1,100 net acres. PetroShare acquired the Prospect from two entities: (1) Premier Energy LLC, an entity affiliated with Frederick J. Witsell, the Company’s President and Director of Operations/Geosciences and (2) an unaffiliated entity.
 
On April 9, 2013, PetroShare acquired 463.29 net acres from the unaffiliated entity for cash consideration of $341,430.
On April 18, 2013, PetroShare acquired 623.65 net acres from Premier Energy, LLC for a total purchase price of $223,880 in cash and 67,000 shares of common stock valued at $1.00 per share (See Notes 7 and 10).
 
In June and August 2013, PetroShare acquired 17.876 net acres in the Prospect from unaffiliated entities in exchange for certain daily prospective drilling and completion information on one of its two wells (See Notes 3 and 6).
 
The following table highlights the costs incurred for oil and gas property acquisition, exploration, and development activities:

 
 
 
For the year ended
December 31,
2013
   
September 4, 2012 (Inception) through
December 31,
2012
 
Acquisition of Properties
 
   
 
Proved
 
$
-
   
$
-
 
Unproved
   
250,474
     
-
 
Exploration Costs
   
29,537
     
-
 
Development Costs
   
439,873
     
-
 
Total Costs Incurred
 
$
719,884
   
$
-
 

 
 
 
 

F-27


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


Aggregate Capitalized Costs. Aggregate capitalized costs relating to PetroShare’s crude oil and natural gas producing activities are shown below:

 
 
December 31, 2013
   
December 31, 2012
 
Proved
 
$
-
   
$
-
 
Wells in progress
   
439,873
     
-
 
Unproved
   
250,474
     
-
 
Total capitalized costs
 
$
690,347
   
$
-
 

Costs Incurred in Oil and Gas Activities. Costs incurred in connection with PetroShare’s crude oil and natural gas acquisition, exploration and development activities for each of the periods are shown below:

 
 
For the year ended
December 31, 2013
   
September 4, 2012
(Inception) through
December 31, 2012
   
September 4, 2012
(Inception) through
December 31, 2013
 
Lease acquisition costs
 
$
-
   
$
-
   
$
-
 
Exploration costs
   
29,537
     
-
     
29,537
 
Total operations
 
$
29,537
   
$
-
   
$
29,537
 

During the year ended December 31, 2013, PetroShare entered into certain participation agreements with third parties in which these parties agreed to participate in the drilling and development of certain of PetroShare’s wells. These agreements are detailed below:

·
On August 1, 2013, PetroShare entered into a participation agreement whereby it granted a 10% working interest in certain of its wells in exchange for a prospect fee of $75,000 and the participant’s agreement to pay its proportionate share of the costs of the wells.
·
On September 30, 2013, PetroShare entered into a participation agreement whereby it granted a 25% working interest in certain of its wells in exchange for a prospect fee of $187,500 and the participant’s agreement to pay its proportionate share of the costs of the wells.
 
F-28


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


·
On September 30, 2013, PetroShare, in association with a proposed business combination, entered into a participation agreement whereby the Counterparty agreed to pay 30% of the total cost and expense of at least one and up to two wells for a 30% working interest thereafter having a net revenue interest of not less than 23.509% in the wells. In the event that the proposed acquisition is not completed, the Counterparty’s interests in the wells would be reduced to 25% and the net revenue interest shall be proportionately reduced. On March 10, 2014, the Company notified the Counterparty that it owed certain funds for its share of the drilling and/or completion costs of the two wells. On March 12, 2014, the Company notified the Counterparty in writing that it terminated the Letter of Intent and all negotiations for the proposed business combination. On May 5, 2014, the parties entered into a settlement agreement. (See full discussion in Note 3 “Business Combination”).
·
On November 1, 2013, PetroShare entered into a participation agreement whereby it granted a 25% working interest in certain of its wells in exchange for a prospect fee of $187,500 and the participant’s agreement to pay its proportionate share of the costs of the wells.

During the years ended December 31, 2013 and 2012, the Company collected drilling advances from its working interest partners of $3,246,713 and $nil, respectively. As of the years ended December 31, 2013 and 2012, the Company had unused portions of these advances totaling $663,560 and $nil, respectively.

 
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liability balances were comprised of trade accounts payable, drilling advances, deferred exploration expenses associated with the Asset Exchange, and accounts payable – related parties and are shown below:

 
 
December 31, 2013
   
December 31, 2012
 
Trade payables
 
$
1,876,094
   
$
-
 
Drilling advances
   
663,560
     
-
 
Deferred exploration expenses (1)
   
17,997
     
-
 
Accounts payable – related parties
   
2,966
     
-
 
Total accounts payable and accrued liabilities
 
$
2,560,617
   
$
-
 
(1)
   See Note 3 for discussion of the Asset Exchange.


NOTE 7 - SHAREHOLDERS’ EQUITY

Common Stock

As of December 31, 2013 and 2012, PetroShare had 100,000,000 shares of common stock authorized with a par value of $0.001 per share. As of December 31, 2013 and 2012, 14,764,750 and 12,000,000 shares were issued and outstanding, respectively. Holders of the common stock are entitled to one vote per share, and dividends may be paid on the common stock at the discretion of the Board of Directors.

Activity of the period from September 4, 2012 (inception) through December 31, 2012 included the following:

·
12,000,000 shares of common stock were issued to founders in consideration of initial capital contributions of $12,000 cash.

Activity of the period from January 1, 2013 through December 31, 2013 included the following:

·
2,254,000 shares of common stock were issued at $0.50 per share in connection with a private placement. The cash proceeds received by PetroShare as of December 31, 2013 and related to the sale of the shares in this private placement amounted to $1,127,000. The private placement was completed in March 2013.
·
67,000 shares of common stock valued at $1.00 per share were issued as partial consideration for the Buck Peak Prospect acquisition (See Note 3).
 
 
F-29


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


·
2,250,000 shares of common stock were issued at $0.50 per share in connection with a second private placement. The cash proceeds received by PetroShare as of December 31, 2013 related to the sale of the shares in this private placement amounted to $1,125,000. The private placement was completed in December 2013.
·
1,806,250 shares of common stock were cancelled in connection with the resignation and separation agreements of two of the former members of the Board of Directors.

Preferred Stock

As of December 31, 2013, PetroShare had 10,000,000 shares of preferred stock authorized with a par value of $0.01 per share. As of December 31, 2013, there was no preferred stock issued or outstanding.


NOTE 8 - STOCK BASED COMPENSATION
On November 30, 2012, the Board of Directors of PetroShare adopted an Equity Incentive Plan (the “Plan”) reserving up to 5,000,000 shares of PetroShare’s common stock to be issued in the form of Incentive Options, Non-Qualified Options, Restricted Stock Awards, Stock Bonuses, or other stock grants to certain employees and consultants of PetroShare.

During the period beginning September 4, 2012 through December 31, 2012, PetroShare granted non-qualified options to purchase up to 3,000,000 shares of PetroShare’s common stock to the members of the Board of Directors pursuant to the Plan. During the year ended December 31, 2013, options to acquire 1,000,000 shares of PetroShare’s common stock were forfeited concurrent with the resignation of certain former members of the Board of Directors. No options were granted during the year ended December 31, 2013.

A summary of activity under the Plan through December 31, 2013 is as follows:
 
 
Number of Shares
   
Weighted Average Exercise Price
   
Remaining Contractual
Term
 
Outstanding, September 4, 2012
   
-
     
-
     
-
 
Granted
   
3,000,000
   
$
0.25
     
10.00
 
Exercised
   
-
     
-
     
-
 
Forfeited
   
-
     
-
     
-
 
Outstanding, December 31, 2012
   
3,000,000
   
$
0.25
     
9.96
 
Exercisable, December 31, 2012
   
3,000,000
   
$
0.25
     
9.96
 
 
                       
Outstanding, December 31, 2012
   
3,000,000
   
$
0.25
     
9.96
 
Granted
   
-
             
-
 
Exercised
   
-
             
-
 
Forfeited
   
1,000,000
   
$
0.25
     
9.35
 
Outstanding, December 31, 2013
   
2,000,000
   
$
0.25
     
8.96
 
Exercisable, December 31, 2013
   
2,000,000
   
$
0.25
     
8.96
 

All options granted during the period ended December 31, 2012 vested 100% as of the date of grant. Options will expire ten years from the date of grant in December 2022 and are non-transferable.
 
F-30


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012

 
The fair value of each share-based award is estimated on the date of the grant using the Black-Scholes pricing model that incorporates the assumptions noted in the following table. As PetroShare’s common stock is not currently publicly traded, the expected stock price volatility is based on the historical volatility of a group of publicly traded companies that the Company believes share similar operating metrics and histories. The expected term of the awards represents the period of time that management anticipates awards to be outstanding. As there was no historical data available to ascertain a forfeiture rate, the plain vanilla method was applied in calculating the expected term of the options. The risk-free rate for the periods within the contractual life of the option is based on the U.S Treasury bond rate in effect at the time of the grant for bonds with maturity dates at the expected term of the options. PetroShare has never paid dividends on its common stock and currently does not intend to do so, and as such, the expected dividend yield is zero.

 
 
December 31, 2013
   
December 31, 2012
 
Expected option term — years
   
-
     
5
 
Weighted-average risk-free interest rate
   
-
     
0.70%
 
Expected dividend yield
   
-
     
0
 
Weighted-average volatility
   
-
     
158%
 

In connection with the issuance of the options to purchase its common stock, PetroShare recorded share-based compensation of $nil for the year ended December 31, 2013, and $692,840 for the period from September 4, 2012 through December 31, 2012.


NOTE 9 - INCOME TAXES

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
PetroShare has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. No uncertain tax positions have been identified as of December 31, 2013.
 
PetroShare is in a position of cumulative reporting losses for the current and preceding reporting periods. The volatility of energy prices is not readily determinable by management At this date, this fact pattern does not allow PetroShare to project sufficient sources of future taxable income to offset tax loss carryforwards and net deferred tax assets. Under these circumstances, it is management’s opinion that the realization of these tax attributes does not reach the “more likely than not criteria” under ASC 740 – Income Taxes. As a result, PetroShare’s deferred tax assets as of December 31, 2013 and 2012 are subject to a full valuation allowance.

F-31


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


Net deferred tax assets and liabilities consist of the following components as of December 31, 2013 and 2012:
 
 
 
2013
   
2012
 
Deferred tax assets - current:
 
   
 
Exploration costs
 
$
4,210
   
$
-
 
Deferred tax assets - noncurrent:
               
NOL Carryover
   
349,382
     
2,591
 
Stock Compensation
   
263,345
     
263,345
 
Exploration costs
   
4,210
     
-
 
Total deferred tax assets
   
621,147
     
265,936
 
 
               
Deferred tax liabilities - current:
               
Intangible drilling costs
   
(163,614
)
   
-
 
Total deferred tax liabilities
   
(163,614
)
   
-
 
Valuation Allowance
   
(457,533
)
   
(265,936
)
Net deferred tax assets
 
$
-
   
$
-
 
 
The income tax provision differs from the amount of income tax determined by applying the U.S. federal tax rate to pretax loss from continuing operations for the years ended December 31, 2013 and 2012 due to the following:
 
 
 
2013
   
2012
 
 
 
   
 
Tax at statutory federal rate
 
$
(168,258
)
 
$
(233,542
)
State taxes, net of federal
   
(23,339
)
   
(32,394
)
Change in valuation allowance
   
191,596
     
265,936
 
Provision (benefit) for income taxes
 
$
-
   
$
-
 
 
               
 
At December 31, 2013, the Company had net operating loss carryforwards of approximately $350,000 that may be offset against future taxable income from the years 2014 through 2033.
 
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years.
 
The Company files income tax returns in the U.S. federal jurisdiction and in the state of Colorado. The Company is currently subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities since inception of the Company.

F-32


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


NOTE 10 - RELATED PARTY TRANSACTIONS

Pursuant to ASC 850 “Related Party Disclosure”, management has evaluated related parties and all transactions associated with those and determined that no transactions exist which would require disclosure, except as disclosed below:

·
In April 2013, PetroShare acquired working interests in the Buck Peak Prospect from two entities: (1) Premier Energy LLC, an entity affiliated with Frederick J. Witsell, the Company’s President and Director of Operations/Geosciences and (2) an unaffiliated entity. As consideration for the purchase from Premier Energy LLC, PetroShare paid cash totaling $223,880 and 67,000 shares of common stock valued at $1.00 per share. Pursuant to the Asset Purchase Agreement, the total Purchase Price was allocated among the four members of Premier Energy LLC, including Mr. Witsell, who received $50,480 in cash and no shares of common stock (See Note 3).
·
During the year ended December 31, 2013, the Company recognized $3,850 in rent expense associated with certain office facilities managed by Compass Capital, LLC, an entity controlled by the Company’s board member Bill Conrad. As of December 31, 2013, the Company no longer utilizes these office facilities.


NOTE 11 - COMMITMENTS AND CONTINGENCIES

Operating leases and agreements

PetroShare leases its office facilities under a three-year non-cancelable operating lease agreement expiring in June 2016. The following is a schedule by year of future minimum rental payments required under the operating lease agreement. Lease expense totaled $15,325 for the year ended December 31, 2013 and $nil for the period from inception through December 31, 2012.

Year ending December 31,
 
Amount
 
 
 
 
2014
 
$
23,551
 
2015
   
24,254
 
2016
   
12,302
 
 
 
$
60,107
 

Employment agreements

On March 1, 2013, PetroShare executed an employment agreement with Frederick J. Witsell, PetroShare’s President and Director of Operations/Geosciences. The one-year agreement provides for an annual salary of $150,000 and can be terminated by PetroShare at any time with cause or with 30-days’ notice without cause in which latter case all consideration due under the agreement is payable immediately upon termination. Pursuant to the terms of the agreement, Mr. Witsell’s employment shall continue after the initial term on a year-to-year basis unless terminated pursuant to the terms of the contract.

On November 1, 2013, PetroShare executed an employment agreement with Stephen J. Foley, PetroShare’s Chief Executive Officer. The one-year agreement provides for an annual salary of $150,000 and can be terminated by PetroShare at any time with cause or with 30-days’ notice without cause in which latter case all consideration due under the agreement is payable immediately upon termination as well as severance payments equal to twelve months of base salary from the date of termination. Pursuant to the terms of the agreement, Mr. Foley’s employment shall continue after the initial term on a year-to-year basis unless terminated pursuant to the terms of the contract.


F-33


PETROSHARE CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012


NOTE 12 - SUBSEQUENT EVENTS

Pursuant to ASC 855, management has evaluated all events and transactions that occurred from January 1, 2014 through the date of issuance of the financial statements. During this period, PetroShare did not have any significant subsequent events, except as disclosed below:

·
On March 10, 2014, the Company notified on of its working interest partners (the “Counterparty”) that it owed certain funds for its share of the completion costs of the two wells. On March 12, 2014, the Company notified the Counterparty in writing that it terminated the Letter of Intent and all negotiations for the proposed merger. On May 5, 2014, the parties entered into a settlement agreement. (See full discussion in Note 3 “Business Combination”). We made a non-refundable payment of $100,000 upon entering into the Settlement Agreement and the final payment of $1,042,237 was made on June 16, 2014. Under the terms of the Settlement Agreement, the delinquent partner surrendered its rights under the participation agreement and the joint operating agreement after final payment was made by us. Concurrently with this Settlement Agreement and after the performance of the Settlement agreement, we and our three remaining working interest partners purchased additional interests in the two wells such that these three partners own 75% of the working interest in the two wells and we retain 25%.
 
·
Through July 2, 2014, the Company sold 1,715,024 shares of common stock to accredited investors in a private placement. The sale of these shares, at a price of $0.50 per share, resulted in gross proceeds of $857,512.
 
F-34

 
You should rely only on the information contained in this document or that we have referred you to. We have not authorized anyone to provide you with information that is different. This prospectus is not an offer to sell common stock and is not soliciting an offer to buy common stock in any state where the offer or sale is not permitted.
 
 
 
 
4,600,000 Shares
PETROSHARE CORP.
 
Until       , 2015, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions .
 
 
9,426,003 Shares
by Selling Shareholders
 
 
 
Common Stock
TABLE OF CONTENTS
 
 
 
 
 
 
___________________
 
 
 
PROSPECTUS
____________________
 
 
 
  ____________, 2015
 
 
 
 
 
 
 

 
 
 

 
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

We will pay all expenses in connection with the issuance and distribution of the securities being registered except selling discounts and commissions of the selling shareholders. The following table sets forth expenses and costs related to this offering (other than underwriting discounts and commissions) expected to be incurred with the issuance and distribution of the securities described in this registration statement.
 
 
SEC registration fee
 
$
1,688.62
 
Legal fees
   
50,000.00
 
Accounting fees
   
40,000.00
 
Blue Sky filing fees and expenses
 
_1,000.00
 
Printing and engraving expenses
 
__500.00
 
Miscellaneous
 
6,811.38
 
Total
 
$
100,000.00
 

 
Item 14. Indemnification of Directors and Officers

Included in the prospectus.

Item 15.  Recent Sales of Unregistered Securities.

Since our inception on September 4, 2012, we have issued an aggregate of 17,008,191 shares of our common stock without registering those securities under the Securities Act.  The following information describes the transactions in which those securities were issued.
 
In September 2012, in connection with our initial organization, we issued a total of 12,000,000 shares of our common stock to five individuals at a price per share of $0.001 per share for cash proceeds of $12,000.  The common stock was issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.

In February and March 2013, we issued an additional 2,254,000 shares of common stock to 21 individuals or entities at a price per share of $0.50 for cash proceeds of $1,127,000.  The common stock was issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated thereunder.

In April 2013, we issued an additional 67,000 shares of common stock valued at $1.00 per share as partial consideration for the purchase of mineral leases for the Buck Peak Prospect from Premier Energy Partners (I) LLC.  The common stock was issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.

In August 2013, 1,806,250 shares of common stock were cancelled in connection with the resignation and separation agreements of two former members of the Board of Directors.

In August through December 2013, we issued an additional 2,250,000 shares of common stock to 25 individuals or entities at a price of $0.50 per share for cash proceeds of $1,125,000.  This second private placement was completed in December 2013.  The common stock was issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated thereunder.

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Between May and July 2014, we issued an additional 2,220,003 shares of common stock to 37 individuals and entities at a price of $0.50 per share in connection with a third private placement for cash proceeds of $1,110,002.  The common stock was issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated thereunder.

In October 2014, we issued 23,438 additional shares of common stock to a former officer of the company in connection with a Separation Agreement dated August 16, 2013.  This transaction was completed pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act.
 
In each transaction in which we relied on Section 4(a)(2) of the Securities Act and/or Rule 506(b) promulgated thereunder, we did not engage in any general solicitation or advertising and we offered the securities to a limited number of persons with whom we had pre-existing relationships.  We exercised reasonable care to ensure that the purchasers of securities were not underwriters within the meaning of the Securities Act, including making reasonable inquiry prior to accepting any subscription, making written disclosure regarding the restricted nature of the securities and placing a legend on the certificates representing the shares.  In each case, the offerees were provided with a subscription agreement detailing the restrictions on transfer of the shares and eliciting their investment intent.  Further, stop transfer restrictions were placed with our transfer agent and a restrictive legend was placed on the certificate in connection with these offerings.  In addition, sales in the transactions exempt under Rule 506(b) were made exclusively to what the Company reasonably believed were accredited investors as defined in Rule 501 of the Securities Act.


Item 16.  Exhibits and Financial Statement Schedules.

The following exhibits are filed with this registration statement:

3.1 Articles of Incorporation as filed with the Colorado Secretary of State on September 4, 2012.

3.2 Bylaws of the Company dated November 30, 2012.

4.1 Specimen stock certificate.

*4.2 Form of Warrant Agreement.
 
* 5 Opinion on Legality.

10.1 Equity Incentive Plan dated November 30, 2012.

10.2 Form of Option Agreement.

10.3 Employment Agreement dated November 1, 2013 between the Company and Stephen J. Foley.

10.4 Employment Agreement dated March 1, 2013 between the Company and Frederick J. Witsell.

10.5 Form of Subscription Agreement between the Company and investors in the Company’s private placements.

10.6 Settlement Agreement with Rancher Energy Corp. dated May 5, 2014.

10.7 Asset Purchase Agreement between the Company and Premier Energy Partners (I) LLC dated April 18, 2013.
 
10.8 Asset Purchase Agreement between the Company and Buck Peak, LLC dated April 16, 2013.
 
10.9 Form of Joint Operating Agreement.

II-2

 
 
10.10 Participation Agreement between the Company and Royale Investments, LLC dated August 1, 2013.
 
10.11 Participation Agreement between the Company and U.S. Energy Development Co. dated September 30, 2013.
 
10.12 Participation Agreement between the Company and LLOCO LLC dated November 1, 2013.
 
10.13 Separation Agreement between the Company and Steven Garrison dated August 9, 2013.
 
10.14 Separation Agreement between the Company and Christopher Dilapo dated August 16, 2013.
 
*23.1 Consent of StarkSchenkein, LLP.

* 23.2 Consent of Dufford & Brown, P.C. (included in Exhibit 5).

24 Power of Attorney (included on signature page).
______________
* Filed with this amendment.
 

Item 17.                          UNDERTAKINGS.
 
The undersigned registrant hereby undertakes:
 
1. To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to:
 
i. To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
 
ii. To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the registration statement arising after the effective date of the registration statement (or the most recent post-effective amendment thereof).  Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
 
iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement, provided, however, that paragraphs (1)(i), (1)(ii) and (1)(iii) do not apply if the registration statement is on Form S-3 or F-3 and  the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the SEC by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act, that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.
 
2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
 
4. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.  In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question, whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

II-3

 
5. For determining liability of the undersigned registrant under the Securities Act to any purchaser:

 i. That each prospectus filed by the undersigned pursuant to Rule 424(b)(3) shall be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

ii. Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.

iii. Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
II-4

 

SIGNATURES


In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and authorize this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Denver, Colorado, on this 14th day of January, 2015 .

PETROSHARE CORP.
(Registrant)

                                                            
/s/ Stephen J. Foley
By:  Stephen J. Foley
Chief Executive Officer


In accordance with the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons in the capacity and on the dates stated.
 
 
 
 
/s/ Stephen J. Foley 
 
Stephen J. Foley 
Chief Executive Officer and Director (Principal Executive, Financial and Accounting Officer)
January 14, 2015
 
 
 
 
 
 
/s/ Bill M. Conrad 
 
 
Bill M. Conrad 
Chairman of the Board
January 14, 2015
 
 
 
 
 
 
/s/ Frederick J. Witsell 
 
 
Frederick J. Witsell 
President, Secretary, Treasurer and Director
January 14, 2015
 
 
 
 
 
 
 
 
 

II-5


 
EXHIBIT INDEX

The following Exhibits are filed as part of this registration statement on Form S-1.

3.1 Articles of Incorporation as filed with the Colorado Secretary of State on September 4, 2012.

3.2 Bylaws of the Company dated November 30, 2012.

4.1 Specimen stock certificate.

*4.2 Form of Warrant Agreement.
 
*5 Opinion on Legality.

10.1 Equity Incentive Plan dated November 30, 2012.

10.2 Form of Option Agreement.

10.3 Employment Agreement dated November 1, 2013 between the Company and Stephen J. Foley.

10.4 Employment Agreement dated March 1, 2013 between the Company and Frederick J. Witsell.

10.5 Form of Subscription Agreement between the Company and investors in the Company’s private placements.

10.6 Settlement Agreement with Rancher Energy Corp. dated May 5, 2014.

10.7 Asset Purchase Agreement between the Company and Premier Energy Partners (I) LLC dated April 18, 2013.
 
10.8 Asset Purchase Agreement between the Company and Buck Peak, LLC dated April 16, 2013.
 
10.9 Form of Joint Operating Agreement.
 
10.10 Participation Agreement between the Company and Royale Investments, LLC dated August 1, 2013.
 
10.11 Participation Agreement between the Company and U.S. Energy Development Co. dated September 30, 2013.
 
10.12 Participation Agreement between the Company and LLOCO LLC dated November 1, 2013.
 
10.13 Separation Agreement between the Company and Steven Garrison dated August 9, 2013.
 
10.14 Separation Agreement between the Company and Christopher Dilapo dated August 16, 2013.
 
*23.1 Consent of StarkSchenkein, LLP.

* 23.2 Consent of Dufford & Brown, P.C. (included in Exhibit 5).

24 Power of Attorney (included on signature page).
______________
* Filed with this amendment.

 
II-6