Saratoga Resources, Inc.



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-KSB/A

Amendment No. 1

(Mark One)

x

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

 

For the Fiscal Year Ended December 31, 2006

 

o

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

 

For the transition period from ____________ to _____________

 

Commission File No. 0-27563

 

SARATOGA RESOURCES, INC.

(Name of Small Business Issuer in its charter)

 

 

Texas

 

 

76-0314489

 

 

(State or other jurisdiction of

incorporation or organization)

 

 

 

(I.R.S. Employer Identification No.)

 

 

 

2304 Hancock Drive, Suite 5

Austin, Texas 78756

(Address of principal executive offices)(Zip code)

 

Issuer's telephone number, including area code:          (512) 478-5717

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

 

Name of each exchange on which each is registered

 

 

None

 

None

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.001 par value

(Title of Class)

 

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    ¨

 

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.     Yes   x       No   ¨

 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  x

 

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

 

The Issuer’s revenues for the fiscal year ended December 31, 2006 were $10,802.

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on March 9, 2007, based on the last reported sales price on the OTC Bulletin Board, was approximately $159,934.

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of March 9, 2007 was 7,540,292.  

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

Transition Small Business Disclosure Format:     Yes   ¨     No   x






EXPLANATORY NOTE


We are filing this Form 10-K/A in order to amend our Annual Report on Form 10-KSB for the year ended December 31, 2006, as originally filed with the Securities and Exchange Commission on March 14, 2007. The purpose of this amendment is to correct the inadvertent reference to “generally accepted audited standards” in the second paragraph of the opinion of our independent auditors, to replace that reference with the corrected reference to the “standards of the Public Company Accounting Oversight Board (United States)” and to reflect the elimination of the “going concern” qualification language in the audit opinion as reissued. This amendment does not otherwise update or modify any disclosures made in the Form 10-KSB as originally filed.




TABLE OF CONTENTS


 

PAGE

PART I

 

 

 

Item 1.       Description of Business

3

Item 2.       Description of Property

9

Item 3.       Legal Proceedings

9

Item 4.       Submission of Matters to a Vote of Security Holders

9

 

 

PART II

 

 

 

Item 5.       Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

9

Item 6.       Management's Discussion and Analysis

9

Item 7.       Financial Statements

13

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

13

Item 8A.    Controls and Procedures

13

Item 8B.    Other Information

14

 

 

PART III

 

 

 

Item 9.       Directors and Executive Officers of the Registrant

14

Item 10.     Executive Compensation

15

Item 11.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

16

Item 12.     Certain Relationships and Related Transactions

17

Item 13.     Exhibits

17

Item 14.     Principal Accountant Fees and Services

18

 

 

Signatures

 





2






FORWARD-LOOKING STATEMENTS


This annual report on Form 10-KSB contains forward-looking statements within the meaning of the federal securities laws.  These forwarding-looking statements include, without limitation, statements regarding our expectations and beliefs about the market and industry, our goals, plans, and expectations regarding our properties and drilling activities and results, our intentions and strategies regarding future acquisitions and sales of properties, our intentions and strategies regarding the formation of strategic relationships, our beliefs regarding the future success of our properties, our expectations and beliefs regarding competition, competitors, the basis of competition and our ability to compete, our beliefs and expectations regarding our ability to hire and retain personnel, our beliefs regarding period to period results of operations, our expectations regarding revenues, our expectations regarding future growth and financial performance, our beliefs and expectations regarding the adequacy of our facilities, and our beliefs and expectations regarding our financial position, ability to finance operations and growth and the amount of financing necessary to support operations.  These statements are subject to risks and uncertainties that could cause actual results and events to differ materially.  We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this annual report on Form 10-KSB.


As used in this annual report on Form 10-KSB, unless the context otherwise requires, the terms “we,” “us,” “the Company,” and “Saratoga Resources” refer to Saratoga Resources, Inc., a Texas corporation.


PART I


ITEM 1.

DESCRIPTION OF BUSINESS


General


Saratoga Resources, Inc. is an oil and gas development, exploration and production company.  Since the 1996 sale of a majority of the Company’s oil and gas producing properties, the Company’s operations and operating assets have been limited to (1) ownership of a participation interest in the Red Hawk Fusselman and Red Hawk Mississippian fields, including the Adcock Farms No. 1 well, in Dawson County, Texas, (2) rights in approximately 27 square miles of 3D seismic data in the area including the Company’s Dawson County well, (3) a license to approximately 2,000 miles of 2D seismic data in the U.S. gulf coast region, (4) a 50% working interest in a 160 acre leasehold, running through October 2009, in Dawson County, Texas, adjoining the Adcock Farms No. 1 well site, and (5) pursuit of various potential business opportunities, both within and outside of the oil and gas industry.


History and Development of the Company


The Company was incorporated in Texas on July 25, 1990 under the name Saratoga Resources, Inc. In 1993, the Company became a wholly-owned subsidiary of Saratoga Resources, Inc., a Delaware corporation (“Saratoga Delaware”).


In April 1999, the Company entered into an agreement with DBX Geophysical Corporation whereby, during the term of the agreement (which was for a minimum period of 12 months and thereafter dependent on the term of any leasehold interest acquired), the Company had the exclusive right to acquire a license to data and the exclusive right to acquire all leasehold interests and any other interest in oil, gas, and other mineral, or the revenues arising there from which were attributable to lands located within an identified area of approximately 27 square miles in Dawson County, Texas (collectively, the “DBX Data”).  Pursuant to the terms of the agreement with DBX, as consideration for the DBX Data, the Company agreed (1) to grant to DBX a 3% overriding royalty in any leasehold acquired in the Adcock Farms prospect and (2) to pay to DBX $100,000, payable (a) $25,000 upon commencement of drilling operations of the first prospect, (b) $25,000 as a production payment out of a 25% working interest in the first well, (c) $25,000 upon commencement of drilling operations on a second well, and (d) $25,000 as a production payment out of a 25% working interest in the second well.  In the event that the required production payments are not made in full from the referenced wells, such deficiency will be payable out of a 25% working interest in all other wells drilled within the area of interest.


In March 1999, the Company entered into a one year consulting agreement with Trek Oil and Gas, Inc. (“Trek”), an independent oil and gas exploration company, to utilize the Company’s seismic and well log data for the identification of oil and gas exploration and development prospects in the Louisiana gulf coast region. Under this agreement, Trek provided advisory services related to interpretation of seismic data and received compensation for its expertise in the form of a working interest and/or royalties of up to 33% generated from identified prospects.




3





In June 1999, the Company entered into an agreement, with an unspecified term, with Ivy Oil Company LLC (“Ivy”) and Trek (Trek together with Ivy, the “Dawson County Operators”) by which the Company supplied the DBX Data to the Dawson County Operators and received in return a one third interest in the development of certain prospects in Dawson County, Texas (the “Dawson Prospects Agreement”). As a result of the work performed under the Dawson Prospects Agreement, the Dawson County Operators acquired mineral leases covering 80 net acres underlying the identified area in the DBX Data, acquired equipment, including service equipment, down-hole equipment and a cased well bore to the depth of 12,000 feet and re-entered the existing well (the “Adcock Farms No. 1”) on the property.


In August 1999, Saratoga Delaware, then the parent of the Company, closed merger agreements with each of PrimeVision Health, Inc., a Delaware corporation (“Prime”), a vertically integrated vision services company, and OptiCare Eye Health Centers, Inc., a Connecticut corporation (“OptiCare”), a provider of consulting, administrative and other support services to ophthalmology and optometry eye care centers located in Connecticut. Pursuant to the merger agreements, Saratoga Delaware acquired Prime and OptiCare in an all-stock transaction by issuance to the shareholders of OptiCare and Prime shares of Saratoga Delaware Common Stock constituting 97.5% of the outstanding Common Stock of Saratoga Delaware (the “Eye Care Acquisition”).


In conjunction with the Eye Care Acquisition, in August 1999, the Company was spun off by Saratoga Delaware to continue its prior business operations.  In the spin-off, Saratoga Delaware, which was then the 100% owning parent entity of the Company, made an in-kind distribution of all of the Company’s issued and outstanding stock to the shareholders of Saratoga Delaware as of August 9, 1999. The distribution was made on the basis of one share of the Company’s common stock, for each share of Saratoga Delaware stock held. As a result of the spin-off 3,465,292 shares of the Company's common stock were distributed to 1,363 shareholders.  In conjunction with the spin-off and the Eye Care Acquisition, Saratoga Delaware distributed to the Company 100% of the outstanding shares of LOI and LEI as well as 9% of the outstanding shares of Saratoga Holdings I, Inc. (“Holdings”).


In January 2001, the Company and Ivy acquired the interests of Trek in the Dawson Prospects Agreement, including the Adcock Farms No. 1, bringing their interests therein to 50% each.  The Company paid $6,028 as consideration for the interest of Trek.


In April 2002, Holdings entered into a Share Exchange Agreement pursuant to which Holdings acquired Agence 21, Inc. and resulting in Agence 21 becoming a subsidiary of Holdings and Holdings changing its name to A21, Inc.


In response to significant increases in oil and gas prices during 2005, the Company began developing plans to expand its existing oil and gas operating activities utilizing the experience and contacts of management in the energy industry to identify potential domestic oil and gas prospects and to participate in the acquisition, exploration, development and operation of those prospects through partnerships, joint ventures and direct investments.  In carrying out those plans, the Company is relying on the experience and contacts of Thomas Cooke, the Company’s President, to identify and evaluate prospects, develop acquisition, exploration and development plans relating to identified prospects, negotiate with mineral owners and with potential partners and financing sources to participate in planned acquisition, exploration and development of prospects, and carry out exploration, development and operation activities on acquired prospects.


In conjunction with its plans to expand its oil and gas operations, the Company brought current all of its reports with the SEC and undertook efforts to commence trading in its common stock.


Business Developments and Operations During 2006


During 2006, the Company continued to operate its oil interest in the Red Hawk Mississippian field. Simultaneously, the Company continued its efforts to further develop its oil interests including possible business acquisitions both within and outside of the oil and gas industry.  Management continued to undertake efforts to minimize costs during the period.


The Adcock Farms No. 1 well was in production from January 2006 through the end of the year following two workovers undertaken on the well in 2005 to repair down-hole equipment and restore production to prior levels. Management believes that previous production levels can be achieved or surpassed, however, management can give no assurances that such production levels will occur.




4





The Company, during 2006, was engaged in ongoing evaluation of its approximately 27 square miles of 3D seismic data and engaged a third party consultant to evaluate the oil reserves and the development potential of the geologic structure in both the Mississippian and Fussellman formations. The Company also increased its efforts to acquire oil and gas assets through acquisitions and drilling opportunities.


In order to fund overhead during 2006, the Company’s principal shareholder and sole officer contributed an additional $25,000 to the Company and converted $25,000 of existing loans in exchange for an aggregate of 4,000,000 shares of common stock.


In order to enhance the Company’s efforts to evaluate and pursue drilling and acquisition opportunities, in June 2006, the Company appointed an additional independent director and appointed, as a consultant, an advisory director.  In connection with the appointment of the new director and advisory director, the Company issued an aggregate of 75,000 shares of common stock as compensation for the services of the Company’s 2 independent directors and its advisory director.


In July 2006, the Company, its subsidiary Lobo Resources, Inc. and its principal shareholder settled certain claims against a21, Inc.  Pursuant to the settlement, the Company and Lobo Resources received an aggregate of 34,640 shares of common stock of a21, Inc.  In connection with the settlement, the Company and Lobo Resources paid their respective portion of the costs associated with the settlement.


In October 2006, the Company entered into oil and gas leases covering 160 acres in Dawson County, Texas, adjoining the acreage held by the Adcock Farms No. 1 well.  The Company holds a 50% working interest in the acreage.


As of December 31, 2006, discussions and efforts were ongoing to identify additional suitable oil and gas prospects but no definitive agreements or preliminary agreements, understandings, letters of intent or term sheets in that regard had yet been entered.  The Company plans to continue such efforts to expand its oil and gas operating activities in 2007.


The Company has no definitive financing plans currently in place but intends to tailor financing to specific project requirements and characteristics, which financing plans may include farm-outs, carried interests, joint ventures and other participation arrangements with industry partners as well as seeking debt and/or equity financing, including senior debt, mezzanine or bridge debt, reserve based loans and public and/or private stock offerings, from, or to, known financing sources to the oil and gas industry.  The Company, utilizing the industry contacts of Mr. Cooke, intends to evaluate the specific characteristics and financing requirements of identified prospects and to broadly canvas its industry contacts and the financial community to obtain suitable forms of acquisition and development financing. Pending identification of specific prospects, no specific financing plans have been developed and the Company has not identified any specific financing sources that it plans to contact.


Oil and Gas Operations and Properties


Since May 1999, our operations have been limited to ownership of a participation interest in a single oil and gas property in Dawson County, Texas.


At December 31, 2006, our oil and gas holdings consisted of (1) a contractual right to participate in 50% of the profits and losses in an 80-acre tract known as the Adcock Farms Prospect, including the Adcock Farms No. 1 well, in Dawson County, Texas, (2) rights to approximately 27 square miles of 3D seismic data in an area including the Adcock Farms No. 1 well, (3) a license to approximately 2,000 miles of 2D seismic data in the U.S. gulf coast region, and (4) a 50% working interest in a 160 acre prospect in Dawson County, Texas, adjoining the Adcock Farms Prospect and held under a lease running through October 2009.  Under the contractual participation interest, we receive our proportionate interest in revenues from the Adcock Farms prospect and bear a proportionate share of operating costs.


The Adcock Farms No. 1 well was drilled on the Adcock Farms Project in September 1993.  The Adcock Farms No. 1 well tested the Fusselman and Mississippian formations to a depth of 12,000 feet and was credited with two new field discoveries, the Red Hawk Fusselman and the Red Hawk Mississippian.  The Adcock Farms No. 1 well was successfully completed in October 1993 and commenced production as an oil well.  We are presently evaluating the 3D data in the area including the Adcock Farms No. 1 well to identify potential lease prospects and drilling sites with a view to drilling additional wells.




5





Marketing


At December 31, 2006, we had no contractual agreements to sell our gas and oil production and all production was sold on spot markets.


Risks Related to Our Oil and Gas Operations


Operational Hazards and Insurance. Our oil and gas activities may be unsuccessful for many reasons, including weather, cost overruns, equipment shortages and mechanical difficulties.  A variety of factors, both geological and market related can cause a well to become uneconomical or only marginally profitable.  Our business involves a variety of operating risks which may adversely affect our profitability, including:


·

fires;

·

explosions;

·

blow-outs and surface cratering;

·

uncontrollable flows of oil, natural gas, and formation water;

·

natural disasters, such as hurricanes and other adverse weather conditions;

·

pipe, cement, or pipeline failures;

·

casing collapses;

·

embedded oil field drilling and service tools;

·

abnormally pressured formations; and

·

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


In accordance with industry practice, our insurance protects us against some, but not all, operational risks.  Further, we do not carry business interruption insurance.  As pollution and environmental risks generally are not fully insurable, our insurance may be inadequate to cover any losses or exposure for such liability.


Volatility of Oil and Gas Prices. As our sole source of revenue is our interest in a single producing well, our revenue and profitability are substantially dependent upon the prevailing prices of, and demand for, natural gas, oil, and condensate.  Prices for oil and natural gas are subject to wide fluctuation in response to relatively minor changes in the supply of, and demand for, oil and gas, market uncertainty and a variety of additional factors that are beyond our control.  Among the factors that can cause the volatility of oil and gas prices are:


·

worldwide or regional demand for energy, which is affected by economic conditions;

·

the domestic and foreign supply of natural gas and oil;

·

weather conditions;

·

domestic and foreign governmental regulations;

·

political conditions in natural gas and oil producing regions;

·

the ability of members of the Organization of Petroleum Exporting Countries to agree upon and maintain oil prices and production levels; and

·

the price and availability of other fuels.




6





Competition


Competition in the oil and gas industry is intense.  While the Company’s activities are currently limited to its interest in a single well and various other prospects or rights that have not yet been developed, should the Company seek to expand its oil and gas activities, it will compete with major and other independent oil and gas companies with respect to the acquisition of producing properties and proved undeveloped acreage.  Existing competitors actively bid for desirable oil and gas properties, as well as for the equipment and labor required to operate and develop the properties.  Many of those competitors have significant financial resources and exploration and development budgets.  The Company presently has no financial resources that would allow it to compete in that market.  Our ability to acquire additional properties and develop new and existing properties in the future will depend on our capability to secure financing to support those efforts and our ability to conduct operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment.


Governmental Regulation


Our business and the oil and gas industry in general are subject to extensive laws and regulations, including environmental laws and regulations.  As such, we may be required to make large expenditures to comply with environmental and other governmental regulations.  State and federal regulations, including those enforced by the Texas Railroad Commission as the primary regulator of the oil and gas industry in the State of Texas, are generally intended to prevent waste of oil and gas, protect rights to produce oil and gas between owners in a common reservoir and control contamination of the environment. Matters subject to regulation in the State of Texas include:


·

location and density of wells;

·

the handling of drilling fluids and obtaining discharge permits for drilling operations;

·

accounting for and payment of royalties on production from state, federal and Indian lands;

·

bonds for ownership, development and production of natural gas and oil properties;

·

transportation of natural gas and oil by pipelines;

·

operation of wells and reports concerning operations; and

·

taxation.


Under these laws and regulations, we could be liable for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages.  Failure to comply with these laws and regulations also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties.  Moreover, these laws and regulations could change in ways that substantially increase our operating costs.


Natural gas operations are subject to various types of regulation at the federal, state and local levels.  Prior to commencing drilling activities for a well, we are required to procure permits and/or approvals for the various stages of the drilling process from the applicable state and local agencies. Permits and approvals include those for the drilling of wells, and regulations including maintaining bonding requirements in order to drill or operate wells and the location of wells, the method of drilling and casing wells, the surface use and restoration of properties on which wells are drilled, the plugging and abandoning of wells, and the disposal of fluids used in connection with operations.


Our operations are also subject to various conservation laws and regulations.  These include the regulation of the size of drilling and spacing units and the density of wells, which may be drilled and the unitization or pooling of natural gas properties.  In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely primarily or exclusively on voluntary pooling of lands and leases.  In areas where pooling is voluntary, it may be more difficult to form units, and therefore, more difficult to develop a project if the operator owns less than 100 percent of the leasehold.





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Regulation of Sales and Transportation of Natural Gas.  Historically, the transportation and resale of natural gas in interstate commerce have been regulated by the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978, and the regulations promulgated by the Federal Energy Regulatory Commission.  Maximum selling prices of some categories of natural gas sold in "first sales," whether sold in interstate or intrastate commerce, were regulated under the NGPA.  The Natural Gas Well Head Decontrol Act removed, as of January 1, 1993, all remaining federal price controls from natural gas sold in "first sales" on or after that date. FERC's jurisdiction over natural gas transportation was unaffected by the Decontrol Act.  While sales by producers of natural gas and all sales of crude oil, condensate and natural gas liquids can currently be made at market prices, Congress could reenact price controls in the future.


Sales of natural gas are affected by the availability, terms and cost of transportation.  The price and terms for access to pipeline transportation are subject to extensive regulation.  In recent years, FERC has undertaken various initiatives to increase competition within the natural gas industry.  As a result of initiatives like FERC Order No. 636, issued in April 1992, the interstate natural gas transportation and marketing system has been substantially restructured to remove various barriers and practices that historically limited non-pipeline natural gas sellers, including producers, from effectively competing with interstate pipelines for sales to local distribution companies and large industrial and commercial customers.  The most significant provisions of Order No. 636 require that interstate pipelines provide transportation separate or "unbundled" from their sales service, and require that pipelines make available firm and interruptible transportation service on an open access basis that is equal for all natural gas suppliers.


In many instances, the result of Order No. 636 and related initiatives has been to substantially reduce or eliminate the interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only storage and transportation services.  Another effect of regulatory restructuring is the greater transportation access available on interstate pipelines.  In some cases, producers and marketers have benefited from this availability.  However, competition among suppliers has greatly increased and traditional long-term producer pipeline contracts are rare.  Furthermore, gathering facilities of interstate pipelines are no longer regulated by FERC, thus allowing gatherers to charge higher gathering rates.


Environmental Regulations.  Our operations are subject to additional laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection.  Public interest in the protection of the environment has increased dramatically in recent years.  It appears that the trend of more expansive and stricter environmental legislation and regulations will continue.


We generate wastes that may be subject to the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes, which have limited the approved methods of disposal for some hazardous wastes. Additional wastes may be designated as "hazardous wastes" in the future, and therefore become subject to more rigorous and costly operating and disposal requirements.  Although management believes that we utilize good operating and waste disposal practices, prior owners and operators of our properties may not have done so, and hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by us or on or under locations where wastes have been taken for disposal.  These properties and the wastes disposed on the properties may be subject to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), RCRA and analogous state laws, which require the removal and remediation of previously disposed wastes, including waste disposed of or released by prior owners or operators.


CERCLA and similar state laws impose liability, without regard to fault or the legality of the original conduct, on some classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed of or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for release of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.




8





Employees


As of March 9, 2007, we had one full-time employee and no part time employees.  The employee is not covered by a collective bargaining agreement, and we do not anticipate that any of our future employees will be covered by such agreement.


ITEM 2.

DESCRIPTION OF PROPERTY


As of March 9, 2007, the Company’s executive offices consist of approximately 200 square feet in Austin, Texas which space is leased on a month-to-month basis at a current rate of $150 per month.  Management anticipates that the Company’s office space will be sufficient for the foreseeable future.


A description of our interests in oil and gas properties is included in “Item 1.  Description of Business.”


ITEM 3.

LEGAL PROCEEDINGS


As of March 9, 2007, we were not party to any pending litigation and were not aware of any threatened litigation.


ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


None


PART II


ITEM 5.

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES


The Company’s common stock is traded on the OTC Bulletin Board under the symbol "SROE."  The Company’s common stock has traded on a sporadic basis on the OTC Bulletin Board since January 13, 2006 and, accordingly, no established trading market in the Company’s common stock exists.


As of March 9, 2007, there were approximately 1,364 beneficial holders of our common stock.


At March 9, 2007, the bid price of the Company’s common stock, as quoted on the OTC Bulletin Board, was $0.15.


The Company has not paid any cash dividends since its inception and presently anticipates that all earnings, if any, will be retained for development of the Company's business and that no dividends on the shares of common stock will be declared in the foreseeable future.  Any future dividends will be subject to the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements, general business conditions and other pertinent facts.  Therefore, there can be no assurance that any dividends on the common stock will be paid in the future.


ITEM 6.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


General


Saratoga Resources, Inc. is an oil and gas exploration and production company.  Since the 1996 sale of a majority of the Company’s oil and gas producing properties, the Company’s operations and operating assets have been limited to (1) ownership of a participation interest in the Red Hawk Fusselman and Red Hawk Mississippian fields, including the Adcock Farms No. 1 well, in Dawson County, Texas, (2) rights in approximately 27 square miles of 3D seismic data in the area including the Company’s Dawson County well, (3) a license to approximately 2,000 miles of 2D seismic data in the U.S. gulf coast region, (4) a 50% working interest in a 160 acre leasehold, running through October 2009, in Dawson County, Texas, adjoining the Adcock Farms Prospect, and (5) pursuit of various potential business opportunities, both within and outside of the oil and gas industry.




9





Overview of Operations


Our operations, and our operating results, are a continuation of the operations previously conducted by our prior parent company, Saratoga Delaware.  During 2005 and 2006 our operations were exclusively devoted to our ownership of a participation interest in a single oil well, the Adcock Farms No. 1, and efforts relating to acquisitions of business opportunities, both within and outside the oil and gas industry.


Our interest in the Adcock Farms No. 1 are reflected on our financial statements as gain or loss from participation agreement.  The gain or loss reported reflect the excess of our allocable portion of revenues over expenses or expenses over revenues, as appropriate.  The gain or loss from the participation agreement is a function of production volumes from the well, our interest in the well and the market prices of production sold as well as costs incurred in operating the well.


During late 2005 and throughout 2006, in addition to operation of our interest in the Adcock Farms No. 1 well, we were actively engaged in efforts to evaluate the potential of our other oil and gas holdings, including retaining a consultant to evaluate our 3D seismic, and in efforts to acquire additional operations and assets.  As a result of those efforts, during 2006, we entered into an oil and gas lease, running through October 2009, pursuant to which the Company acquired a 50% working interest in 160 acres in Dawson County, Texas, adjoining our Adcock Farms Prospect.  Subject to the results of our ongoing evaluation of drilling prospects of each of our oil and gas holdings and the availability of funds, we intend, during 2007, to undertake efforts to drill one or more wells on our existing acreage.


During 2006, the Company, its subsidiary Lobo Resources, Inc. and its principal shareholder settled certain claims against a21, Inc.  Pursuant to the settlement, the Company and Lobo Resources received an aggregate of 34,640 shares of common stock of a21, Inc.  In connection with the settlement, the Company and Lobo Resources paid their respective portion of the costs associated with the settlement.


Critical Accounting Policies


The following describes the critical accounting policies used in reporting our financial condition and results of operations.  In some cases, accounting standards allow more than one alternative accounting method for reporting, such is the case with accounting for oil and gas activities described below.  In those cases, our reported results of operations would be different should we employ an alternative accounting method.


Revenue Recognition.  


The Company recognizes revenues from its participating interest in the profits and losses of the Adcock Farm prospect in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 69 – Disclosures About Oil and Gas Producing Activities.  As of December 31, 2006, the Company had no capitalized or equity interest in, and had not realized significant net royalties with respect to the participating interest in the profits and losses of the Adcock Farm prospect.  Due to the lack of significant revenue generation and the excessive cost involved in reporting the associated activities, disclosure required by SFAS No. 69 is neither relevant nor reliable and has been excluded from the Company’s financial statements.


Marketable Securities.  


Marketable securities are classified as available-for-sale and, at December 31, 2006, were available to support current operations or to take advantage of other investment opportunities.  The securities were stated at estimated fair value based upon market quotes.  Unrealized gains and losses, net of tax, are computed on the basis of specific identification and are included as a separate component of stockholders’ equity.  Realized gains, realized losses, and declines in value, judged to be other-than-temporary, are included in Other Income.  The cost of securities sold is based on the specific identification method and interest earned is included in Interest Income.  Certain marketable securities held at December 31, 2006 were pledged as security for a debt of Saratoga Delaware.




10





Impairment of Long-Lived Assets


We review all long-lived assets on a regular basis to determine if there has been impairment in the value of those assets.  If, upon review, it is determined that the carrying value of those assets may not be recoverable, we will record a charge to earnings and reduce the value of the asset on the balance sheet to the amount determined to be recoverable.


For purposes of evaluating recoverability of long-lived assets, the recoverability test is performed using undiscounted cash flows of the individual assets and consolidated undiscounted net cash flows for long-lived assets not identifiable to individual properties compared to the related carrying value.  If the undiscounted operating income is less than the carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each asset with its fair value.  Fair value is generally based on a discounted cash flow analysis.


Based on our review of our present operating properties and other long-lived assets, during the fiscal year ended December 31, 2006, we recorded no impairments of our long-lived assets.


Results of Operations


Year Ended December 31, 2006 Compared to Year Ended December 31, 2005


Revenues.  Revenues during 2006 were $10,802 as compared to $(1,858) in 2005. Revenues during 2006 were attributable to the Company’s share of the excess of revenues from the Adcock Farms #1 well over the related costs of operations while 2005 deficit revenues were attributable to a net loss from participation in the Adcock Farm No. 1 well as a result of decreased revenues and the incurrence of work-over expenses. The positive change in results attributable to the participation agreement was caused by completion of down-hole repairs to the well and the return of the well to production and producing revenue beginning in January 2006.  


Costs and Expenses.  Operating costs and expenses totaled $110,348 in 2006 as compared to $109,019 in 2005 and, during 2006 and 2005, consisted principally of general and administrative expenses and interest expense.  


-- General and Administrative Expenses.  General and administrative expense decreased from $69,584 in 2005 to $65,032 in 2006. The company incurred substantial accounting and legal expenses during the current year period in order to bring its filings current with the Securities and Exchange Commission.  General and administrative expense during 2006 reflected the issuance of an aggregate of 75,000 shares of common stock as compensation for the services of the Company’s 2 independent directors and its advisory director. These services were valued at $33,000. General and administrative expense during 2005 included additional accounting and legal expenses incurred by the Company in bringing its SEC filings current.


-- Depreciation Expense.  Depreciation expense was unchanged, being $351 in 2005 and 2006.


-- Interest Expense.  Interest expense increased from $39,084 in 2005 to $44,965 in 2006.  The increase in interest expense was attributable to the continuing accrual of interest on advances from the Company’s principal shareholder, which was partially offset by conversion of $25,000 of advances to equity during the period.


Other Income.  Other income of $10,392 during 2006 related to the settlement of certain claims with a21 pursuant to which the Company received shares of a21 common stock.  Other income recorded reflected the fair value of the shares received in the settlement net of associated costs.


Unrealized Holding Gains.  At December 31, 2006, the Company had $56,738 of securities holdings classified as “available-for-sale securities”.


The Company had unrealized losses on its available-for-sale securities of $21,059 during 2006.  Those unrealized losses are included in Other Comprehensive Income (Loss).




11





Financial Condition


Liquidity and Capital Resources.  


The Company had a cash balance of $8,443 and a working capital deficit of $399,833 at December 31, 2006 as compared to a cash balance of $2,372 and a working capital deficit of $373,047 at December 31, 2005.  Included in current assets and the calculation of working capital are “available for sale” securities in the amount of $56,738 at December 31, 2006 and $67,405 at December 31, 2005.


The change in cash and working capital balances was attributable to the receipt of shares in the a21 settlement, the receipt of $25,000 in cash and the reduction of $25,000 in debt owed to our majority shareholder for the purchase of 4,000,000 shares of our unregistered common stock, partially offset by the operating loss during the period and unrealized losses on available for sale securities.


The Company, at and for the year ended December 31, 2006, had limited capital resources and limited operating revenues to support its overhead.  The Company is, and was, dependent upon its principal shareholder to provide financing to support operations and ongoing cost control measures to minimize negative cash flow.  Unless that shareholder continues to provide financing the Company will be required to substantially limit its activities and may be unable to sustain its operations.


Available-For-Sale Securities.


At December 31, 2006, the Company’s current assets included $56,738 of securities holdings classified as “available-for-sale securities”.  Those securities consisted of shares of stock of Opticare (formerly, Saratoga Delaware) and A21, Inc. (formerly, Saratoga Holdings).  All of the Opticare stock is held in a pledge account to secure obligations guaranteed by the Company.  The Company’s guarantee is limited to the extent of the shares pledged, the market value of which was $0 at December 31, 2006.  The A21 shares are freely transferable by the Company and had a market value of $55,258 at December 31, 2006.


The Company had unrealized gains on its available-for-sale securities of $21,059 during 2006.  Those unrealized gains are included in Other Comprehensive Income (Loss).


Long-Term Debt


At December 31, 2006, the Company had long-term debt of $407,751 owed to the Company’s principal shareholder as compared to $386,144 at December 31, 2005. Loans from the Company’s principal shareholder bear interest at 12.5% and are to be repaid from proceeds from operations as they become available.  The change in long-term debt was attributable to the conversion of $25,000 of loans to equity offset by additional interest accrued on the loans of $44,965.


Capital Expenditures and Commitments  


During 2006, the Company made no capital expenditures and, at December 31, 2006, the Company had no fixed capital commitment obligations.


The Company, at December 31, 2006, was contractually obligated to bear 50% of the expenses of operating the Adcock Farm prospect.  The Company plans to use funds provided by Thomas Cooke from time to time to pay the Company’s portion of costs associated with the rework of the Adcock Farms well.




12





The Company, at December 31, 2006, was also contractually obligated to pay certain amounts relating to the licensing of the right to certain data from DBX Geophysical.  Pursuant to the terms of the agreement with DBX, as consideration for the DBX Data, the Company agreed (1) to grant to DBX a 3% overriding royalty in any leasehold acquired in the Adcock Farms prospect and (2) to pay to DBX $100,000, payable (a) $25,000 upon commencement of drilling operations of the first prospect, (b) $25,000 as a production payment out of a 25% working interest in the first well, (c) $25,000 upon commencement of drilling operations on a second well, and (d) $25,000 as a production payment out of a 25% working interest in the second well.  In the event that the required production payments are not made in full from the referenced wells, such deficiency will be payable out of a 25% working interest in all other wells drilled within the area of interest.  As of December 31, 2006, no wells had been drilled on the Adcock Farms prospect.  Accordingly, other than the overriding royalty, no amounts had, as of that date, been paid to DBX.


Off-Balance Sheet Arrangements


As noted elsewhere, all of our marketable securities at December 31, 2006 were pledged to secure obligations of our predecessor, Saratoga Delaware.  Our exposure in that regard is limited to the value of the securities pledged.


Except for the pledge of securities to secure obligations of Saratoga Delaware, we had no off-balance sheet arrangements or guarantees of third party obligations at December 31, 2006.


Inflation


We believe that inflation has not had a significant impact on our operations since inception.


ITEM 7.

FINANCIAL STATEMENTS


Our financial statements, together with the independent accountants reports thereon of Robnett & Company, LLP, appears immediately after the signature page of this report.  See “Index to Financial Statements” on page 20 of this report.


ITEM 8.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


Not applicable.


ITEM 8A.

CONTROLS AND PROCEDURES


Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), as appropriate to allow timely decisions regarding required disclosure.


As required by Rules 13a-15 and 15d-15 under the Exchange Act, the Certifying Officers carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2006. Their evaluation was carried out with the participation of other members of the Company’s management. Based upon their evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were effective.




13





The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Certifying Officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the Company’s financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with the authorization of the Company’s Board of Directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its financial statements. There has been no change in the Company’s internal control over financial reporting that occurred in the quarter ended December 31, 2006, that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.


ITEM 8B.

OTHER INFORMATION


Not applicable.


PART III


ITEM 9.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


Executive Officers and Directors


The following table sets forth the names, ages and offices of the present executive officers and directors of the Company.  The periods during which such persons have served in such capacities are indicated in the description of business experience of such persons below.


Name

Age

Position


Thomas Cooke

 58

President, Treasurer and Director

Kevin M. Smith

 62

Director

Rex H. White

 74

Director


The following is a biographical summary of the business experience of the present directors and executive officers of the Company:


Thomas F. Cooke co-founded the Company in 1990 and has served as our president chief executive officer and chairman since 1996.  In addition to his service as an officer of the Company, Mr. Cooke has been self-employed as an independent oil and gas producer for more than 20 years.  


Kevin M. Smith has served as a Director of the Company since 1997.   Mr. Smith has in excess of 35 years experience as an exploration geophysicist.  Since 1984 Mr. Smith's work experience has been exclusively devoted to his own geophysical consulting firm (Kevin M. Smith, Inc.).  Mr. Smith received a Bachelor of Science degree with a dual major of Geology and Geophysics from the University of Houston.  He also did post graduate studies in Geology and Geophysics at the University of Houston.


Rex H. White has served as a Director of the Company since 2006.  Mr. White is a self employed attorney, Board Certified in Oil, Gas and Mineral Law, with over 46 years of experience in the energy industry.  Prior to commencing his legal career, Mr. White worked as a petroleum geologist/geophysicist for approximately 10 years, including 7 years with Mobil Oil Corporation.  Mr. White’s long and distinguished career in the energy industry includes service as Special Counsel to the Texas Railroad Commission, Assistant Attorney General of the State of Texas, President of the Texas Independent Producer and Royalty Owners Association, and a Presidential appointment to The National Petroleum Council.  Mr. White holds a B.S. in Geology, a M.A. in Geology with a minor in Petroleum Engineering and a law degree all from the University of Texas.



14






The Company’s directors serve for a term of one year or until their successors are elected by the shareholders.  The Company’s executive officers are elected by our board of directors and serve terms of one year or until their death, resignation or removal by the board of directors.


Advisory Director


A.C. “Andy” Clifford has served as an advisory director of the Company since June 2006.  Mr. Clifford is a petroleum geologist/geophysicist with over 27 years of experience in domestic and international oil and gas exploration and production.  Mr. Clifford’s broad experience includes providing professional geological services on prospects throughout the United States and around the world as an independent consultant, as Vice President of Exploration for BHP Petroleum and as a Senior Geophysicist for BHP Petroleum, Kuwait Foreign Petroleum and Esso Exploration.  Mr. Clifford is a co-founder and Executive Vice President of Aurora Gas, LLC, an independent gas developer and producer with gas production operations in Cook Inlet, Alaska.  Mr. Clifford holds a B.Sc, with honors, in Geology with Geophysics from London University and is a frequent speaker and published author on a variety of energy industry topics.


Board Committees


The Company does not presently maintain an audit committee or any other committee of our board of directors.  Because we do not presently maintain an audit committee, we have no audit committee financial expert.


Compliance with Section 16(a) of Exchange Act


Under the securities laws of the United States, the Company’s directors, its executive officers, and any person holding more than ten percent of the Company’s Common Stock are required to report their initial ownership of the Company’s Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission.  Specific due dates for these reports have been established and the Company is required to disclose any failure to file by these dates during fiscal year 2006.  To the Company’s knowledge, all of the filing requirements were satisfied on a timely basis in fiscal year 2006 with the exception of one Form 4 filing of Thomas Cooke that was filed late.  In making these disclosures, the Company has relied solely on copies of reports provided to the Company.


Code of Ethics


The Board of Directors has adopted a Code of Business Ethics covering all of our officers, directors and employees. We require all employees to adhere to the Code of Business Ethics in addressing legal and ethical issues encountered in conducting their work. The Code of Business Ethics requires that our employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in the company's best interest.


The Board of Directors has also adopted a separate Code of Business Ethics for the CEO and Senior Financial Officers. This Code of Ethics supplements our general Code of Business Ethics and is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters.


The Code of Business Ethics for the CEO and Senior Financial Officers was filed as an exhibit to the Annual Report on Form 10-KSB for the year ended December 31, 2005 and is available for review at the SEC's web site at www.sec.gov.


ITEM 10.

EXECUTIVE COMPENSATION


Named Executive Officers


During 2006, no compensation was paid to the Company’s Chief Executive Officer or any other officers or employees of the Company.




15





The Company, during 2006 and at January 12, 2007, had no employment agreements with any employees.


Directors


The following table sets forth the compensation paid to directors during 2006:


 

 



Fees Earned or Paid in Cash

($)

 





Stock Awards

($)(1)

 





Option Awards

($)

 




Non-Equity incentive Plan Compensation

($)

 

Change in Pension Value and Nonqualified Deferred Compensation Earnings

($)

 





All other Compensation

($)

 






Total

($)

Kevin Smith

 

0

 

11,000

 

0

 

0

 

0

 

0

 

11,000

Rex White

 

0

 

11,000

 

0

 

0

 

0

 

0

 

11,000


(1)

During 2006, the Company issued 25,000 each to its two non-employee directors as compensation for service as directors.


Other than the issuance of the shares, the Company currently pays no compensation for service of directors.  The Company may consider payment of certain amounts to attract the services of independent directors.


ITEM 11.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


The following table sets forth information as of March 9, 2007, based on information obtained from the persons named below, with respect to the beneficial ownership of shares of the Company's Common Stock held by (i) each person known by the Company to be the owner of more than 5% of the outstanding shares of the Company's Common Stock, (ii) each director, (iii) each named executive officer, and (iv) all executive officers and directors as a group:


Name and Address of Beneficial Owner (1)

 

Number of Shares
Beneficially Owned (2)

 

Percentage
of Class

Thomas F. Cooke (3)

 

6,220,422

 

82.5%

1304 Alta Vista Ave

 

 

 

 

Austin, TX  78704

 

 

 

 

 

 

 

 

 

Kevin Smith (4)

 

189,295

 

2.6%

 

 

 

 

 

Rex H. White

 

25,000

 

.4%

 

 

 

 

 

All directors and officers as a group (3 persons)

 

6,434,717

 

85.4%

 

 

 

 

 

_________


(1)

Unless otherwise indicated, each beneficial owner has both sole voting and sole investment power with respect to the shares beneficially owned by such person, entity or group. The number of shares shown as beneficially owned include all options, warrants and convertible securities held by such person, entity or group that are exercisable or convertible within 60 days of March 9, 2007.


(2)

The percentages of beneficial ownership as to each person, entity or group assume the exercise or conversion of all options, warrants and convertible securities held by such person, entity or group which are exercisable or convertible within 60 days, but not the exercise or conversion of options, warrants and convertible securities held by others shown in the table.




16





(3)

Includes 109,148 shares held by June Cooke, Mr. Cooke’s spouse, of which Mr. Cooke disclaims beneficial ownership. Includes 150,000 shares held in the name of Lobo Resources, Inc. which is controlled by Mr. Cooke.


(4)

Includes 10,000 shares held by Sandra Smith, Mr. Smith’s spouse, of which Mr. Smith disclaims beneficial ownership.


ITEM 12.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


During 2005 and 2006, Thomas Cooke, the principal officer, director and shareholder of the Company loaned funds to the Company and purchased shares of common stock to support operations and, for the foreseeable future, the Company anticipates that Mr. Cooke will continue to advance funds to the Company to support operations.  


During 2006, Mr. Cooke converted $25,000 of existing loans and invested an additional $25,000 in the Company in exchange for the issuance of 4,000,000 shares of common stock.  Interest accrued on the outstanding loans of Mr. Cooke totaled $44,965 during 2006.


Amounts loaned to the Company by Mr. Cooke, totaling $226,705 at December 31, 2006, bear interest at 12.5% and are repayable from proceeds from operations when they become available. Accrued interest on these loans totaled $181,046 at December 31, 2006.


ITEM 13.

EXHIBITS


Exhibit

Number

Description of Exhibit


3.1

Restated Articles of Incorporation of Saratoga Resources, Inc. (incorporated by reference to Exhibit 3(i) to the Company’s Registration Statement on Form 10-SB filed with the SEC on October 6, 1999).


3.2

Bylaws of Saratoga Resources, Inc. (incorporated by reference to Exhibit 3(ii) to the Company’s Registration Statement on Form 10-SB filed with the SEC on October 6, 1999).


10.1

Geophysical/Geological Data Review Agreement dated December 1999, between Saratoga Resources, Inc. and Trek Oil and Gas, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form 10-SB filed with the SEC on February 16, 2000).


10.2

Letter Agreement, dated March 22, 1999, between Saratoga Resources, Inc. and DBX Geophysical Corporation. (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1999)


10.3

Letter Agreement, dated June 21, 1999, between Saratoga Resources, Inc., Ivy Oil Company and Trek Oil and Gas, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1999)


10.4

Letter Agreement, dated January 3, 2001, between Saratoga Resources, Inc. and Trek Oil and Gas, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2000)


10.5

Securities Purchase Agreement between Saratoga Resources, Inc. and Thomas F. Cooke. (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005)


10.6

Promissory Note, dated July 31, 2005, payable to Thomas F. Cooke. (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005)



17






14.1

Code of Ethics for CEO and Senior Financial Officers. (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005)


21.1

List of subsidiaries. (incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005)


23.1*

Consent of Robnett & Co., LP


31.1*

Section 302 Certifications


32.1*

Section 906 Certifications


*

Filed herewith


ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES


The following table presents fees billed for professional services rendered by the Company’s principal accountants for the audit of the Company’s annual financial statements for the years ended December 31, 2005 and 2006 and fees billed for other services rendered by that firm during those periods.


 

 

2006

 

2005

Audit fees (1)

 

$

8,614

 

$

35,524

Audit related fees

 

 

 

 

 

 

Tax fees

 

 

 

 

 

 

All other fees

 

 

 

 

 

 

   Total

 

$

8,614

 

$

35,524


(1)

Audit fees consist of fees billed for professional services rendered for the audit of the Company’s consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by in connection with statutory and regulatory filings or engagements.  


The Company does not maintain an Audit Committee.  The policy of the Company’s board is to pre-approve all audit and non-audit services provided by the independent auditors.



18






SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 

 

 

 

SARATOGA RESOURCES, INC.

Dated:

January 4, 2008

 

 

 

 

 

 

 

By:

/s/ Thomas F. Cooke

 

 

 

 

Thomas F. Cooke

 

 

 

 

Chairman & CEO







19






SARATOGA RESOURCES, INC.

 

 

 

 

Index to Financial Statements

 

 

Independent auditors’ report

F-1

 

 

Consolidated Balance Sheet as of December 31, 2006

F-2

 

 

Consolidated Statements of Operations for the years ended December 31, 2006 and 2005

F-3

 

 

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended
December 31, 2006 and 2005

F-4

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005

F-5

 

 

Notes to Consolidated Financial Statements

F-6




20







Report of Independent Auditors


Board of Directors

Saratoga Resources, Inc. and Subsidiaries


We have audited the accompanying consolidated balance sheet of Saratoga Resources, Inc. and Subsidiaries as of December 31, 2006, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years ended December 31, 2006 and 2005.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.  


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saratoga Resources, Inc. and Subsidiaries as of December 31, 2006 and the consolidated results of their operations and cash flows for the years ended December 31, 2005 and 2006 in conformity with generally accepted accounting principles.



/s/ Robnett & Co., LP

Robnett & Co., LP

Austin, Texas


February 24, 2007

Except for the removal of Note 5 and the going concern provision in the Auditor’s report, the date as to which is:


January 3, 2008






F-1





Saratoga Resources, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEET

December 31, 2006


ASSETS

 

 

 

 

Current assets:

 

 

 

Cash

 

$

8,443 

Available-for-sale securities

 

 

56,738 

 

 

 

65,181 

Fixed assets:

 

 

 

Furniture and equipment

 

 

26,688 

Accumulated depreciation

 

 

(26,136)

 

 

 

552 

 

 

 

 

Total assets

 

$

65,732 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ CAPITAL

 

 

 

 

Current liabilities:

 

 

 

Accounts payable & other accrued liabilities

 

$

57,263 

Due to related parties

 

 

407,751 

 

 

 

465,014 

Stockholders’ capital:

 

 

 

Preferred stock, $0.001 par value; 100,000 shares

authorized, 0 issued and outstanding

 

 

Common stock, $0.001 par value; 100,000,000 shares

authorized, 7,540,292 issued and outstanding

 

 

7,540 

Additional paid-in capital

 

 

2,568,499 

Accumulated deficit

 

 

(3,021,667)

Accumulated other comprehensive income (loss)

 

 

46,346 

 

 

 

(399,282)

 

 

 

 

Total liabilities and stockholders’ capital

 

$

65,732 

 

 

 

 


See notes to financial statements.





F-2





Saratoga Resources, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

For the Years Ended December 31, 2006 and 2005


 

 

2006

 

2005

REVENUES:

 

 

 

 

 

 

Net gain from participation agreement

 

$

10,802 

 

$

(2,747)

Other

 

 

10,392 

 

 

889 

 

 

 

21,194 

 

 

(1,858)

 

 

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

Depreciation expense

 

 

351 

 

 

351 

General and administrative

 

 

65,032 

 

 

69,584 

Interest expense

 

 

44,965 

 

 

39,084 

 

 

 

110,348 

 

 

109,019 

 

 

 

 

 

 

 

Net income (loss)

 

$

(89,154)

 

$

(110,876)

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

Unrealized holding gains/losses

 

 

(21,059)

 

 

40,720 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(110,213)

 

$

(70,156)

 

 

 

 

 

 

 

Basic and diluted (loss) per share:

 

$

(0.016)

 

$

(0.012)

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

7,169,460 

 

 

3,465,292 


See notes to financial statements.




F-3





Saratoga Resources, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' CAPITAL

For the Years Ended December 31, 2006 and 2005


 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Amount

 

Shares

 

Capital

 

Deficit

 

Loss

 

Total

January 1, 2005

 

$

3,465 

 

3,465,292 

 

$

2,489,499 

 

$

(2,821,637)

 

$

26,685 

 

$

(301,988)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

(110,876)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on securities

 

 

 

 

 

 

 

 

 

40,720 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(70,156)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2005

 

 

3,465 

 

3,465,292 

 

 

2,489,499 

 

 

(2,932,513)

 

 

67,405 

 

 

(372,144)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

4,075 

 

4,075,000 

 

 

79,000 

 

 

(89,154)

 

 

 

 

83,075 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on securities

 

 

 

 

 

 

 

 

 

(21,059)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(110,213)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2006

 

$

7,540 

 

7,540,292 

 

$

2,568,499 

 

$

(3,021,667)

 

$

46,346 

 

$

(399,282)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


See notes to financial statements.





F-4





Saratoga Resources, Inc. and Subsidiaries

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2006 and 2005


 

 

2006

 

2005

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income (loss)

 

$

(110,213)

 

$

(110,876)

Adjustments to reconcile net income (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

351 

 

 

351 

(Increase) decrease in other assets

 

 

10,668 

 

 

4,125 

Increase (decrease) in accounts payable

 

 

22,190 

 

 

39,787 

Net cash provided by (used in) operating activities

 

 

(77,004)

 

 

(66,613)

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sale of available-for-sale securities

 

 

 

 

Net cash provided by (used in) investing activities

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Cash borrowed (repaid) related parties

 

 

 

 

68,000 

Proceeds from sale of stock

 

 

83,075 

 

 

Net cash provided by (used in) financing activities

 

 

83,075 

 

 

68,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

6,071 

 

 

1,387 

Cash and cash equivalents at beginning of period

 

 

2,372 

 

 

985 

Cash and cash equivalents at end of period

 

$

8,443 

 

$

2,372 


See notes to financial statements.





F-5





Saratoga Resources, Inc. and Subsidiaries

Notes to Financial Statements

December 31, 2006


1.   Organization and Summary of Significant Accounting Policies


Organization


Saratoga Resources, Inc., a Texas Corporation (the “Company”, “Saratoga” or the “Registrant”) was incorporated on July 25, 1990 to engage in the transaction of any and all lawful businesses for which corporations may be incorporated under the Texas Business Corporation Act. The Company derives its revenues from a working interest in a single oil and gas property.


Prior to August 9, 1999, the Company was a wholly owned subsidiary of Saratoga Resources, Inc., a Delaware Corporation (the “Predecessor”).  On August 9, 1999, the Predecessor distributed 100% of the outstanding shares of the Company’s common stock to the Predecessor’s shareholders (the “Spin-Off”).  Concurrently, the Predecessor distributed its assets and 100% of the outstanding common shares of its previously wholly owned subsidiaries, Lobo Operating, Inc., a Texas Corporation (“Lobo Operating”), and Lobo Resources, Inc., a Texas Corporation (“Lobo Resources”), as well as a 9% equity interest in Saratoga Holdings, Inc., a Texas Corporation (“Holdings”), to the Company.  Holdings had no identifiable assets or a readily determinable fair market value and did not affect the Company’s financial position or results of activities and cash flows as of or for the year ended December 31, 2006.


Use of Estimates


The preparation of the Company’s consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.


Principles of Consolidation


The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation.




F-6





Saratoga Resources, Inc. and Subsidiaries

Notes to Financial Statements

December 31, 2006


1.   Organization and Summary of Significant Accounting Policies - Continued


Cash and Cash Equivalents


The company considers all investments with maturities of ninety days or less when purchased to be cash equivalents.


Marketable Securities


All marketable securities are classified as available-for-sale. These securities are stated at estimated fair value based upon market quotes. Unrealized gains and losses, net of tax, are computed on the basis of specific identification and are included as a separate component of stockholders’ equity. Realized gains, realized losses, and declines in value, judged to be other-than-temporary, are included in Other Income. The cost of securities sold is based on the specific identification method and interest earned is included in Interest Income.  Marketable securities of the Company’s are pledged as security for a debt of the Predecessor incurred during the Spin-Off. (See Note 4).  The exposure to loss in the surety is limited to the value of 7,839 shares of the Predecessor’s stock held in the Company’s brokerage accounts, valued at $-0-, as of December 31, 2006.


Equipment


Equipment is recorded at cost less accumulated depreciation. Depreciation of equipment is computed using the straight-line method over the estimated useful life of the assets (five to seven years).  Expenditures for maintenance and repairs are charged to expense, and expenditures which extend the physical or economic life of the assets are capitalized. Gains or losses on disposition of assets are recognized in income and the related assets and accumulated depreciation accounts are adjusted accordingly.


Recognition of Revenues


The Company recognizes net gains and losses arising from its participating interest in the profits and losses of an unaffiliated oil & gas production company in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 69 – Disclosures About Oil and Gas Producing Activities.  As of the date of report, the Company has no capitalized or equity interest in, and has not realized significant net royalties with respect to the participating interest in the profits and losses of the unaffiliated oil & gas production company.  Due to the lack of significant revenue generation and the excessive cost involved in reporting the associated activities, disclosure required by SFAS No. 69 are neither relevant nor reliable and are therefore excluded from this report.




F-7





Saratoga Resources, Inc. and Subsidiaries

Notes to Financial Statements

December 31, 2006


1.   Organization and Summary of Significant Accounting Policies - Continued


Income Taxes


The Company accounts for income taxes in accordance with Statement of Financial accounting Standards (SFAS) No. 109, Accounting for Income Taxes. This statement prescribes the use of the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.


Loss Per Share


The Company follows the provisions of SFAS No. 128, Earnings Per Share. Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.


Segments


In 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes reporting standards for a company’s operating segments in annual financial statements and the reporting of selected information about operating segments in financial statements. The adoption of SFAS No. 131 had no effect on the disclosure of segment information as the Company continues to consider its business activities as a single segment.


2. Related Parties  


Due to Related Parties


In January, 2006 Thomas F. Cooke, the President and a Director of the Company, acquired 4,000,000 shares of the Company’s common stock in exchange for the conversion of outstanding loans in the amount of $25,000 and an additional contribution of cash of $25,000.


The issuance of all shares of our common stock described above was pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended and related state private offering exemptions.




F-8




Saratoga Resources, Inc. and Subsidiaries

Notes to Financial Statements

December 31, 2006


2. Related Parties - continued


As of December 31, 2006 the company was indebted to the principal shareholder in the amount of $407,751 which includes $181,046 of accrued interest.  The indebtedness to the principle shareholder bears interest at 9.86% and is to be repaid from proceeds from operations as they become available.  Accrued interest of $44,965 is included in the interest expense recognized in the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2006.  Subsequent to December 31, 2006, operations of the Company have been funded by loans from the Company’s principal shareholder, Thomas F. Cooke.


3. Income Taxes.


As of December 31, 2006, the company had estimated federal net operating loss carry-forwards approximating $929,850.  The net operating losses will expire beginning in 2012, if not utilized.


Utilization of the net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation, if applicable, may result in the expiration of net operating losses.


Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes for the years ended December 31, 2006 and 2005 are as follows:


Deferred tax asset (liabilities)

 

2006

 

2005

Depreciable assets

 

$

(1,871)

 

$

(1,742)

Tax carry-forwards

 

 

439,418 

 

 

405,897 

Accrual to cash adjustment

 

 

49,184 

 

 

40,452 

Total deferred tax assets

 

 

486,731 

 

 

440,607 

Valuation allowance for deferred tax assets

 

 

(486,731)

 

 

(440,607)

Net deferred tax assets (liabilities)

 

$

-0- 

 

$

-0- 


The Company has established valuation allowances equal to the net deferred tax assets due to uncertainties regarding their realization. The valuation allowance increased by approximately $46,124 during the year ended December 31, 2006 due primarily to current year net operating losses, which were aggregated with prior year un-utilized net operating losses.


The reconciliation of generally accepted accounting principles net loss to taxable net loss is as follows:


 

 

2006

 

2005

GAAP Net Loss

 

$

(89,154)

 

$

(110,876)

Differences in realized losses

 

 

 

 

 

 

Cash to accrual adjustments

 

 

(21,059)

 

 

40,720 

Taxable Net Loss

 

$

(110,213)

 

$

(70,156)




F-9





Saratoga Resources, Inc. and Subsidiaries

Notes to Financial Statements

December 31, 2006


4. Commitments & Contingencies


Debt Surety


The Company pledged equity securities to secure debt of the Predecessor incurred in the Spin-Off.  The amount of the surety is limited to the equity securities held in brokerage accounts pledged as collateral for the debt.



F-10