UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-32237
GALAXY ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado (State or other jurisdiction of incorporation or organization) | 98-0347827 (IRS Employer Identification No.) |
1331 – 17th Street, Suite 1050, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
(303) 293-2300
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ]Yes [X] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] | Smaller reporting company [X] |
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ X ]Yes [ ]No
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). [ ]Yes [X] No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 83,661,968 shares of Common Stock, $0.001 par value, as of October 10, 2008.
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
| August 31, 2008 | November 30, 2007 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 239,418 | $ | 12,542 | ||||
Accounts receivable, joint interest | 6,698 | 1,464 | ||||||
Accounts receivable, joint interest, related party | 30,531 | 14,975 | ||||||
Accounts receivable, other | 53,280 | 22,711 | ||||||
Prepaid and other | 93,942 | 77,668 | ||||||
Total current assets | 423,869 | 129,360 | ||||||
| Oil and gas properties, at cost, full cost method of accounting | ||||||||
Evaluated oil and gas properties | 17,398,348 | 15,247,793 | ||||||
Unevaluated oil and gas properties | 39,703,512 | 41,271,752 | ||||||
Less accumulated depletion, amortization and impairment | (16,593,715 | ) | (13,400,793 | ) | ||||
| Total oil and gas properties | 40,508,145 | 43,118,752 | ||||||
| Furniture and equipment, net | 8,866 | 55,572 | ||||||
| Other assets | ||||||||
Deferred financing costs, net | 862 | 45,965 | ||||||
Restricted investments | 493,473 | 429,473 | ||||||
Other | 18,398 | 18,002 | ||||||
| Total other assets | 512,733 | 493,440 | ||||||
| Total Assets | $ | 41,453,613 | $ | 43,797,124 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT
| Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 670,846 | $ | - | ||||
Notes payable | 10,000,000 | 12,000,000 | ||||||
Interest payable | 208,082 | 317,603 | ||||||
Total liabilities not subject to compromise | 10,878,928 | 12,317,603 | ||||||
| Liabilities subject to compromise | 47,319,616 | 40,135,838 | ||||||
| Total current liabilities | 58,198,544 | 52,453,441 | ||||||
| Non-current liabilities | ||||||||
Asset retirement obligation | 2,037,956 | 1,924,883 | ||||||
| Total liabilities | 60,236,500 | 54,378,324 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ deficit | ||||||||
Preferred stock, $.001 par value, Authorized – 25,000,000 shares Issued – none | - | - | ||||||
Common stock, $.001 par value Authorized – 400,000,000 shares Issued and outstanding – 83,661,968 shares | 83,662 | 83,662 | ||||||
Capital in excess of par value | 73,666,978 | 73,054,798 | ||||||
Deficit accumulated during the development stage | (92,533,527 | ) | (83,719,660 | ) | ||||
Total stockholders’ deficit | (18,782,887 | ) | (10,581,200 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 41,453,613 | $ | 43,797,124 | ||||
The accompanying notes are an integral part of these financial statements
2
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended August 31, | ||||||||
| 2008 | 2007 | |||||||
| Revenue | ||||||||
Natural gas sales | $ | 173,556 | $ | 76,303 | ||||
| Costs and expenses | ||||||||
Lease operating expense | 353,306 | 445,817 | ||||||
General and administrative | 815,656 | 761,617 | ||||||
Impairment of oil and gas properties | 3,082,000 | 2,370,880 | ||||||
Depreciation, depletion and accretion | 126,316 | 232,056 | ||||||
| Total costs and expenses | 4,377,278 | 3,810,370 | ||||||
| Other income (expense) | ||||||||
Interest and other income | (7,346 | ) | 4,749 | |||||
Interest expense and financing costs (for the 2008 period, $1,286,583, Note 3) | (296,463 | ) | (2,044,630 | ) | ||||
| Total other income (expense) | (303,809 | ) | (2,039,881 | ) | ||||
| Net loss before reorganization items | (4,507,531 | ) | (5,773,948 | ) | ||||
| Reorganization items, net | 133,402 | - | ||||||
| Net Loss | $ | (4,640,933 | ) | $ | (5,773,948 | ) | ||
| Net loss per common share – basic and diluted | $ | (0.06 | ) | $ | (0.07 | ) | ||
| Weighed average number of common shares | ||||||||
outstanding – basic and diluted | 83,661,968 | 83,661,968 | ||||||
The accompanying notes are an integral part of these financial statements
3
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Nine Months Ended August 31, | Cumulative From Inception (June 18, 2002) to | |||||||||||
| 2008 | 2007 | August 31, 2008 | ||||||||||
| Revenue | ||||||||||||
| Natural gas sales | $ | 419,672 | $ | 447,232 | $ | 3,514,718 | ||||||
Gain on disposition of oil and gas property | - | - | 197,676 | |||||||||
Gain on disposition of oil and gas property | ||||||||||||
and other income, related party | - | - | 122,946 | |||||||||
| Total revenue | 419,672 | 447,232 | 3,835,340 | |||||||||
| Costs and expenses | ||||||||||||
Lease operating expense | 946,649 | 704,151 | 3,743,442 | |||||||||
General and administrative | 2,312,450 | 2,801,617 | 23,092,347 | |||||||||
Impairment of oil and gas properties | 3,082,000 | 3,866,195 | 13,616,191 | |||||||||
Depreciation, depletion and accretion | 270,700 | 511,168 | 3,600,420 | |||||||||
| Total costs and expenses | 6,611,799 | 7,883,131 | 44,052,400 | |||||||||
| Other income (expense) | ||||||||||||
Interest and other income | 22,152 | 14,043 | 278,451 | |||||||||
Interest expense and financing costs (for the 2008 period, $4,245,301, Note 3) | (2,340,873 | ) | (7,119,791 | ) | (52,291,899 | ) | ||||||
| Total other income (expense) | (2,318,721 | ) | (7,105,748 | ) | (52,013,448 | ) | ||||||
| Net loss before reorganization items | (8,510,848 | ) | (14,541,647 | ) | (92,230,508 | ) | ||||||
| Reorganization items, net | 303,019 | - | 303,019 | |||||||||
| Net Loss | $ | (8,813,867 | ) | $ | (14,541,647 | ) | $ | (92,533,527 | ) | |||
| Net loss per common share – basic and diluted | $ | (0.11 | ) | $ | (0.17 | ) | $ | (1.51 | ) | |||
| Weighed average number of common shares | ||||||||||||
outstanding – basic and diluted | 83,516,428 | 83,321,309 | 61,300,519 | |||||||||
The accompanying notes are an integral part of these financial statements
4
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended August 31, | Cumulative From Inception (June 18, 2002) to | |||||||||||
| 2008 | 2007 | August 31, 2008 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net loss | $ | (8,813,867 | ) | $ | (14,541,647 | ) | $ | (92,533,527 | ) | |||
Adjustments to reconcile net loss to net cash | ||||||||||||
(used) by operating activities: | ||||||||||||
Stock for interest | - | 410,000 | 4,762,508 | |||||||||
Stock for services | - | - | 264,600 | |||||||||
Stock for services – related party | - | - | 90,000 | |||||||||
Oil and gas properties for services | - | - | 732,687 | |||||||||
Stock for debt – related party | - | - | 233,204 | |||||||||
Amortization of discount and deferred financing | ||||||||||||
costs on convertible debt | 236,967 | 2,738,126 | 21,808,650 | |||||||||
Finance costs incurred for waiver of triggering event | - | - | 3,457,101 | |||||||||
Write-off of discount and deferred financing costs | ||||||||||||
upon conversion of convertible debt | - | - | 2,979,404 | |||||||||
Write-off of discount and deferred financing costs | ||||||||||||
upon extinguishment of convertible debt | - | - | 4,126,371 | |||||||||
Compensation expense on vested stock options | 612,180 | 891,647 | 3,448,622 | |||||||||
Depreciation, depletion and | ||||||||||||
accretion expense | 270,700 | 262,582 | 3,595,419 | |||||||||
Gain on disposition of oil and gas properties | - | - | (270,389 | ) | ||||||||
| Impairment of oil and gas properties | 3,082,000 | 3,866,195 | 13,616,191 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts payable – trade, LSTC, accruals, bankoverdrafts | 631,409 | (41,515 | ) | 1,468,950 | ||||||||
Accounts payable – related party | (14,500 | ) | (14,987 | ) | 32,318 | |||||||
Interest payable | 954,734 | 2,387,825 | 7,301,706 | |||||||||
Accounts receivable, prepaids and other | ||||||||||||
current assets | (51,358 | ) | 953,110 | (191,837 | ) | |||||||
Other | (204,635 | ) | (43,300 | ) | (182,330 | ) | ||||||
| Net cash used for operating activities | (3,296,370 | ) | (3,131,964 | ) | (25,260,352 | ) | ||||||
| Cash flows from investing activities | ||||||||||||
Additions to oil and gas properties | (415,754 | ) | (1,967,853 | ) | (49,000,342 | ) | ||||||
Management fees earned on operated properties | - | 56,303 | 1,752,133 | |||||||||
Purchase of furniture and equipment | - | (2,289 | ) | (283,461 | ) | |||||||
Purchase surety bonds, net | (64,000 | ) | 31,521 | (493,473 | ) | |||||||
Proceeds from sale of oil and gas properties | - | - | 340,000 | |||||||||
Advance to affiliate | - | - | (60,000 | ) | ||||||||
Cash received upon recapitalization and merger | - | - | 4,234 | |||||||||
| Net cash used for investing activities | (479,754 | ) | (1,882,318 | ) | (47,740,909 | ) | ||||||
The accompanying notes are an integral part of these financial statements
5
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended August 31, | Cumulative From Inception (June 18, 2002) to | |||||||||||
| 2008 | 2007 | August 31, 2008 | ||||||||||
| Cash flows from financing activities | ||||||||||||
Proceeds from sale of common stock | - | - | 17,905,300 | |||||||||
Proceeds from sale of convertible notes payable | - | - | 44,695,000 | |||||||||
Proceeds from sale of convertible debentures | - | - | 5,040,000 | |||||||||
| Proceeds for sale of notes payable – related party | 3,600,000 | 8,618,777 | 19,518,777 | |||||||||
| Proceeds from Debtor – in – possession loan – related party | 2,403,000 | - | 2,403,000 | |||||||||
Proceeds from exercise of warrants | - | - | 1,019,306 | |||||||||
Debt and stock offering costs | - | - | (3,980,569 | ) | ||||||||
Payment of convertible notes payable | (2,000,000 | ) | (4,160,505 | ) | (12,680,285 | ) | ||||||
Payment of note payable – related party | - | - | (129,578 | ) | ||||||||
Payment of note payable | - | - | (550,272 | ) | ||||||||
| Net cash provided by financing activities | 4,003,000 | 4,458,272 | 73,240,679 | |||||||||
| Net increase (decrease) in cash | 226,876 | (556,010 | ) | 239,418 | ||||||||
| Cash and cash equivalents, beginning of period | 12,542 | 608,180 | - | |||||||||
| Cash and cash equivalents, end of period | $ | 239,418 | $ | 52,170 | $ | 239,418 | ||||||
| Supplemental schedule of cash flow information | ||||||||||||
Cash paid for interest | $ | 1,149,171 | $ | 1,585,045 | $ | 7,754,570 | ||||||
| Reorganization items included in operating activities | $ | (196,520 | ) | $ | - | $ | (196,520 | ) | ||||
| Reorganization items included in investing activities | $ | (64,000 | ) | $ | - | $ | (64,000 | ) | ||||
| Reorganization items included in financing activities | $ | 2,403,000 | $ | - | $ | 2,403,000 | ||||||
| Supplemental disclosures of non-cash investing and | ||||||||||||
financing activities | ||||||||||||
Debt incurred for oil and gas properties | $ | - | $ | - | $ | 3,646,000 | ||||||
Debt incurred for finance costs | $ | - | $ | - | $ | 3,547,101 | ||||||
Stock issued for services | $ | - | $ | - | $ | 354,600 | ||||||
Stock issued for interest and debt | $ | - | $ | 410,000 | $ | 14,152,538 | ||||||
Stock issue for convertible debentures | $ | - | $ | - | $ | 5,640,000 | ||||||
Warrants issued for offering and financing costs | $ | - | $ | - | $ | 1,685,850 | ||||||
Discount on convertible debt issued | $ | - | $ | - | $ | 14,883,630 | ||||||
Conversion of interest to debt | $ | - | $ | - | $ | 11,178 | ||||||
Stock issued for subsidiary – related party | $ | - | $ | - | $ | (202,232 | ) | |||||
Stock issued for oil and gas properties | $ | - | $ | - | $ | 9,146,800 | ||||||
Accounts payable settled through issuance of | ||||||||||||
related party notes | $ | - | $ | - | $ | 175,000 | ||||||
Recognition of asset retirement obligation | $ | - | $ | - | $ | 1,760,000 | ||||||
The accompanying notes are an integral part of these financial statements
6
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 1 - ORGANIZATION
Galaxy Energy Corporation (“Galaxy” or the “Company”) is an independent oil and gas company primarily engaged in the exploration for, and the acquisition and development of crude oil and natural gas. These activities have been conducted primarily in the Rocky Mountain region of the United States.
The unaudited financial statements included herein were prepared from the records of the Company in accordance with generally accepted accounting principles in the United States applicable to interim financial statements and reflect all adjustments which are, in the opinion of management, necessary to provide a fair statement of the results of operations and financial position for the interim periods. Such financial statements conform to the presentation reflected in the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended November 30, 2007. The current interim period reported herein should be read in conjunction with the Company’s Form 10-K for the year ended November 30, 2007.
The results of operations for the nine months ended August 31, 2008 are not necessarily indicative of the results that may be expected for the full fiscal year ending November 30, 2008.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the Company and its wholly owned subsidiaries, Dolphin Energy Corporation (“Dolphin”) and Pannonian International, Ltd. (“Pannonian”). All significant intercompany transactions have been eliminated.
LIQUIDITY
During the nine months ended August 31, 2008, the Company incurred a net loss of $8,813,867 and used cash for operating activities of $3,296,370. As of August 31, 2008, the Company’s working capital deficit was $57,774,675. See Note 3 - Chapter 11 and Related Disclosures.
ACCOUNTING FOR REORGANIZATION
Our Consolidated Financial Statements have been prepared in accordance with SOP 90-7 which requires that financial statements, for periods subsequent to the Chapter 11 filings, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain income and expense items that are realized or incurred in the Chapter 11 cases are recorded as reorganization items on our Consolidated Statements of Operations. In addition, pre-petition obligations impacted by the Chapter 11 cases have been classified as liabilities subject to compromise (“LSTC”) on our Consolidated Balance Sheets. These liabilities, including interest payable on subordinated debt included in LSTC, and the related interest expense on LSTC debt recorded in our Consolidated Statement of Operations, have been determined and reported as of the petition date.
7
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
DEVELOPMENT STAGE
The Company is considered a development stage company as defined by Statement of Financial Accounting Standards (“SFAS”) No. 7, and its principal activities since inception have been raising capital through the sale of common stock and convertible notes and the acquisition of oil and gas properties in the Western United States, Germany and Romania. The Company has recorded limited production from wells in the Powder River Basin of Wyoming and the Piceance Basin of Colorado; however, management does not consider that the Company has commenced principal operations as of August 31, 2008.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported period. Significant estimates include the Company’s ability to continue as a going concern and realize assets and liquidate liabilities in an orderly manner. Other significant estimates are required for proved oil and gas reserves which, as described in Note 4 – Property and Equipment, have a material impact on the carrying value of oil and gas property. In addition, significant estimates are required in the valuation of undeveloped oil and gas properties. Actual results could differ from those estimates especially as a result of the Company’s bankruptcy proceedings and such differences could be material.
The oil and gas industry is subject, by its nature, to environmental hazards and clean-up costs. At this time, management knows of no substantial costs from environmental accidents or events for which the Company may be currently liable. In addition, the Company’s oil and gas business makes it vulnerable to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to be volatile in the future. By definition, proved reserves are based on current oil and gas prices and estimated reserves. Price declines reduce the estimated quantity of proved reserves and increase annual amortization expense (which is based on proved reserves).
OIL AND GAS PROPERTIES
The Company utilizes the full cost method of accounting for oil and gas activities. Under this method, subject to a limitation based on estimated value, all costs associated with property acquisition, exploration and development, including the costs of unsuccessful exploration activities, are capitalized within a cost center. No gain or loss is recognized upon the sale or abandonment of undeveloped or producing oil and gas properties unless: 1) the sale represents a significant portion of oil and gas properties within a cost center and the gain significantly alters the relationship between capitalized costs and proved oil and gas reserves of the cost center; or 2) the proceeds of the sale are in excess of the capitalized costs within the cost center. Depreciation, depletion and amortization of oil and gas properties is computed on the units of production method based on proved reserves. Amortizable costs include estimates of future development costs of proved undeveloped reserves.
8
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Capitalized costs of oil and gas properties may not exceed an amount equal to the present value, discounted at 10%, of the estimated future net cash flows from proved oil and gas reserves plus the cost, or estimated fair market value, if lower, of unproved properties. Should capitalized costs exceed this ceiling, an impairment is recognized. The present value of estimated future net cash flows is computed by applying year end prices of oil and natural gas to estimated future production of proved oil and gas reserves as of year end, less estimated future expenditures to be incurred in developing and producing the proved reserves and assuming continuation of existing economic conditions. During the nine month period ending August 31, 2008 and 2007, the Company recorded impairment expense of $3,082,000 and $3,866,195, respectively, representing the excess of capitalized costs over the ceiling amount. Unevaluated properties are assessed periodically on a cost center basis and any impairment is added to the amortization base, which is subject to the full cost ceiling test limitations as described above.
IMPAIRMENT
The Company applies SFAS 144, “Accounting for the Impairment and Disposal of Long-Lived Assets,” which requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil and gas properties accounted for using the full cost method of accounting, the method utilized by the Company, are excluded from this requirement, but will continue to be subject to the ceiling test limitations as described above.
ASSET RETIREMENT OBLIGATION
In 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations.” SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires companies to record the present value of obligations associated with the retirement of tangible long-lived assets in the period in which it is incurred. The liability is capitalized as part of the related long-lived asset’s carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset. The Company’s asset retirement obligations (“ARO”) relate primarily to the plugging, dismantlement, removal, site reclamation and similar activities of its oil and gas properties. The Company records ARO associated with all wells in which the Company owns an interest on the date such obligation arose. Depreciation of the related asset, and accretion of the ARO on wells from which production has commenced, has been calculated using the Company’s estimate of the life of the wells, based upon the lives of comparable wells in the area. The amounts recognized are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate.
9
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The information below reflects the change in the ARO during the nine month period ended August 31, 2008:
| August 31,2008 | ||||
| Balance beginning of period | $ | 1,924,883 | ||
Liabilities incurred | - | |||
Liabilities settled | - | |||
Accretion | 113,073 | |||
| Balance end of period | $ | 2,037,956 | ||
SHARE - BASED COMPENSATION
The Company follows FAS No. 123(R), “Accounting for Share-Based Compensation”. FAS 123(R) requires companies to recognize share-based payments to employees as compensation expense on a fair value method. Under the fair value recognition provisions of FAS 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the service period, which generally represents the vesting period. The expense recognized over the service period is required to include an estimate of the awards that will be forfeited. Previously, no such forfeitures have occurred. The Company is assuming no forfeitures going forward based on the Company’s historical forfeiture experience. The fair value of stock options is calculated using the Black-Scholes option-pricing model.
As of August 31, 2008, options to purchase an aggregate of 4,170,000 shares of the Company's common stock were outstanding, of which 3,661,250 are exercisable. These options were granted to the Company’s employees, directors and consultants at exercise prices ranging from $0.0325 to $3.51 per share. The options vest at varying schedules within five years of their grant date and typically expire within ten years from the grant date. Stock-based compensation costs were $612,180, for the nine months ended August 31, 2008 and $891,647 for the nine months ended August 31, 2007. These amounts were charged to operations as compensation expense and included within general and administrative expense.
LOSS PER COMMON SHARE
Basic loss per share is based on the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Convertible equity instruments such as stock options, warrants, convertible debentures and notes payable are excluded from the computation of diluted loss per share, as the effect of the assumed exercises would be antidilutive.
RECLASSIFICATION
Certain amounts in the 2007 financial statements have been reclassified to conform to the August 31, 2008 financial statement presentation. The reclassifications have no effect on the Company's net loss for the period.
10
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 3 – CHAPTER 11 AND RELATED DISCLOSURES
SUMMARY OF PROCEEDINGS
On March 14, 2008, the Company and Dolphin filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Colorado (the “Court”). The Company and Dolphin continues to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court, as they devote renewed efforts to resolve their liquidity problems and develop a reorganization plan.
Pursuant to the provisions of the Bankruptcy Code, the Company and Dolphin are not permitted to pay any claims or obligations which arose prior to the filing date (prepetition claims) unless specifically authorized by the Court. Similarly, claimants may not enforce any claims against the Company and Dolphin that arose prior to the date of the filing. In addition, as debtors-in-possession, the Company and Dolphin have the right, subject to the Court’s approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the filing. Parties having claims as a result of any such rejection may file claims with the Court which will be dealt with as part of the Chapter 11 cases.
On April 11, 2008, the United States Bankruptcy Court for the District of Colorado approved interim post-petition financing to the Company and Dolphin of $308,000 by Bruner Family Trust UTD March 28, 2005, pursuant to the terms of a Loan Agreement dated as of April 14, 2008. The Company and Dolphin requested this amount to avoid immediate and irreparable harm. At a hearing held April 28, 2008, the Bankruptcy Court entered a final order authorizing the Company and Dolphin to borrow up to $4,485,250 pursuant to the terms of the Loan Agreement. The Loan Agreement provides for interest at the rate of 10% per annum and maturity of the loan on the earlier of (i) the closing of any transaction pursuant to which any third party acquires substantially all of the Company’s or Dolphin’s assets; (ii) the conversion of the Company’s or Dolphin’s bankruptcy case to a case under Chapter 7 of the Bankruptcy Code; (iii) the dismissal of either of the bankruptcy cases; (iv) the date on which any Chapter 11 plan of reorganization becomes effective; (v) the occurrence of an Event of Default (as defined in the Loan Agreement) or (vi) December 31, 2008. The Loan is secured by a lien on all of the Company’s and Dolphin’s assets. One of the trustees of Bruner Family Trust UTD March 28, 2005 is Marc E. Bruner, the President and Chairman of the registrant.
It is the Company’s and Dolphin’s intention to address all of their prepetition claims in a plan of reorganization in the Chapter 11 cases. At this juncture, it is impossible to predict with any degree of certainty how such a plan will treat such claims and the impact the Chapter 11 cases and any reorganization plan will have on the trading market for the Company’s stock. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors are satisfied in full under the plan or unless creditors accept a reorganization plan which permits holders of equity interests to participate. The formulation, approval and implementation of a plan of reorganization in the Chapter 11 cases could take a significant period of time. On July 9, 2008, the Company and Dolphin requested a 90-day extension of the exclusivity period in which to file their joint reorganization plan. On September 30, 2008, the Court approved an extension of the exclusivity period to November 13, 2008.
It is possible that at least a portion of the Company’s and Dolphin’s oil and gas assets will be offered for sale to potential buyers as part of the bankruptcy reorganization; however, there is no assurance a sale will be completed or that the full carrying value of the assets in such a sale will be realized. If that were to occur,
11
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 3 - CHAPTER 11 AND RELATED DISCLOSURES (continued)
the Company may be required to write off a portion of the carrying value of such properties and such write-off could be material.
These matters raise substantial doubt about the Company’s and Dolphin’s ability to continue as a going concern. The Company’s and Dolphin’s continued operations are contingent upon their ability to raise additional capital through debt or equity placements and or sell assets, successfully emerging from bankruptcy, and ultimately attaining profitability from their oil and gas operations.
In addition to the sale of its oil and gas properties, the Company is considering other options for raising additional capital for the development of its properties, such as debt and equity offerings, the farm-out of some of its acreage and other similar type transactions. There is no assurance that financing will be available to the Company on favorable terms or at all or that any farm-out transaction will occur. Any financing obtained through the sale of Company equity will likely result in substantial dilution to the Company’s stockholders.
The Company’s senior lender has filed a prepetition claim with the Court, after the petition date, that includes an additional $2.5 million penalty. The Company has evaluated the merits of this claim and believes that the penalty will be disallowed in Chapter 11 proceedings and plans to vigorously defend this position. Accordingly, the Company has not recorded this penalty in its financial statements.
On September 23, 2008, the Company and Dolphin have filed their Motion Pursuant to §§ 105(a) and 362 of the Bankruptcy Code for Order Establishing Notification Procedures and Approving Restrictions on Certain Transfers of Claims Against and Interests in Debtors’ Estates (the “Motion”). Debtors seek to enforce the automatic stay by implementing court-ordered procedures intended to protect the Debtors’ estates against the possible loss of valuable tax benefits that could flow from inadvertent stay violations. Pursuant to §§ 105(a) and 362 of the Bankruptcy Code, the Debtors have requested authorization to (i) establish and implement restrictions and notification requirements regarding the Tax Ownership, and certain transfers of Stock, (ii) establish sell down procedures with respect to Covered Claims, and (iii) to notify holders of Stock and Covered Claims of the restrictions, notification requirements and procedures.
On September 30, 2008, the Company and Dolphin have filed a Motion with the Court authorizing the assumption of unexpired oil and gas leases and an office lease.
INTEREST EXPENSE
Due to the uncertainty with respect to whether our upcoming plan of reorganization as ultimately confirmed will include postpetition interest, the Company has recorded postpetition interest expense only on its secured debt. The Company is currently paying interest on its secured debt and is currently not paying or accruing postpetition interest on any other debt. The Company expects that all subordinated debt and related accrued interest will be converted into equity when the Company and Dolphin emerge from Chapter 11, which has generally been agreed to by the subordinated claimholders. The conversion price at which the subordinated debt and accrued interest will be converted to equity is currently unknown. The Company expects that the future conversion price will be substantially greater than the current market price of the Company’s stock. The Company expects that the value of the subordinated debt and accrued
12
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 3 - CHAPTER 11 AND RELATED DISCLOSURES (continued)
interest that is converted to equity will be higher than the fair value of the common stock issued in conversion, and as a result, expects that there will be a gain for forgiveness of debt recognized in the financial statements when the subordinated debt and accrued interest is converted to equity.
For the three month and nine month periods ended August 31, 2008, interest expense incurred was $296,463 and $2,340,873, respectively. If the Company had recorded interest expense on all of its debt for the post petition period, interest expense for the three month and nine month periods ending August 31, 2008 would have increased by $990,120 and $1,904,428, respectively, to $1,286,583 and $4,245,301, respectively.
REORGANIZATION ITEMS
Reorganization items represent the direct and incremental costs related to our Chapter 11 cases, such as professional fees net of interest income earned on accumulated cash during the Chapter 11 process. Our restructuring activities may result in additional charges and other adjustments for expected allowed claims (including claims that have been allowed by the Court) and other reorganization items that could be material to our financial position or results of operations in any given period.
The table below details the reorganization expenses incurred for the three and nine month periods ended August 31, 2008:
| Three Month | Nine Month | |||||||
| Legal expense | $ | 124,234 | $ | 289,325 | ||||
| Fees | 9,750 | 17,225 | ||||||
| Interest income | (582 | ) | (3,531 | ) | ||||
| Total | $ | 133,402 | $ | 303,019 | ||||
13
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 3 - CHAPTER 11 AND RELATED DISCLOSURES (continued)
LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise at August 31, 2008 and November 30, 2007 include:
| August 31, 2008 | November 30, 2007 | |||||||
| Accounts payable and accrued expenses | $ | 1,428,398 | $ | 1,435,517 | ||||
| Accounts payable – related party | - | 46,818 | ||||||
| Notes payable – related party: | ||||||||
| Bruner Family Trust and DAR note | 21,652,728 | 15,649,748 | ||||||
| PetroHunter Energy Corporation | 2,493,777 | 2,493,777 | ||||||
| Interest payable – related party: | ||||||||
| Bruner Family Trust and DAR note | 1,670,292 | 1,283,091 | ||||||
| PetroHunter Energy Corporation | 106,037 | 49,739 | ||||||
| Notes payable: | ||||||||
| March 2005 notes | 7,695,000 | 7,695,000 | ||||||
| April 2006 debentures | 4,500,000 | 4,500,000 | ||||||
| Less unamortized discount | (23,391 | ) | (142,535 | ) | ||||
| June 2006 debentures | 2,500,000 | 2,500,000 | ||||||
| Less unamortized discount | (20,521 | ) | (71,839 | ) | ||||
| Interest payable – notes and debentures | 5,317,296 | 4,696,522 | ||||||
| Total | $ | 47,319,616 | $ | 40,135,838 | ||||
The following describes the notes included in liabilities subject to compromise:
NOTES PAYABLE – RELATED PARTY
Bruner Family Trust and DAR Notes
The following summarizes the outstanding notes payable that are held by the Bruner Family Trust. One of the trustees of the Bruner Trust UTD March 2005 is Marc E. Bruner, the President and director of the Company, a related party. The Bruner Family Trust acquired the DAR Note that was issued to DAR in connection with the purchase of oil and gas properties. All of the related party debt with the Bruner Family Trust is due during the year ended November 30, 2008. The Bruner Family Trust has provided $2,403,000 in debtor – in - possession financing post petition that is included below in the February 29, 2008 Note, through the date of this report.
14
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 3 - CHAPTER 11 AND RELATED DISCLOSURES (continued)
As of August 31, 2008 the total amounts outstanding for the Bruner Family Trust Notes are as follows:
| Amount Outstanding | Interest Rate | |
| Bruner Family Trust Notes: | ||
| November 30, 2006 | $5,500,000 | 8% |
| November 30, 2007 | 8,100,000 | 8% |
| February 29, 2008, Incl. DIP | 6,003,000 | 8%-10% |
| DAR Note, October 2006 | 2,049,728 | 12% |
| Total | $21,652,728 |
During the three and nine month periods ending August 31, 2008, the Company recorded $0 and $387,201, respectively, of interest expense relative to the Bruner Family Notes.
PETROHUNTER ENERGY CORPORATION
On December 29, 2006, the Company entered into a Purchase and Sale Agreement (PSA) with a related party (PetroHunter Energy Corporation) to sell all of the Company’s oil and gas interests in the Powder River Basin of Wyoming and Montana (the “Powder River Basin Assets”). The purchase price for the Powder River Basin Assets was to be $45 million, with $20 million to be paid in cash and $25 million to be paid in shares of the purchaser’s common stock. The sale was not completed.
As part of the PSA, PetroHunter was required and did make an interest earnest money payment of $1.4 million. PetroHunter made an additional earnest money payment of $600,000 in January 2007. These deposits and certain other payments totaling $2,493,777 were converted into a promissory note, payable to PetroHunter, and is unsecured subordinated debt of the Company, which is payable only after repayment of our senior indebtedness. The note to PetroHunter accrues interest at 8% per annum. During the three and nine month periods ending August 31, 2008 the Company recorded $0 and $56,298, respectively, of interest expense, relative to the PetroHunter note.
NOTES PAYABLE
MARCH 2005 NOTES
In March 2005, the Company completed a private offering of Senior Subordinated Convertible Notes and Warrants to a group of accredited investors (the March 2005 Notes). Gross proceeds from the offering were $7,695,000. The March 2005 Notes pay interest at the prime rate plus 6.75% per annum, mature April 30, 2007, are subordinated to Galaxy’s secured debt and existing senior debt, and are convertible into 4,093,085 shares of common stock based on a conversion price of $1.88 per share beginning September 1, 2005. Purchasers of the March 2005 Notes received warrants to purchase 1,637,235 shares of the Company’s common stock at an exercise price of $1.88 per share, that were exercisable for a period of three years.
Principal and interest on the Notes are payable upon maturity. In connection with the December 1, 2005 agreement entered into with the holders of the 2004 Notes, as discussed above, the terms of the March
15
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 3 - CHAPTER 11 AND RELATED DISCLOSURES (continued)
2005 Notes were subsequently amended to lower the conversion price to $1.25 per share, and lower the exercise price of existing warrants to $1.25 per share.
On April 27, 2007 the Company and the Holders of the March 2005 Notes entered into a Waiver and Amendment Agreement, which, among other things, extended the term of the March 2005 notes to the earliest of (A) the date of consummation of the Sale of the Powder River Basin oil & gas assets (PRB sale), (B) October 31, 2007, and (C) such date as all amounts due under the Notes have been fully paid. In addition each of the Holders agreed and confirmed the 2005 Subordinated Notes continue to be subordinate to the senior secured indebtedness. As the PRB Sale was not consummated the Company is prohibited from paying the March 2005 Notes until the senior secured indebtedness is paid in full.
During the three and nine months ending August 31, 2008, the Company recorded $0 and $324,455, respectively, of interest expense relative to the March 2005 Notes.
APRIL 2006 DEBENTURES
In April 2006, the Company completed a private offering of Subordinated Convertible Debentures and Warrants to a group of accredited investors (the April 2006 Debentures). Gross proceeds from the offering were $4,500,000. The April 2006 Debentures pay interest at 15% per annum, have a 30-month maturity which will extend under the terms of the financing until all of the Company’s senior debt has been retired, and are subordinated to Galaxy’s secured debt and existing senior debt. The April 2006 Debentures are convertible into 2,884,615 shares of common at a conversion price of $1.56 per share. The purchasers of the April 2006 Debentures received warrants to purchase 865,383 shares of the Company’s common stock at an exercise price of $1.60 per share, for a period of five years. Principal and interest on the April 2006 Debentures are payable upon maturity.
The fair value of the warrants was estimated as of the issue date under the Black-Scholes pricing model, with the following assumptions: common stock market price of $1.06 per share, zero dividends, expected volatility of 67.46%, risk free interest rate of 4.875% and expected life of 2.5 years. The fair value of the warrants of $295,029 resulted in a discount of $395,986 which has been recorded as additional paid in capital and as a discount to the April 2006 Debentures and is being amortized over the term of the April 2006 Debentures.
During the three and nine month periods ending August 31, 2008, the Company recorded $0 and $190,479, respectively, of interest expense, relative to the April 2006 Debentures. In addition, for the three month and nine month periods ending August 31, 2008, amortization of the discount of $39,859 and $119,844, respectively, and deferred finance costs of $15,090 and $45,102, respectively, has been recorded and included in interest expense for these periods.
JUNE 2006 DEBENTURES
In June 2006, the Company completed a private offering of Subordinated Convertible Debentures and Warrants to an accredited investor (the June 2006 Debentures). Gross proceeds from the offering were $2,500,000. The June 2006 Debentures pay interest at 15% per annum, have a 30-month maturity which will extend under the terms of the financing until all of the Company’s senior debt has been retired, and are subordinated to Galaxy’s secured debt and existing senior debt. The June 2006 Debentures are convertible into 1,602,564 shares of common stock at a conversion price of $1.56 per share. The purchaser of the June
16
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 3 - CHAPTER 11 AND RELATED DISCLOSURES (continued)
2006 Debentures received warrants to purchase 480,769 shares of the Company’s common stock at an exercise price of $1.60 per share, for a period of five years. Principal and interest on the June 2006 Debentures are payable upon maturity.
The fair value of the warrants was estimated as of the issue date under the Black-Scholes pricing model, with the following assumptions: common stock market price of $0.79 per share, zero dividends, expected volatility of 67.36%, risk free interest rate of 5.125% and expected life of 2.5 years. The fair value of the warrants of $92,695 resulted in a discount of $170,555 which has been recorded as additional paid in capital and as a discount to the June 2006 Debentures and is being amortized over the term of the June 2006 Debentures.
During the three and nine month periods ending August 31, 2008, the Company recorded $0 and $105,822, respectively, of interest expense, relative to the June 2006 Debentures. In addition, for the three month and nine month periods ending August 31, 2008, amortization of the discount of $17,168 and $51,318, respectively, has been recorded and included in interest expense for these periods.
NOTE 4 – PROPERTY AND EQUIPMENT
OIL AND GAS PROPERTIES
The Company currently recognizes one cost center for its oil and gas activities, the United States Cost Center. In prior periods the Company recognized two additional cost centers, the Germany and Romanian cost centers. The Company does not have a carrying value for the Germany or Romanian cost centers and does not currently conduct any exploratory or development activities associated with these cost centers.
United States Cost Center
In 2003 the Company began the acquisition of unevaluated oil and gas properties in the Powder River Basin region of the Rocky Mountain area. In 2004 the Company acquired additional unevaluated properties, began its exploration program and commenced limited production of natural gas in the Powder River Basin.
During 2005 exploratory drilling activities continued in the Powder River Basin, development of certain areas commenced and natural gas production reached a level that allowed the Company to recognize proved reserves on those producing properties. During 2007 and 2006 the Company continued limited operations in the Powder River Basin and extended de-watering operations on some of those properties. The Company currently continues its de-watering program in the Powder River Basin.
In 2005, the Company entered into an exploration project in the Piceance Basin, acquiring prospective acreage and evaluating and planning for an exploratory drilling program. Through August 31, 2008, the Company, through Dolphin Energy, has participated in fifty six Piceance Basin wells, with working interests ranging from less than 1% to 25%.
17
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 5 – NOTES PAYABLE (not subject to compromise)
MAY 2005 NOTES
In May 2005, the Company completed a private offering of Senior Secured Convertible Notes to a group of accredited investors (the May 2005 notes). Gross proceeds from the offering were $10,000,000. The notes are secured by a security interest in all of the assets of Galaxy and the domestic properties of its subsidiaries. Such security interest ranks senior to the March 2005 Notes. The notes pay interest at the prime rate plus 7.25% adjusted and payable quarterly. The May 2005 notes mature August 31, 2010, and are convertible into 5,319,149 shares of common stock at any time, based on a conversion price of $1.88 per share. In addition, the Investors received a perpetual overriding royalty interest (“ORRI”) in Galaxy’s domestic acreage averaging from 1% to 3%, depending upon the nature and location of the property, a right of first refusal with respect to future debt and/or equity financings, and a right to participate in any farm-out financing transactions that do not have operating obligations by the financing party as a material component. The fair value of the ORRI was estimated at approximately $3,900,000. This amount has been recorded as a charge to the Company’s undeveloped oil and gas properties full cost pool and as a discount to the notes. The discount has been amortized in full, initially over the five-year term of the notes. Amortization of the discount is included in interest expense. Deferred financing costs associated with the notes in the amount of $639,888 were capitalized and were being amortized over the life of the notes.
On November 29, 2006, the Company and the holders of the May 2005 Notes entered into a Waiver and Amendment Agreement. The Company had notified the holders of the May 2005 Notes of the fact that a Triggering Event under the terms of the Notes had occurred as of August 31, 2006. Among other things, this would have enabled the holders of the Notes to require the Company to redeem all or any portion of the outstanding principal amount of the Notes at a price equal to the greater of (i) 125% of such principal plus accrued and unpaid interest and (ii) the product of the current conversion rate in effect under the Notes multiplied by the volume-weighted average price of Galaxy’s common stock. The holders agreed to waive the Triggering Event in consideration for an amendment to the May 2005 Notes that reset the principal amounts of the Notes to 125% of the amounts outstanding as of October 31, 2006. The increased principal in the amount of $2,500,000 was included in interest expense during the year ended November 30, 2006. In addition, in accordance with EITF 98-5 and EITF 00-27 the Company recognized the fair value of the warrants and the beneficial conversion feature associated with the Notes aggregating $2,750,577 as a discount to the Notes.
On November 16, 2007, the Company and the holders of the May 2005 Notes entered into an Amendment Agreement. The Amendment Agreement amended the 2005 Notes and the related Securities Purchase Agreement to affect the following:
• Monthly principal payments of $500,000;
• A $6,000,000 principal payment by March 1, 2008; and
• A final balloon payment of any remaining amounts owed under the 2005 Notes by October 1, 2008.
In addition, cash proceeds from any sales of the Company’s and Dolphin’s assets are to be used to repay the 2005 Notes.
18
GALAXY ENERGY CORPORATION
(A Development Stage Company)
(DEBTOR – IN – POSSESSION)
Notes to Consolidated Financial Statements
Unaudited
NOTE 5 – NOTES PAYABLE (not subject to compromise - continued)
In accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, the Company recognized this transaction as an extinguishment of the existing debt and the issuance of new debt. The note was initially recorded at its fair value of $12,500,000 and then reduced by a $500,000 payment made by the Company on November 16, 2007. The Company wrote off unamortized discount and deferred financing associated with the May 2005 debt in the amounts of $1,963,776 and $330,107, respectively, including the amount in interest and financing cost during the year ending November 30, 2007.
During the three and nine month periods ending August 31, 2008, the Company recorded $265,815 and $1,039,654, respectively, of interest expense relative to the May 2005 Notes. The Company repaid $2,000,000 of principal on the May 2005 notes during the nine months ending August 31, 2008.
NOTE 6 – STOCKHOLDERS’ EQUITY
During the three month period ending February 28, 2007, the Company issued 2,000,000 shares of its common stock to its senior secured creditors in exchange for the creditors’ consent to the Powder River Basin Asset Sale. The creditors’ consent was required because they have a security interest covering the assets to be sold. The Company issued the shares at the closing market price per share on the dates of issuance, and the value of $410,000 associated with these shares was expensed during the same period in 2007. There were no shares issued during the three or nine month periods ended August 31, 2008.
NOTE 7 – STOCK OPTION PLAN
The Company adopted the 2003 Stock Option Plan (the “Plan”), as amended. Under the Plan, stock options may be granted at an exercise price not less than the fair market value of the Company’s common stock at the date of grant. Options may be granted to key employees and other persons who contribute to the success of the Company. The Company has reserved 6,500,000 shares of common stock for the plan. At August 31, 2008, and November 30, 2007, options to purchase 2,570,000 and 2,270,000 shares, respectively, were available to be granted pursuant to the stock option plan.
In January 2008 and 2007, the Company granted options to purchase 240,000 and 240,000 shares, respectively, of the Company’s common stock to the Company’s outside directors for a term of 10 years at the closing price of the common stock on the date of grant. The options were vested upon grant.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Proceedings under Chapter 11
On March 14, 2008, we and Dolphin filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Colorado (the “Court”) (Jointly Administered Under Case Numbers 08-13164 for Galaxy and 08-13166 for Dolphin). We and Dolphin will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the order of the Court, as we devote renewed efforts to resolve our liquidity problems and develop a reorganization plan.
Pursuant to the provisions of the Bankruptcy Code, neither we nor Dolphin are not permitted to pay any claims or obligations which arose prior to the filing date (prepetition claims) unless specifically authorized by the Court. Similarly, claimants may not enforce any claims against us or Dolphin that arose prior to the date of the filing. In addition, as debtors-in-possession, we have the right, subject to the Court’s approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the filing. Parties having claims as a result of any such rejection may file claims with the Court which will be dealt with as part of the Chapter 11 cases.
It is our intention to address all of our prepetition claims in a plan of reorganization in our Chapter 11 cases. At this juncture, it is impossible to predict with any degree of certainty how such a plan will treat such claims and the impact the Chapter 11 cases and any reorganization plan will have on the trading market for our stock. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors are satisfied in full under the plan or unless creditors accept a reorganization plan which permits holders of equity interests to participate. The formulation and implementation of a plan of reorganization in the Chapter 11 cases could take a significant period of time.
It is possible that at least a portion of our oil and gas assets will be offered for sale to potential buyers as part of our bankruptcy reorganization; however there is no assurance a sale will be completed or that we will realize the full carrying value of the assets in such a sale. If that were to occur, we may be required to write off a portion of the carrying value of such properties and such write-off could be material.
Overview and Plan of Operation
Since our inception, our business has been to acquire oil and gas properties in the Piceance Basin of Colorado and the Powder River Basin of Wyoming and Montana and obtaining the funding to pay for those properties to commence drilling operations and to complete the infrastructure necessary to deliver natural gas to nearby pipelines. Most of this funding has been high-interest debt financing. On March 14, 2008 we declared bankruptcy under Chapter 11.
As we work towards exiting Chapter 11, our tasks now are to establish reserves on our properties and to place our properties into production. We anticipate that the revenues generated from our properties will not be sufficient to fund our planned operations, debt repayment and commitments.
At August 31, 2008, our working capital deficit was $57,774,675. As of that date, we had contractual obligations to pay accounts payable, accrued liabilities, debt and accrued interest due within twelve months totaling $58,198,544.
20
Going Concern
The report of our independent registered public accounting firm on the financial statements for the year ended November 30, 2007, includes an explanatory paragraph indicating substantial doubt as to our ability to continue as a going concern. We have incurred a cumulative net loss of $92,533,527 for the period from inception to August 31, 2008. We require significant additional funding to sustain our operations and satisfy our contractual obligations for our planned oil and gas exploration and development operations. Our ability to establish the Company as a going concern is dependent upon our ability to obtain additional financing, and successfully emerging from bankruptcy in order to fund our planned operations and ultimately, to achieve profitable operations.
We and Dolphin will continue to operate our businesses as debtors-in-possession under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the order of the Court, as we devote renewed efforts to resolve our liquidity problems and develop a reorganization plan.
Results of Operations
Three months ended August 31, 2008 compared to the three months ended August 31, 2007
During the three months ended August 31, 2008 our revenue from natural gas sales was $173,556, an increase of $97,253 or 127% compared to our revenue of $76,303 during the same period in 2007. We sold approximately 21,000 Mcf’s of natural gas in the 2008 period, compared to approximately 45,000 Mcf’s sold in the 2007 period. The 2008 production decrease reflects the shutting in of an uneconomic producing field in the Powder River Basin. Average prices received for gas sold increased to $8.27 per Mcf in the 2008 period from $2.68 per Mcf in the 2007 period. Lease operating and production tax expenses decreased in 2008 to $353,306, compared to $445,817 during the 2007 period. This decrease is primarily attributed to the shutting in of a Powder River Basin field as noted above.
For the three months ended August 31, 2008 and August 31, 2007, we incurred general and administrative expenses of $815,656 and $761,617, respectively, as summarized below:
| 2008 | 2007 | |||||||
| Stock - based compensation | $ | 240,810 | $ | 289,589 | ||||
| Salaries and benefits | 136,160 | 212,595 | ||||||
| Professional and consulting fees | 124,547 | 12,245 | ||||||
| Investor relations | 38,039 | 108,593 | ||||||
| Legal | 26,277 | 41,555 | ||||||
| Travel and entertainment | 7,555 | 10,864 | ||||||
| Office lease and expenses | 46,115 | 39,575 | ||||||
| Audit and accounting | 82,232 | 15,990 | ||||||
| Directors fees | 43,500 | - | ||||||
| Insurance, prospect generation and other | 70,421 | 30,611 | ||||||
| Total | $ | 815,656 | $ | 761,617 | ||||
21
Significant period-to-period variances include:
| · | Salary and benefits decreased and professional fees increased as the Company has not replaced certain professionals with in house hires. |
| · | Investor relations expenses continued to decrease as less time was spent on IR activities. |
| · | Legal fees decreased during 2008 due to lower activity levels. |
Non-cash impairment of oil and gas properties in the 2008 period increased to $3,082,000 from $2,370,880 in the 2007 period. The 2008 period impairment charge includes approximately $2 million associated with expiring Piceance Basin oil and gas leases that are not being renewed.
Depreciation, depletion and amortization expense (“DD&A”) of $126,316 in the 2008 period decreased $105,740 as compared to the 2007 period expense of $232,056. The decrease in DD&A expense is primarily attributed to lower gas sales volumes during the 2008 period.
Interest and financing costs decreased to $296,463 in the 2008 period from $2,044,630 in the 2007 period, reflecting significantly lower amortization of discount on the May 2005 Notes and the reduction of debt levels compared to the 2007 period due to the payments made on the May 2005 notes. In addition, during the 2008 period we stopped recording interest expense on debt included in liabilities subject to compromise for periods post petition.
The table below summarizes interest and financing costs for the three months ended August 31, 2008 and 2007.
| 2008 | 2007 | |||||||
| Interest on outstanding debt | $ | 265,815 | $ | 1,044,969 | ||||
| Interest on outstanding debt, related party | (35,473 | ) | 284,682 | |||||
| Amortization of discount | 57,027 | 303,184 | ||||||
| Amortization of deferred finance costs | 9,094 | 411,795 | ||||||
| Total | $ | 296,463 | $ | 2,044,630 | ||||
Nine months ended August 31, 2008 compared to the nine months ended August 31, 2007
During the nine months ended August 31, 2008, revenue from natural gas sales of $419,672 decreased $27,560, or approximately 6%, as compared to our revenue from natural gas sales of $447,232 for the 2007 period. We sold approximately 55,000 Mcf’s of natural gas in the 2008 period, compared to sales of approximately 118,000 Mcf’s in the 2007 period. Average prices received for gas sold increased to $7.63 per Mcf in the 2008 period from $3.79 per Mcf in the 2007 period. Lease operating and production tax expenses increased in the 2008 period to $946,649, as compared to $704,151 for the 2007 period. This increase is primarily attributed of dewatering costs incurred and recorded as expense in the 2008 period relative to our Powder River Basin fields. The Company had previously capitalized its dewatering costs during the the first two quarters of 2007.
22
For the nine months ended August 31, 2008 and August 31, 2007, we incurred general and administrative expenses of $2,312,450 and $2,801,617, respectively, as summarized below:
| 2008 | 2007 | |||||||
| Stock - based compensation | $ | 612,180 | $ | 891,647 | ||||
| Salaries and benefits | 468,090 | 648,589 | ||||||
| Professional and consulting fees | 268,828 | 51,412 | ||||||
| Investor relations | 168,493 | 331,864 | ||||||
| Legal | 117,413 | 267,172 | ||||||
| Travel and entertainment | 38,543 | 46,049 | ||||||
| Office lease and expenses | 113,164 | 144,386 | ||||||
| Audit and accounting | 244,550 | 167,439 | ||||||
| Directors fees | 130,500 | 133,700 | ||||||
| Insurance, prospect generation and other | 150,689 | 119,359 | ||||||
| Total | $ | 2,312,450 | $ | 2,801,617 | ||||
Significant period-to-period variances include:
| · | Salary and benefits and stock – based compensation decreased and professional fees increased as the Company has not replaced certain professionals with in house hires. |
| · | Investor relations expenses continued to decrease as less time was spent on IR activities. |
| · | Legal fees in 2008 are less than legal fees in 2007 as the 2007 period included various SEC filings that did not occur during 2008 and in addition during 2007 additional legal costs were incurred relative to asset sale negotiations that also were not incurred in 2008. |
Non-cash impairment of oil and gas properties in the 2008 period decreased to $3,082,000 from $3,866,195 in the 2007 period. The 2008 period impairment charge includes approximately $2 million associated with expiring Piceance Basin oil and gas leases that are not being renewed.
DD&A expense of $270,700 for the 2008 period decreased $240,468 as compared to the 2007 period expense of $511,168. The decrease is primarily attributed to lower gas sales volumes.
Interest and financing costs decreased to $2,340,873 in the 2008 period from $7,119,791 in the 2007 period, reflecting significantly lower amortization of discount on the May 2005 Notes and the reduction of debt levels in 2007 due to the payments made on the May 2005 notes. In addition, during the 2008 period we stopped recording interest expense on debt included in liabilities subject to compromise for periods post petition.
The table below summarizes interest and financing costs for the nine months ended August 31, 2008 and 2007.
23
| 2008 | 2007 | |||||||
| Interest on outstanding debt | $ | 1,660,407 | $ | 3,282,157 | ||||
| Interest on outstanding debt, related party | 443,499 | 687,714 | ||||||
| Amortization of discount | 170,462 | 2,738,125 | ||||||
| Amortization of deferred finance costs | 66,505 | 411,795 | ||||||
| Total | $ | 2,340,873 | $ | 7,119,791 | ||||
Liquidity and Capital Resources
Operating Activities
For the nine months ended August 31, 2008 we used $3,296,370 for operating activities, and we incurred a net loss of $8,813,867. Significant adjustments to reconcile the net loss to cash used for operating activities for the 2008 period includes: non-cash impairment expense of $3,082,000, accruals of $954,734 for interest expense payable, an increase of $631,409 in accounts payable and accrued liabilities, and $612,180 for non-cash stock-based compensation expense. For the nine months ended August 31, 2007 we used $3,131,964 for operating activities, and we incurred a net loss of $14,541,647. Significant adjustments to reconcile the net loss to net cash used for operating activities for the 2007 period includes: $2,738,126 of non-cash charges for amortization of discount and deferred financing costs on convertible debt, $891,647 of non-cash stock-based compensation expense, non-cash impairment expense of $3,866,195, accruals for interest expense payable of $2,387,825, and increases in cash received due to accounts receivable collections and other of $953,110.
Investing Activities
Our investing activities used net cash of $479,754 during the nine months ended August 31, 2008, as compared to $1,882,318 of cash used for the comparable period of 2007. During the 2007 period we used $1,967,853 for capital expenditures. Our investing activities during the 2008 period included capital expenditures of $415,754 and a reorganization related vendor deposit of $64,000. Capital expenditures during the 2008 period decreased as compared to the 2007 period due to the Company’s financial position.
Financing Activities
Since inception, we have funded our operating and investing activities through the sale of our debt and equity securities, raising net proceeds of approximately $73 million through the period ended August 31, 2008. Financing activities provided cash of $4,003,000 during the first nine months of fiscal 2008, as compared to $4,458,272 provided in the 2007 period. During the 2008 period we borrowed $6,003,000 from the Bruner Family Trust, of which $2,403,000 relates to the post petition period DIP loan, and repaid $2,000,000 of secured convertible debt. During the 2007 period we borrowed a total of $8,618,777 from the Bruner Family Trust and PetroHunter ($6,125,000 and $2,493,777, respectively),and used $4,160,505 of those borrowings to pay secured convertible debt.
24
Schedule of Contractual Obligations
The following table summarizes our significant contractual obligations and commitments to make future payments as of August 31, 2008.
| Payments due by period: | ||||||||||||||||||||
| Contractual obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Liabilities not subject to compromise | $ | 10,878,928 | $ | 10,878,928 | $ | - | $ | - | $ | - | ||||||||||
| Liabilities subject to compromise | 47,319,616 | 47,319,616 | - | - | - | |||||||||||||||
| Asset retirement obligations (1) | 2,037,956 | - | - | - | 2,037,956 | |||||||||||||||
| Total | $ | 60,236,500 | $ | 58,198,544 | $ | - | $ | - | $ | 2,037,956 | ||||||||||
_____________
| (1) | Neither the ultimate settlement amounts nor the timing of our asset retirement obligations can be precisely determined in advance. |
Critical Accounting Policies and Estimates
The Critical Accounting Policies and Estimates followed by the Company are set forth in Company’s Annual Report on Form 10-K for the year ended November 30, 2007 (the “2007 Form 10-K”).
Forward-Looking Statements
This report includes “forward-looking statements.” All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” or “continue” or the negative thereof or variations thereon or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”) include, but are not limited to, our assumptions about energy markets, production levels, reserve levels, operating results, competitive conditions, technology, the availability of capital resources, capital expenditure obligations, the supply and demand for oil and natural gas, the price of oil and natural gas, currency exchange rates, the weather, inflation, the availability of goods and services, drilling risks, future processing volumes and pipeline throughput, general economic conditions (either internationally or nationally or in the jurisdictions in which we are doing business), legislative or regulatory changes (including changes in environmental regulation, environmental risks and liability under federal, state and foreign environmental laws and regulations), the securities or capital markets and other factors disclosed above under “Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and elsewhere in this report. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk relates to changes in the pricing applicable to the sales of gas production in the Powder River Basin in Wyoming and Montana. This risk will become more significant to us as our production increases in these areas. Although we are not using derivatives at this time to mitigate the risk of adverse changes in commodity prices, we may consider using them in the future.
ITEM 4. CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures at the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
26
PART II - OTHER INFORMATION
Item 1. Legal Progeedings
Other than the filing of voluntary petitions for relief in the United States Bankruptcy Court for the District of Colorado, we are not a party to any pending legal proceedings.
Item 1A. Risk Factors
There were no material changes from the risk factors disclosed in our Form 10-K for the fiscal year ended November 30, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
The filing of voluntary petitions for relief in the United States Bankruptcy Court for the District of Colorado was an event of default under the instruments governing the registrant’s indebtedness.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting held August 20, 2008, shareholders of Galaxy Energy Corporation elected the following directors:
| DIRECTOR | VOTE TYPE | SHARES VOTED | VOTED (%) |
| Marc E. Bruner | FOR | 49,856,486 | 93.31 |
| WITHHELD | 3,575,809 | 6.69 | |
| Nathan C. Collins | FOR | 49,910,286 | 93.41 |
| WITHHELD | 3,522,009 | 6.59 | |
| James E. Edwards | FOR | 49,911,423 | 93.41 |
| WITHHELD | 3,520,872 | 6.59 | |
| Robert Thomas Fetters Jr. | FOR | 49,909,933 | 93.41 |
| WITHHELD | 3,522,362 | 6.59 | |
| Cecil D. Gritz | FOR | 49,903,577 | 93.40 |
| WITHHELD | 3,528,718 | 6.60 | |
| Ronald P. Trout | FOR | 49,910,077 | 93.41 |
| WITHHELD | 3,522,218 | 6.59 |
27
Item 5. Other Information
None.
| Item 6. | Exhibits |
| Regulation S-K Number | Exhibit |
| 2.1 | Purchase and Sale Agreement Between Dolphin Energy Corporation, and Galaxy Energy Corporation and PetroHunter Operating Company, and PetroHunter Energy Corporation Dated December 29, 2006 (1) |
| 3.1 | Articles of Incorporation (2) |
| 3.2 | Articles of Amendment to Articles of Incorporation (3)(4) |
| 3.3 | Bylaws (2) |
| 10.1 | 2003 Stock Option Plan (3) |
| 10.2 | Lease Acquisition and Development Agreement between Dolphin Energy Corporation (Buyer/Operator) and Apollo Energy LLC and ATEC Energy Ventures, LLC (Seller/Non-Operator) dated February 22, 2005 (5) |
| 10.3 | Participation Agreement between Dolphin Energy Corporation and Marc A. Bruner dated February 23, 2005 (5) |
| 10.4 | Securities Purchase Agreement dated March 1, 2005 between Galaxy Energy Corporation and the Buyers named therein (5) |
| 10.5 | Form of Note (5) |
| 10.6 | Form of Common Stock Purchase Warrant (5) |
| 10.7 | Registration Rights Agreement dated March 1, 2005 between Galaxy Energy Corporation and the Buyers named therein (5) |
| 10.8 | Subordination Agreement (5) |
| 10.9 | Amended Participation Agreement between Marc A. Bruner and Dolphin Energy Corporation dated March 16, 2005 (6) |
| 10.10 | Second Amendment to Participation Agreement dated May 24, 2005 (7) |
| 10.11 | Securities Purchase Agreement dated May 31, 2005 between Galaxy Energy Corporation and the Buyers named therein (8) |
| 10.12 | Form of Note (8) |
| 10.13 | Form of Qualifying Issuance Warrants (8) |
| 10.14 | Form of Repurchase Warrants (8) |
| 10.15 | Form of Registration Rights Agreement (8) |
28
| Regulation S-K Number | Exhibit |
| 10.16 | Form of First Amendment to Security Agreement, Pledge Agreement and Guaranty (8) |
| 10.17 | Form of Mortgage Amendment (8) |
| 10.18 | Form of Waiver and Amendment to 2004 Notes and Warrants (9) |
| 10.19 | Form of Waiver and Amendment to March 2005 Notes and Warrants (8) |
| 10.20 | Form of Conveyances of Overriding Royalty Interests (8) |
| 10.21 | Form of March 2005 Subordination Agreement (8) |
| 10.22 | Second Amendment to Lease Acquisition and Development Agreement (10) |
| 10.23 | Third Amendment to Participation Agreement dated October 4, 2005 (11) |
| 10.24 | Waiver and Amendment dated December 1, 2005 between Galaxy Energy Corporation and the investors named therein (12) |
| 10.25 | Securities Purchase Agreement dated April 25, 2006 between Galaxy Energy Corporation and the Buyers named therein (13) |
| 10.26 | Form of Debenture (13) |
| 10.27 | Form of Warrant (13) |
| 10.28 | Form of Subordination Agreement (13) |
| 10.29 | Securities Purchase Agreement dated June 20, 2006 between Galaxy Energy Corporation and the Buyers named therein (14) |
| 10.30 | Waiver and Agreement dated July 7, 2006 between Galaxy Energy Corporation and the investors named therein (16) |
| 10.31 | Subordinated Unsecured Promissory Note dated September 28, 2006 to Bruner Family Trust UTD March 28, 2005 (16) |
| 10.32 | Subordination Agreement dated September 28, 2006 (16) |
| 10.33 | Subordinated Unsecured Promissory Note dated November 1, 2006 to Bruner Family Trust UTD March 28, 2005 (17) |
| 10.34 | Subordination Agreement dated November 1, 2006 (17) |
| 10.35 | Subordinated Unsecured Promissory Note dated November 13, 2006 to Bruner Family Trust UTD March 28, 2005 (18) |
| 10.36 | Subordination Agreement dated November 13, 2006 (18) |
| 10.37 | November 2006 Waiver and Amendment Agreement dated November 29, 2006 among Galaxy Energy Corporation, its subsidiaries and the investors named therein (19) |
| 10.38 | Registration Rights Agreement dated November 29, 2006 (19) |
29
| Regulation S-K Number | Exhibit |
| 10.39 | Subordinated Unsecured Promissory Note dated November 30, 2006 to Bruner Family Trust UTD March 28, 2005 (20) |
| 10.40 | Subordination Agreement dated November 30, 2006 (20) |
| 10.41 | Subordinated Unsecured Promissory Note dated February 1, 2007 to Bruner Family Trust UTD March 28, 2005 (21) |
| 10.42 | Subordination Agreement dated February 1, 2007 (21) |
| 10.43 | Subordinated Unsecured Promissory Note dated February 26, 2007 to Bruner Family Trust UTD March 28, 2005 (22) |
| 10.44 | Subordination Agreement dated February 26, 2007 (22) |
| 10.45 | Combined Amendment to Lease Acquisition and Development Agreements and to Participation Agreement (23) |
| 10.46 | Forbearance Agreement between Galaxy Energy Corporation and Bruner Family Trust UTD March 28, 2005 dated effective December 1, 2006 (24) |
| 10.47 | Subordinated Unsecured Promissory Note dated March 30, 2007 to Bruner Family Trust UTD March 28, 2005 (25) |
| 10.48 | Subordination Agreement dated March 30, 2007 (25) |
| 10.49 | Subordinated Unsecured Promissory Note dated April 25, 2007 to Bruner Family Trust UTD March 28, 2005 (26) |
| 10.50 | Subordination Agreement dated April 25, 2007 (26) |
| 10.51 | Subordinated Unsecured Promissory Note dated May 4, 2007 to Bruner Family Trust UTD March 28, 2005 (27) |
| 10.52 | Subordination Agreement dated May 4, 2007 (27) |
| 10.53 | Subordinated Unsecured Promissory Note dated August 31, 2007 to Bruner Family Trust UTD March 28, 2005 (28) |
| 10.54 | Subordination Agreement dated August 31, 2007 (28) |
| 10.55 | Subordinated Unsecured Promissory Note dated June 29, 2007 to Bruner Family Trust UTD March 28, 2005 (29) |
| 10.56 | Subordination Agreement dated June 29, 2007 (29) |
| 10.57 | Amended Forbearance Agreement between Galaxy Energy Corporation and Bruner Family Trust UTD March 28, 2005 dated effective June 30, 2007 (30) |
| 10.58 | Subordinated Unsecured Promissory Note dated August 22, 2007 to Bruner Family Trust UTD March 28, 2005 (30) |
| 10.59 | Subordination Agreement dated August 22, 2007 (31) |
30
| Regulation S-K Number | Exhibit |
| 10.60 | Subordinated Unsecured Promissory Note dated August 29, 2007 to Bruner Family Trust UTD March 28, 2005 (31) |
| 10.61 | Subordination Agreement dated August 29, 2007 (32) |
| 10.62 | Subordinated Unsecured Promissory Note dated September 28, 2007 to Bruner Family Trust UTD March 28, 2005 (33) |
| 10.63 | Subordination Agreement dated September 28, 2007 (33) |
| 10.64 | Subordinated Unsecured Promissory Note dated October 11, 2007 to Bruner Family Trust UTD March 28, 2005 (34) |
| 10.65 | Subordination Agreement dated October 11, 2007 (34) |
| 10.66 | October 2007 Amendment and Agreement as to 2005 Subordinated Notes (35) |
| 10.67 | Subordinated Unsecured Promissory Note dated November 2, 2007 to Bruner Family Trust UTD March 28, 2005 (36) |
| 10.68 | Subordination Agreement dated November 2, 2007 (36) |
| 10.69 | Subordinated Unsecured Promissory Note dated November 2, 2007 to Bruner Family Trust UTD March 28, 2005 (37) |
| 10.70 | Subordination Agreement dated November 2, 2007 (37) |
| 10.71 | November 2007 Amendment Agreement dated November 16, 2007 among Galaxy Energy Corporation, its subsidiaries and the investors named therein (38) |
| 10.72 | Subordinated Unsecured Promissory Note dated December 3, 2007 to Bruner Family Trust UTD March 28, 2005 (39) |
| 10.73 | Subordination Agreement dated December 3, 2007 (39) |
| 10.74 | Subordinated Unsecured Promissory Note dated December 3, 2007 to Bruner Family Trust UTD March 28, 2005 (40) |
| 10.75 | Subordination Agreement dated December 3, 2007 (40) |
| 10.76 | Subordinated Unsecured Promissory Note dated December 28, 2007 to Partner Marketing AG (41) |
| 10.77 | Subordination Agreement dated December 28, 2007 (41) |
| 10.78 | Subordinated Unsecured Promissory Note dated December 31, 2007 to Bruner Family Trust UTD March 28, 2005 (42) |
| 10.79 | Subordination Agreement dated December 31, 2007 (42) |
| 10.80 | Subordinated Unsecured Promissory Note dated January 15, 2008 to Bruner Family Trust UTD March 28, 2005 (43) |
| 10.81 | Subordination Agreement dated January 15, 2008 (43) |
31
| Regulation S-K Number | Exhibit |
| 10.82 | Subordinated Unsecured Promissory Note dated January 30, 2008 to Bruner Family Trust UTD March 28, 2005 (44) |
| 10.83 | Subordination Agreement dated January 30, 2008 (44) |
| 10.84 | Subordinated Unsecured Promissory Note dated February 14, 2008 to Bruner Family Trust UTD March 28, 2005 (45) |
| 10.85 | Subordination Agreement dated February 14, 2008 (45) |
| 10.86 | Subordinated Unsecured Promissory Note dated March 3, 2008 to Bruner Family Trust UTD March 28, 2005 (46) |
| 10.87 | Subordination Agreement dated March 3, 2008 (46) |
| 10.88 | Unsecured Promissory Note dated March 13, 2008 to Bruner Family Trust UTD March 28, 2005 (47) |
| 10.89 | Loan Agreement dated as of April 14, 2008 among Galaxy Energy Corporation and Dolphin Energy Corporation, Borrowers, and Bruner Family Trust, Lender (48) |
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer |
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer |
_________________
| (1) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated December 29, 2006, filed January 4, 2007, file number 0-32237. |
| (2) | Incorporated by reference to the exhibits to the registrant’s registration statement on Form 10-SB, file number 0-32237. |
| (3) | Incorporated by reference to the exhibits to the registrant’s quarterly report on Form 10-QSB for the quarter ended May 31, 2003, file number 0-32237. |
| (4) | Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K dated October 22, 2004, filed October 26, 2004, file number 0-32237. |
| (5) | Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K dated March 1, 2005, filed March 4, 2005, file number 0-32237. |
| (6) | Incorporated by reference to the exhibits to amendment no. 1 to the registrant’s current report on Form 8-K dated March 1, 2005, filed March 21, 2005. |
| (7) | Incorporated by reference to the exhibits to amendment no. 2 to the registrant’s current report on Form 8-K dated March 1, 2005, filed May 26, 2005. |
| (8) | Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K dated May 31, 2005, filed June 1, 2005, file number 0-32237. |
| (9) | Incorporated by reference to the exhibits to amendment no. 1 to the registrant’s current report on Form 8-K dated May 31, 2005, filed June 2, 2005, file number 0-32237. |
| (10) | Incorporated by reference to the exhibits to amendment no. 3 to the registrant’s current report on Form 8-K dated March 1, 2005, filed June 2, 2005, file number 0-32237. |
32
| (11) | Incorporated by reference to the exhibits to amendment no. 4 to the registrant’s current report on Form 8-K dated March 1, 2005, filed October 6, 2005, file number 0-32237. |
| (12) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated December 1, 2005, filed December 2, 2005, file number 0-32237. |
| (13) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated April 25, 2006, filed April 26, 2006, file number 0-32237. |
| (14) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated June 20, 2006, filed June 26, 2006, file number 0-32237. |
| (15) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated July 7, 2006, filed July 11, 2006, file number 0-32237. |
| (16) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated September 28, 2006, filed October 3, 2006, file number 0-32237. |
| (17) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 1, 2006, filed November 2, 2006, file number 0-32237. |
| (18) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 13, 2006, filed November 16, 2006, file number 0-32237. |
| (19) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 29, 2006, filed November 30, 2006, file number 0-32237. |
| (20) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 30, 2006, filed December 1, 2006, file number 0-32237. |
| (21) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated February 1, 2007, filed February 1, 2007, file number 0-32237. |
| (22) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated February 26, 2007, filed February 27, 2007, file number 0-32237. |
| (23) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated March 12, 2007, filed March 14, 2007, file number 0-32237. |
| (24) | Incorporated by reference to the exhibit to the registrant’s annual report on Form 10-K for the fiscal year ended November 30, 2006, filed March 15, 2007, file number 0-32237. |
| (25) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated March 30, 2007, filed April 2, 2007, file number 0-32237. |
| (26) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated April 25, 2007, filed April 27, 2007, file number 1-32682. |
| (27) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated May 4, 2007, filed May 8, 2007, file number 1-32682. |
| (28) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated August 31, 2007, filed June 29, 2007, file number 1-32682. |
| (29) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated June 29, 2007, filed July 2, 2007, file number 1-32682. |
| (30) | Incorporated by reference to the exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended May 31, 2007, filed July 16, 2007, file number 1-32682. |
| (31) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated August 22, 2007, filed August 23, 2007, file number 1-32682. |
| (32) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated August 29, 2007, filed August 29, 2007, file number 1-32682. |
| (33) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated September 28, 2007, filed October 2, 2007, file number 1-32682. |
| (34) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated October 11, 2007, filed October 15, 2007, file number 1-32682. |
| (35) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated October 31, 2007, filed November 6, 2007, file number 1-32682. |
| (36) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 2, 2007, filed November 8, 2007, file number 1-32682. |
| (37) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 9, 2007, filed November 15, 2007, file number 1-32682. |
33
| (38) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 16, 2007, filed November 19, 2007, file number 1-32682. |
| (39) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated December 3, 2007, filed December 4, 2007, file number 1-32682. |
| (40) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated December 14, 2007, filed December 18, 2007, file number 1-32682. |
| (41) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated December 28, 2007, filed January 3, 2008, file number 1-32682. |
| (42) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated December 31, 2007, filed January 3, 2008, file number 1-32682. |
| (43) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated January 15, 2008, filed January 18, 2008, file number 1-32682. |
| (44) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated January 30, 2008, filed February 4, 2008, file number 1-32682. |
| (45) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated February 14, 2008, filed February 14, 2008, file number 1-32682. |
| (46) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated March 3, 2008, filed March 4, 2008, file number 1-32682. |
| (47) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated March 13, 2008, filed March 17, 2008, file number 1-32682. |
| (48) | Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated April 14, 2008, filed April 16, 2008, file number 1-32682. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GALAXY ENERGY CORPORATION | |||
| October 13, 2008 | By: | /s/ William P. Brand, Jr. | |
| William P. Brand, Jr. | |||
| Interim Chief Financial Officer | |||
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