U.S. SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended: August 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ________________ to _______________
Commission file number 0-32237
GALAXY ENERGY CORPORATION
(Exact name of small business issuer as specified in its charter)
COLORADO 98-0347827
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1001 BRICKELL BAY DRIVE, SUITE 2202, MIAMI, FL 33131
(Address of principal executive offices)
(305) 373-5725
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
33,971,503 SHARES OF COMMON STOCK, $0.001 PAR VALUE, AS OF
AUGUST 31, 2003
Transitional Small Business Disclosure Format (check one): Yes No X
---- -----
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
AUGUST 31, 2003 NOVEMBER 30, 2002
(UNAUDITED)
CURRENT ASSETS
Cash $ 71,078 $ 41,320
Prepaids 11,360 -
------------ -----------
Total Current Assets 82,438 41,320
------------ -----------
UNDEVELOPED OIL & GAS PROPERTIES 1,396,643 873,797
------------ -----------
FURNITURE AND EQUIPMENT (NET) 2,760 3,247
------------ -----------
OTHER ASSETS
Due from Pannonian International Ltd. - 25,000
Other 9,960 10,975
------------ -----------
9,960 35,975
------------ -----------
TOTAL ASSETS $ 1,491,801 $ 954,339
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade $ 386,358 $ 425,032
Accounts payable - related (Note 4) 228,409 233,204
Notes payable - related (Note 2) 324,402 -
Property purchase payable 396,000 396,000
------------ -----------
Total Current Liabilities 1,335,169 1,054,236
------------ -----------
NOTE PAYABLE (NOTE 2) 50,000
-----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value
Authorized - 25,000,000 shares
Issued - none
Common stock, $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 33,971,503 (2003) and
30,025,058 (2002) shares 33,971 30,025
Capital in excess of par value 2,787,916 960,144
(Deficit) accumulated during the development stage (2,665,255) (1,140,066)
------------ -----------
Total Stockholders' Equity (Deficit) 156,632 (149,897)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 1,491,801 $ 954,339
============ ===========
See accompanying notes to financial statements
2
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
2003 2002
REVENUE
OPERATING EXPENSES
General and administrative expenses $ 654,990 $ 456,821
------------- -----------
NET (LOSS) $ (654,990) $ (456,821)
============= ===========
NET (LOSS) PER COMMON SHARE -
BASIC & DILUTED $ ( .02) $ ( .06)
============= ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING -
BASIC AND DILUTED 33,971,503 7,337,988
============ ===========
See accompanying notes to financial statements
3
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED CUMULATIVE
AUGUST 31, TO
AUGUST 31, 2003
2003 2002
REVENUE
OPERATING EXPENSES
General and administrative expenses $ 1,525,189 $ 456,821 $ 2,665,255
-------------- -------------- ---------------
NET (LOSS) $ (1,525,189) $ (456,821) $ (2,665,255)
============== ============== ===============
NET (LOSS) PER COMMON SHARE -
BASIC & DILUTED $ (.05) $ (.06) $ (.09)
============== ============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING -
BASIC AND DILUTED 31,871,683 7,337,988 30,354,789
============== ============== ===============
See accompanying notes to financial statements
4
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED CUMULATIVE
AUGUST 31, TO
2003 2002 AUGUST 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (1,525,189) $ (456,821) $ (2,665,255)
Adjustments to reconcile net (loss) to
net cash (used) by operating activities
Stock for services 154,600 - 354,600
Changes in assets and liabilities
Depreciation 487 487
Increase in accounts payable - trade 249,255 66,293 533,599
Increase in accounts payable - related - - 233,204
(Increase) in prepaids and other (10,345) (129,338) (20,305)
------------- ------------- -------------
Net cash (used) by operating activities (1,131,192) (519,866) (1,563,670)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to oil and gas properties (419,686) (621,034) (771,569)
Purchase of furniture and equipment (454) - (3,247)
Advance to affiliate (20,000) - (45,000)
Cash received upon recapitalization and merger 1,260 - 4,234
------------- ------------- -------------
Net cash (used) by investing activities (438,880) (621,034) (815,582)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net 1,599,830 1,141,000 2,450,330
------------- ------------- -------------
Net cash provided by financing activities 1,599,830 1,141,000 2,450,330
------------- ------------- -------------
NET INCREASE IN CASH 29,758 100 71,078
CASH, BEGINNING OF PERIOD 41,320 - -
------------- ------------- -------------
CASH, END OF PERIOD $ 71,078 $ 100 $ 71,078
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Debt incurred for oil and gas properties $ - $ 396,000 $ 446,000
============= ============= =============
Stock issued for services $ 154,600 $ - $ 354,600
============= ============= =============
Stock issued for payable - related $ 233,204 $ - $ 233,204
============= ============= =============
See accompanying notes to financial statements
5
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
(UNAUDITED)
The accompanying interim financial statements of Galaxy Energy
Corporation are unaudited. In the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for the interim period. The
results of operations for the period ended August 31, 2003 are not necessarily
indicative of the operating results for the entire year.
We have prepared the financial statements included herein pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. We believe the
disclosures made are adequate to make the information not misleading and
recommend that these condensed financial statements be read in conjunction with
the financial statements and notes included in our Form 10-KSB for the year
ended November 30, 2002.
Galaxy Energy Corporation, formerly Galaxy Investments, Inc. (the
"Company") was incorporated under the laws of the State of Colorado on December
17, 1999, for the purpose of acquiring and developing mineral properties. The
Company is a public company that had no operations. On November 13, 2002, the
Company completed an agreement (the "Agreement and Plan of Reorganization")
whereby it issued 20,997,058 shares of its common stock to acquire all of the
shares of Dolphin Energy Corporation ("Dolphin"), a private corporation
incorporated on June 18, 2002, under the laws of the State of Nevada. Dolphin is
an independent energy company engaged in the exploration, development and
acquisition of crude oil and natural gas reserves in the western United States
and is considered a development stage company as defined by Statement of
Financial Accounting Standards (SFAS) No. 7. Dolphin is an oil and gas
exploration company and has not earned any production revenue, nor found proved
resources on any of its properties. Dolphin's principal activities have been
raising capital through the sale of its securities and identifying and
evaluating potential oil and gas properties.
As a result of this transaction, Dolphin became a wholly owned
subsidiary of the Company. Since this transaction resulted in the former
shareholders of Dolphin acquiring control of the Company, for financial
reporting purposes the business combination was accounted for as an additional
capitalization of the Company (a reverse acquisition with Dolphin as the
accounting acquirer).
On June 2, 2003, the Company completed an agreement whereby it issued
1,951,241 shares of its common stock to acquire all of the shares of Pannonian
International, Ltd. ("Pannonian"), a private corporation incorporated on January
18, 2000, under the laws of the State of Colorado. The shares issued to
Pannonian were valued at the net assets of Pannonian as of the date of
acquisition, June 2, 2003. Pannonian is an independent energy company engaged in
the exploration, development and acquisition of crude oil and natural gas
reserves in Europe and is considered a development stage company as defined by
Statement of Financial Accounting Standards (SFAS) No. 7. Pannonian is an oil
and gas exploration company and has not earned any production revenue, nor found
proved resources on any of its properties. Pannonian's principal activities have
been raising capital through the sale of its securities and identifying and
evaluating potential oil and gas properties. As a result of this transaction,
Pannonian became a wholly owned subsidiary of the Company.
6
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the Company
for the period from November 13, 2002 to November 30, 2002, and its
wholly owned subsidiary, Dolphin, for the period from June 18, 2002 to
November 30, 2002. For the nine months ended August 31, 2003, the
consolidated financial statements include the Company and Dolphin for
the entire period, and Pannonian from the effective date of the
acquisition, June 2, 2003. All significant intercompany transactions
have been eliminated upon consolidation.
OIL AND GAS PROPERTIES
The Company follows the full cost pool method of accounting for oil and
gas operations. Under this method all costs related to the exploration
for and development of oil and gas reserves are capitalized on a
country-by-country basis. Costs include lease acquisition costs,
geological and geophysical expenses, overhead directly related to
exploration and development activities and costs of drilling both
productive and non-productive wells. Proceeds from the sale of
properties are applied against capitalized costs, without any gain or
loss being recognized, unless such a sale would significantly alter the
rate of depletion and depreciation.
In applying the full cost pool method, the Company performs a ceiling
test whereby the carrying value of oil and gas properties and
production equipment, net of recorded future income taxes and the
accumulated provision for site restoration and abandonment costs, is
compared annually to an estimate of future net cash flow from the
production of proven reserves. Costs related to undeveloped oil and gas
properties are excluded from the ceiling tests. Discounted net cash
flow, utilizing a 10% discount rate, is estimated using year end
prices, less estimated future general and administrative expenses,
financing costs and income taxes. Should this comparison indicate an
excess carrying value, the excess is charged against earnings. At
August 31, 2003 there were no reserves. Costs of oil and gas properties
are considered unevaluated at August 31, 2003.
IMPAIRMENT
The Company has adopted 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; a method utilized by the Company, is
excluded from this requirement, but will continue to be subject to the
ceiling test limitations.
INCOME TAXES
The Company has adopted the provisions of SFAS 109, "Accounting for
Income Taxes." SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
7
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
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).
(LOSS) PER COMMON SHARE
(Loss) per common share is computed based on the weighted average
number of common shares outstanding during the period.
NOTE 2 - NOTES PAYABLE
On March 6, 2003, the Company, Harbor Petroleum LLC ("Harbor") and
Florida Energy, Inc. ("Florida"), related parties, entered into an
agreement which formalized their understanding with respect to the
ongoing leasing program for acquisition of oil, gas and mineral leases
in the State of Texas. The agreement is effective retroactively with
commencement of the lease acquisitions by Harbor and Florida in 2002.
Under the terms of the agreement, Florida and Harbor will each retain a
1% overriding royalty interest in the acquired leases, including those
leases acquired as of the date of the agreement. The Company has agreed
to pay Florida a bonus of $50,000 for identifying the leases, payable
by a promissory note in the amount of $50,000 with interest at 7.5% per
annum, due March 7, 2004. The Company has recorded this obligation as
of November 30, 2002. The term of the agreement is for a period of one
year through March 6, 2004.
During the nine months ended August 31, 2003, notes payable to related
parties increased by $274,402. Of this amount, $170,000 were cash
advances to the Company and $104,402 were obligations of Pannonian
which were assumed in connection with the acquisition of that company.
8
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
(UNAUDITED)
NOTE 3 - COMMON STOCK
During the nine-month period ended August 31, 2003, the Company
completed the sale of 1,602,000 shares of its common stock at a price
of $1.00 per share in a private placement exempt from registration with
the Securities and Exchange Commission pursuant to Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D promulgated
thereunder.
During the nine-month period ended August 31, 2003, Resource Venture
Management ("RVM"), an entity owned by a founder of the Company, agreed
to convert its outstanding debt at November 30, 2002 in the amount of
$233,204 plus management fees for the period December 1, 2002 to
February 28, 2003 in the amount of $90,000, to 323,204 shares of the
Company's common stock, valued at $1.00 per share. The Company also
agreed to convert $10,000 of accounts payable to 10,000 shares of the
Company's common stock, valued at $1.00 per share, and issued 60,000
shares for services valued at $54,600, or $0.91 per share.
NOTE 4 - RELATED PARTY TRANSACTIONS
During the nine months ended August 31, 2003, the Company paid RVM
$210,000 (90,000 shares of common stock valued at $1.00 per share and
cash of $120,000) pursuant to a consulting agreement with the Company
under which RVM is paid $30,000 per month. At August 31, 2003, $120,000
is owed to RVM, consisting of $60,000 per the consulting agreement and
$60,000 for additional costs. This amount is included in accounts
payable.
NOTE 5 - SUBSEQUENT EVENTS
The Company engaged in a private offering of secured convertible
debentures and warrants in September 2003. The offering was completed
in early October 2003, resulting in gross proceeds of $5,640,000. The
debenture pays interest at 7% per annum, matures two years from the
date of issuance, is secured by all of the Company's assets (subject to
an agreement to subordinate in favor of a senior bank lender), and is
convertible into shares of the Company's common stock based on a price
of $0.59 per share. Investors received five-year warrants to purchase
up to 2,867,797 shares at $0.71 per share and 2,867,797 shares at $0.83
per share. The Company is obligated to file a registration statement
covering the shares underlying the debenture and warrants by November
22, 2003. The Company may have to record additional future expenses if
the convertible feature of the debt results in an beneficial conversion
interest to the holder of the debt.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Effective November 13, 2002 an arrangement was completed between Galaxy
Investments (now known as Galaxy Energy Corporation) and Dolphin Energy
Corporation, a Nevada corporation, whereby the shareholders of Dolphin Energy
exchanged all of their common shares for 20,997,058 shares of Galaxy's common
stock.
Following the acquisition the former shareholders of Dolphin Energy
held a majority of our total issued and outstanding common shares; Dolphin
Energy was thereby deemed to be the acquiror. Accordingly, the transaction has
been accounted for as a reverse takeover using the purchase method whereby the
assets and liabilities of Galaxy have been recorded at their fair market values
and operating results have been included in our financial statements from the
effective date of purchase. The fair value of the net assets acquired is equal
to their book values.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to impairment of long-lived assets. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions; however, we believe
that our estimates, including those for the above-described items, are
reasonable.
OIL AND GAS PROPERTIES
We follow the full cost method of accounting for oil and gas
operations. Under this method, all costs related to the exploration for and
development of oil and gas reserves are capitalized on a country-by-country
basis. Costs include lease acquisition costs, geological and geophysical
expenses, overhead directly related to exploration and development activities
and costs of drilling both productive and non-productive wells. Proceeds from
the sale of properties are applied against capitalized costs, without any gain
or loss being recognized, unless such a sale would significantly alter the rate
of depletion and depreciation.
Depletion of exploration and development costs and depreciation of
production equipment is provided using the unit-of-production method based upon
estimated proven oil and gas reserves. The costs of significant unevaluated
properties are excluded from costs subject to depletion. For depletion and
depreciation purposes, relative volumes of oil and gas production and reserves
are converted at the equivalent conversion based upon relative energy content.
10
In applying the full cost method, we perform a ceiling test whereby the
carrying value of oil and gas properties and production equipment, net of
recorded future income taxes and the accumulated provision for site restoration
and abandonment costs, is compared annually to an estimate of future net cash
flow from the production of proven reserves. Costs related to undeveloped oil
and gas properties are excluded from the ceiling tests. Discounted net cash
flow, utilizing a 10% discount rate, is estimated using year end prices, less
estimated future general and administrative expenses, financing costs and income
taxes. Should this comparison indicate an excess carrying value, the excess is
charged against earnings. At August 31, 2003, there were no reserves. Costs of
oil and gas properties are considered unevaluated at August 31, 2003.
IMPAIRMENT OF LONG-LIVED ASSETS.
Our long-lived assets include property and equipment. We assess
impairment of long-lived assets whenever changes or events indicate that the
carrying value may not be recoverable. In performing our assessment we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates change in the future
we may be required to record impairment charges against these respective assets.
STOCK BASED COMPENSATION.
Options granted to employees under the Company's Stock Option Plan are
accounted for by using the intrinsic method under APB Opinion 25, Accounting for
Stock Issued to Employees (APB 25). In October 1995, the Financial Accounting
Standards Board issued Statement No.123, Accounting for Stock-Based Compensation
(SFAS123), which defines a fair value based method of accounting for stock
options. The accounting standards prescribed by SFAS 123 are optional and the
Company has continued to account for stock options under the intrinsic value
method specified in APB 25.
RESULTS OF OPERATIONS
Dolphin Energy was incorporated on June 18, 2002. It has not yet
generated any revenues. For the three and nine months ended August 31, 2003, we
incurred operating expenses of $654,990 and $1,525,189, respectively. These
expenses were primarily for legal expenses, travel and entertainment, management
fees, payroll, and investor relations.
For the period from inception to November 30, 2002, we incurred
operating expenses of $1,140,066, primarily for contract services - Resource
Venture Management ($692,500), consulting fees and payroll ($125,265), legal
fees ($103,314), and travel and entertainment ($102,479). We expect operating
expenses to continue at that level due to our current activities. Travel and
entertainment expenses incurred since inception were related to the evaluation
of oil and gas properties and our private placement of common stock.
Accordingly, our accumulated deficit at August 31, 2003 was $2,662,255.
11
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2003, we had a working capital deficiency of $1,252,731,
as compared to a deficiency of $1,012,916 at November 30, 2002. The decrease in
working capital was due to the increase in current liabilities, primarily notes
payable to related parties.
Included in current liabilities is a property purchase payable in the
amount of $396,000, due on or before August 28, 2003. The seller has agreed to
extend the due date of this payment to January 15, 2004 in consideration for a
monthly extension fee of $5,000. The extension fees are not credited to the
purchase price.
Since inception, we have funded our activities through the sale of our
common stock, raising net proceeds of $850,500 through the period ended November
30, 2002, and net proceeds of $1,599,830 for the nine months ended August 31,
2003. For the nine months ended August 31, 2003, we used cash of $1,131,192 for
our operating activities and $438,880 for our investing activities, which
consisted of primarily of additions to our oil and gas properties.
The report of our independent auditor on the financial statements for
the period ended November 30, 2002, includes an explanatory paragraph relating
to the uncertainty of our ability to continue as a going concern. We have
suffered losses from operations and require additional financing. We need to
obtain additional capital through the sale of our common stock or other
securities. Ultimately, we need to generate revenues and attain profitable
operations.
PLAN OF OPERATION
Since the end of the fiscal year, we have addressed our working capital
deficiency. From December 1, 2002 through August 31, 2003, we raised net
proceeds of $1,599,830 through the sale of our common stock. These proceeds have
been used for ongoing operations and to pay accrued trade payables. We
negotiated with some of our creditors to convert their debt into equity. At
February 28, 2003, Resource Venture Management, a related party, agreed to
convert its outstanding debt of $233,204, plus management fees for the three
months ended February 28, 2003 in the amount of $90,000, to 323,204 restricted
shares of our common stock. Another party converted $10,000 of accounts payable
to 10,000 shares of common stock.
Effective September 30, 2002, we entered into a lease acquisition and
drilling agreement with Pioneer Oil, a Montana limited liability company
("Pioneer"), which entitles us to earn a 100% working interest and a 78% net
revenue interest in leases covering 15,657 acres in the Powder River Basin, near
Lieter, Wyoming. To acquire the leases to this acreage, we were required to pay
and did pay $100,000 by January 31, 2003. We were required to pay $1,650,000 by
October 1, 2003, deposit the estimated costs to drill and complete 30 pilot
wells into an escrow account by October 1, 2003, and drill at least 25 pilot
wells by March 1, 2004. We also had the opportunity to acquire a 100% interest
in five natural gas wells, for $500,000, by October 1, 2003. Pioneer has
extended the obligations due October 1, 2003 to October 16, 2003, to allow
negotiation of a new agreement.
12
Effective October 1, 2002, we entered into a Coal Bed Methane
Participation Agreement with Horizon Exploitation, Inc., a Colorado corporation
("Horizon"), which provides funding for the development of our Pioneer leasehold
interests and establishes an area of mutual interests in the Powder River Basin
located in Wyoming and Montana for future projects on the same terms as
described below.
Under the terms of the agreement, Horizon may participate, subject to
funding, in the development of up to 120 wells and also includes the purchase of
the five existing wells from Pioneer. Horizon's commitment to participate in the
development is subject to an initial funding by Horizon of $100,000, a $500,000
payment for the purchase of the five existing wells, and the placement of
$1,650,000, plus the estimated amount to drill and complete 30 pilot wells, into
escrow as a partial payment for a 30-well pilot project on or before September
15, 2003. The estimated AFE cost per well is $150,000. These dates were extended
to December 2, 2003.
Accordingly, our plan of operation currently depends upon the ability
of Horizon to fund the proposed 30-well pilot program. If Horizon is unable to
do so, we will seek an extension from Pioneer.
In addition to our obligations under the Pioneer lease acquisition and
drilling agreement, we are obligated to pay $396,000 by January 15, 2004 for our
leases in Sheridan County, Wyoming.
On August 5, 2003, we entered into a Lease Option and Acquisition
Agreement with Quaneco, L.L.C. ("Quaneco"). Quaneco is a privately-held oil and
gas company operating primarily in the Rocky Mountain region.
Under the terms of the agreement, we have an option to acquire up to
fifty percent (50%) of Quaneco's working interests in certain oil and gas leases
covering approximately 206,000 gross acres in the Powder River Basin area of
Montana. If the option is fully exercised, we will acquire the working interests
in approximately 53,000 net acres. The primary geologic target associated in the
acreage is natural gas from shallow coalbeds located at depths of 200 feet to
2,500 feet. The purchase price of the option is $6,625,000 payable in six
installments of varying amounts. The first two installments, totaling
$1,100,000, were paid. In addition, Quaneco has credited us with payment of
$600,000 under the agreement through its purchase of $600,000 in convertible
debentures (discussed below).
In addition, we have the right to earn an undivided 25% working
interest in up to 128 gas wells by paying our proportionate share of the costs
of drilling such wells. The working interests so earned by us would belong to us
without regard to whether we exercise all or none of the purchase option
described in the preceding paragraph.
Also in June 2003, we entered into a non-binding letter of intent to
purchase a percentage of working interest in 57,000 gross acres in the Green
River Basin in Wyoming for shares of our common stock. We are working towards a
definitive agreement for this transaction.
13
Effective June 2, 2003, we completed the acquisition of Pannonian
International, Ltd., a Colorado corporation, solely for 1,951,241 shares of our
common stock. While the acquisition was implemented through the issuance of our
common stock, we anticipate that we will need approximately $400,000 of cash
during the remainder of the fiscal year ending November 30, 2003, to satisfy
Pannonian's trade payables in the ordinary course of business and cover the
additional overhead. Pannonian currently has two employees and an office in
Denver, Colorado.
To address the cash requirements for the Quaneco agreement and our
working capital needs , we engaged in a private offering of secured convertible
debentures and warrants in September 2003. The offering was completed in early
October 2003, resulting in gross proceeds of $5,640,000. The debenture pays
interest at 7% per annum, matures two years from the date of issuance, is
secured by all of our assets (subject to an agreement to subordinate in favor of
a senior bank lender), and is convertible into shares of our common stock based
on a price of $0.59 per share. Investors received five-year warrants to purchase
up to 2,867,797 shares at $0.71 per share and 2,867,797 shares at $0.83 per
share. We are obligated to file a registration statement covering the shares
underlying the debenture and warrants by November 22, 2003.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 or Plan of Operation" 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.
14
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company has
evaluated, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operation of the Company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be disclosed
in Company reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There has been no change in the Company's internal control over
financial reporting identified in the above evaluation that occurred during the
Company's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES
During the three months ended August 31, 2003, the registrant issued
1,951,241 shares in exchange for the outstanding shares of Pannonian
International, Ltd. to Pannonian's 34 non-dissenting shareholders,
pursuant to the exemption from registration contained in Rule 506 under
Section 4(2) of the Securities Act of 1933. No underwriters were used.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
REGULATION
S-B NUMBER EXHIBIT
2.1 Agreement and Plan of Reorganization dated as of
November 1, 2002, by and among Galaxy Investments,
Inc., Dolphin Acquisition Corporation, and Dolphin
Energy Corporation (1)
2.2 Share Exchange Agreement by and between Galaxy
Investments, Inc. and Pannonian International, Ltd. (2)
3.1 Articles of Incorporation (3)
3.2 Articles of Amendment to Articles of Incorporation (4)
3.3 Bylaws (3)
10.1 Escrow Instructions and Agreement dated as of August
28, 2002 (5)
10.2 Lease Acquisition and Drilling Agreement dated as of
September 30, 2002, as amended (5)
16
REGULATION
S-B NUMBER EXHIBIT
10.3 Coal Bed Methane Participation Agreement dated as of
October 1, 2002, as amended (5)
10.4 Letter agreement among Dolphin Energy Corporation,
Harbor Petroleum, LLC and Florida Energy, Inc. dated
March 6, 2003 (5)
10.5 2003 Stock Option Plan (4)
10.6 Third Extension Agreement between Pioneer Oil LLC and
Dolphin Energy Corporation dated April 28, 2003 (4)
10.7 Addendum to Coal Bed Methane Participation Agreement
dated as of May 23, 2003 (4)
10.8 Lease Option and Acquisition Agreement between Dolphin
Energy Corporation and Quaneco, L.L.C. (6)
10.9 Amendment to Lease Option and Acquisition Agreement
between Dolphin Energy Corporation and Quaneco, L.L.C.
dated September 2, 2003 (7)
10.10 Fourth Extension Agreement between Pioneer Oil LLC and
Dolphin Energy Corporation dated April 28, 2003 (7)
10.11 Form of Securities Purchase Agreement dated as of
September 24, 2003 between Galaxy Energy Corporation
and the Purchaser named therein (8)
10.12 Form of 7% Secured Convertible Debenture due September
24, 2005 (8)
10.13 Form of Common Stock Purchase Warrant Exercisable at
$0.71 per Share (8)
10.14 Form of Common Stock Purchase Warrant Exercisable at
$0.83 per Share (8)
21 Subsidiaries of the registrant (5)
31.1 Rule 13a-14(a) Certification of Principal Executive
Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification of Principal Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
-------------
(1) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated November 13, 2002, file number
0-32237.
(2) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated May 7, 2003, filed May 13, 2003,
file number 0-32237.
(3) Incorporated by reference to the exhibits to the registrant's
registration statement on Form 10-SB, file number 0-32237.
(4) Incorporated by reference to the exhibits to the registrant's
quarterly report on Form 10-QSB for the quarter ended May 31, 2003.
(5) Incorporated by reference to the exhibits to the registrant's annual
report on Form 10-KSB for the fiscal year ended November 30, 2002,
file number 0-32237.
17
(6) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated August 5, 2003, filed August 18,
2003, file number 0-32237.
(7) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated September 2, 2003, filed September
8, 2003, file number 0-32237.
(8) Incorporated by reference to the exhibits to the registrant's
current report on Form 8-K dated October 7, 2003, filed October 8,
2003, file number 0-32237.
(b) Reports on Form 8-K:
A report on Form 8-K dated June 2, 2003 was filed on June 10, 2003,
reporting, under Items 2 and 5, the acquisition of Pannonian International, Ltd.
Financial statements of Pannonian International, Ltd. and pro forma financial
statements were not required.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GALAXY ENERGY CORPORATION
Date: October 14, 2003 By: /s/ CARMEN J. LOTITO
----------------------------------------
Carmen J. Lotito
Chief Financial Officer
19
EXHIBIT 31.1
RULE 13A-14(A) CERTIFICATION
I, Marc E. Bruner, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Galaxy Energy
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the small business issuer, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the small business
issuer's internal control over financial reporting that
occurred during the small business issuer's most recent fiscal
quarter (the small business issuer's fourth fiscal quarter in
the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
small business issuer's ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the small
business issuer's internal control over financial reporting.
Date: October 14, 2003 /s/ MARC E. BRUNER
-----------------------------------------
Marc E. Bruner,
President (Principal Executive Officer)
20
EXHIBIT 31.2
RULE 13A-14(A) CERTIFICATION
I, Carmen J. Lotito, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Galaxy Energy
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the small business issuer, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the small business
issuer's internal control over financial reporting that
occurred during the small business issuer's most recent fiscal
quarter (the small business issuer's fourth fiscal quarter in
the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
small business issuer's ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the small
business issuer's internal control over financial reporting.
Date: October 14, 2003 /s/ CARMEN J. LOTITO
-----------------------------------------
Carmen J. Lotito
Chief Financial Officer
21
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Galaxy Energy Corporation (the
"Company") on Form 10-QSB for the period ending August 31, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Marc E. Bruner, President (Chief Executive Officer) of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ MARC E. BRUNER
- -----------------------------------
Marc E. Bruner
President (Chief Executive Officer)
22
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Galaxy Energy Corporation (the
"Company") on Form 10-QSB for the period ending August 31, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Carmen Lotito, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ CARMEN J. LOTITO
- ---------------------------------
Carmen J. Lotito
Chief Financial Officer
23