U.S. SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(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
--- ---
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.
2
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.
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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.
4
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.
5
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." 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.
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ITEM 3. 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.
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PART II - OTHER INFORMATION
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)
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)
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REGULATION
S-B NUMBER EXHIBIT
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.
(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.
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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: December 11, 2003 By: /s/ CARMEN J. LOTITO
--------------------------------------
Carmen J. Lotito
Chief Financial Officer
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