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, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-32237
GALAXY ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 98-0347827
(State or other jurisdiction of (IRS Employer
incorporation or organization) 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. [x]Yes [ ]No
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Exchange Act). [ ]Yes [x]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:
65,693,308 SHARES OF COMMON STOCK, $0.001 PAR VALUE, AS OF
AUGUST 31, 2005
GALAXY ENERGY CORPORATION
(A Development Stage Company
CONSOLIDATED BALANCE SHEETS
August 31, 2005 November 30, 2004
Unaudited
ASSETS
Current assets
Cash and cash equivalents $ 1,959,868 $ 10,513,847
Short-term investments 2,800,000 -
Accounts receivable, trade 293,774 43,786
Prepaid and other 154,358 154,216
------------------ --------------------
Total Current Assets 5,208,000 10,711,849
------------------ --------------------
Undeveloped oil and gas assets, at cost, 50,774,695 37,491,529
------------------ --------------------
full cost method of accounting, net
Furniture and equipment, net 214,912 130,083
------------------ --------------------
Other assets
Deferred financing costs, net 1,498,488 1,310,650
Other 113,942 4,054
------------------ --------------------
1,612,430 1,314,704
------------------ --------------------
TOTAL ASSETS $ 57,810,037 $ 49,648,165
================== ====================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Checks written against future deposits $ 98,106 $ -
Accounts payable and accrued expenses 1,320,446 2,152,977
Advances from joint venture partners 173,262 -
Accounts payable - related party 84,549 113,758
Current portion of notes payable - related party - 15,946
Current portion convertible notes payable, net 9,209,168 6,249,557
Notes payable 2,275,233 2,100,000
Interest payable 469,275 705,719
------------------ --------------------
Total Current Liabilities 13,630,039 11,337,957
------------------ --------------------
Long term obligations
Convertible notes payable, net
16,558,009 10,415,928
Interest Payable 486,472
Notes payable - 500,000
Asset retirement obligation 1,054,319 713,073
------------------ --------------------
18,098,800 11,629,001
------------------ --------------------
Stockholders' equity
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 - 65,693,308 shares and
58,817,509 shares 65,693 58,818
Capital in excess of par value 50,322,270 40,173,154
Deficit accumulated during the development stage (24,306,765) (13,550,765)
------------------ --------------------
Total Stockholders' Equity 26,081,198 26,681,207
------------------ --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,810,037 $ 49,648,165
================== ====================
The accompanying notes are an integral part of these financial statements.
2
GALAXY ENERGY CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended August 31,
2005 2004
Revenue
Natural gas sales $ 323,313 $ 8,565
Gain on disposition of oil and gas property - -
Interest income 37,087 7,652
--------------------------------
360,400 16,217
--------------------------------
Costs and expenses
Lease operating expense 377,435 -
General and administrative 906,760 874,001
Abandoned oil and gas properties - -
Depreciation depletion and amortization 160,258 39,839
Interest expense and financing costs 2,745,696 169,636
--------------------------------
4,190,149 1,083,476
--------------------------------
Net Loss $ (3,829,749) $ (1,067,259)
================================
Net loss per common share - basic and diluted $ (0.06) $ (0.02)
================================
Weighed average number of common
shares outstanding - basic and diluted 64,226,363 58,817,509
================================
The accompanying notes are an integral part of these financial statements.
3
GALAXY ENERGY CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
From Inception
Nine Months Ended August 31, (June 18, 2002) to
2005 2004 August 31, 2005
Revenue
Natural gas sales $ 682,589 $ 8,565 $ 805,044
Gain on disposition of oil and gas property 197,676 - 197,676
property
Interest income 117,570 30,886 168,965
----------------------------------------------------------
997,835 39,451 1,171,685
----------------------------------------------------------
Costs and expenses
Lease operating expense 753,845 - 813,092
General and administrative 3,410,135 2,598,051 10,180,472
Abandoned oil and gas properties - - 65,769
Depreciation depletion and amortization 334,153 168,188 393,669
Interest expense and financing costs 7,255,702 3,124,945 14,025,448
----------------------------------------------------------
11,753,835 5,891,184 25,478,450
----------------------------------------------------------
Net (Loss) $ (10,756,000) $(5,851,733) $ (24,306,765)
==========================================================
Net (loss per common share - basic and diluted $ (0.17) $ (0.11) $ (0.54)
==========================================================
Weighed average number of common
shares outstanding - basic and diluted 62,012,402 51,725,065 45,313,863
==========================================================
The accompanying notes are an integral part of these financial statements.
4
GALAXY ENERGY CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Inception
Nine months ended August 31 (June 18, 2002) to
2005 2004 August 31, 2005
Cash flows from operating activities
Net loss $ (10,756,000) $ (5,851,733) $ (24,306,765)
Adjustments to reconcile net loss to net
cash (used) used by operating activities
Stock for interest 2,531,296 - 2,531,296
Stock for services - - 264,600
Stock for services - related party - - 90,000
Stock for debt - related party - - 233,204
Amortization of discount on convertible debt and
deferred financing costs 3,759,600 2,383,782 6,186,770
Write-off of discount on convertible debentures and
warrants upon conversion - - 2,537,518
Write-off of deferred financing costs upon - - 441,886
conversion
Compensation expense on vested stock -
options
to non-employees 125,353 - 159,874
Depreciation, depletion and amortization expense 334,152 168,188 411,227
Abandonment of oil and gas properties and other - 23,014 89,022
Changes in assets and liabilities
Accounts payable - trade, accruals, bank
overdraft 361,948 (91,763) 279,265
Accounts payable - related (29,209) 84,411 84,549
Interest payable 250,028 92,540 955,748
Accounts receivable, trade and other (249,988) - (293,775)
Prepaid expenses and other current assets (14,622) (116,761) (167,932)
Other - - (4,987)
---------------------------------------------------
Net cash used by operating activities (3,687,442) (3,308,322) (10,508,500)
---------------------------------------------------
Cash flows from investing activities
Additions to oil and gas properties (18,090,556) (11,402,554) (40,496,732)
Purchase of furniture and equipment (129,626) (122,276) (280,747)
Short term investments (2,800,000) - (2,800,000)
Purchase Surety Bonds (95,033) - (95,033)
Advance to affiliate - - (60,000)
Cash received upon recapitalization and merger - - 4,234
---------------------------------------------------
Net cash used by investing activities (21,115,215) (11,524,830) (43,728,278)
---------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
GALAXY ENERGY CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Cash flows from financing activities
Proceeds from sale of common stock - 15,452,800 17,905,300
Proceeds from sale of convertible notes payable 17,695,000 15,000,000 37,695,000
Proceeds from sale of convertible debentures - - 5,040,000
Debt and stock offering costs (942,169) (2,263,796) (3,852,869)
Payment of note payable - related party (15,946) (95,632) (129,578)
Payment of note payable (324,767) - (324,767)
Payment of convertible notes payable (1,155,746) - (1,155,746)
Proceeds from exercise of warrants 992,306 27,000 1,019,306
---------------------------------------------------
Net cash provided by financing activities 16,248,678 28,120,372 56,196,646
---------------------------------------------------
Net (decrease) increase in cash (8,553,979) 13,287,220 1,959,868
CASH, BEGINNING OF PERIOD 10,513,847 2,239,520 -
---------------------------------------------------
CASH, END OF PERIOD $ 1,959,868 $ 15,526,740 $ 1,959,868
===================================================
Supplemental schedule of cash flow information
Cash paid for interest $ 596,038 $ 92,347 804,739
===================================================
Supplemental disclosures of non-cash investing and
financing activities
Debt incurred for oil and gas properties $ - $ 2,600,000 $ 3,646,000
===================================================
Stock issued for services $ - $ - $ 354,600
===================================================
Stock issued for interest and debt $ 5,675,607 $ - $ 5,920,886
===================================================
Stock issued for convertible debentures $ - $ 5,640,000 $ 5,640,000
===================================================
Warrants issued for issue and financing costs $ 88,874 $ 227,930 $ 1,658,576
===================================================
Discount on convertible debt issued $ 6,509,702 $ 4,336,316 $ 14,317,089
===================================================
Conversion of interest to debt $ - $ - $ 11,178
===================================================
Stock issued for subsidiary - related $ - $ - $ (202,232)
===================================================
Stock issued for oil and gas properties $ - $ 9,146,800 $ 9,146,800
===================================================
The accompanying notes are an integral part of these financial statements.
6
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION
Galaxy Energy Corporation 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, 2004. The current interim period
reported herein should be read in conjunction with the Company's Form
10-K for the year ended November 30, 2004.
The results of operations for the nine months ended August 31, 2005 are
not necessarily indicative of the results that may be expected for the
full fiscal year ending November 30, 2005.
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, 2005, the Company incurred a
net loss of $10,756,000 and used cash for operating activities of
$3,867,442. As of August 31, 2005, the Company had a working capital
deficiency of $8,422,039. Included in current liabilities at August 31,
2005 is the current portion of convertible notes payable of $9,209,168
and related accrued interest of $397,035. The Company may, subject to
certain conditions, make payment of these amounts in shares of common
stock rather than cash. As discussed in Note 5, during the nine months
ended August 31, 2005, the Company made principal and interest payments
to the Convertible Note Holders in both common stock and cash, issued
$10,000,000 in Senior Secured Convertible Notes, issued $7,695,000 in
Senior Subordinated Convertible Notes, and generated gas sales revenues
of $682,589. Subsequent to August 31, 2005, the Company reached
agreement with its Joint Venture Partner in its Piceance Basin project,
to have the Joint Venture Partner fund the next $14,000,000 of lease
acquisition and drilling expenditures in the project. The Company will
retain a 25% working interest in all leases acquired and all wells
drilled.
Management believes these transactions are an indication of the
Company's ability to generate additional capital to meet its
obligations during the remainder of the year. However, the Company's
drilling program for the remainder of the fiscal year and into the next
fiscal year, will require additional capital and will require the
Company to raise additional funds by selling securities, issuing debt,
selling assets or farm-outs or similar type arrangements. Any financing
obtained through the sale of the Company's equity will likely result in
substantial dilution to the Company's stockholders. If the Company is
forced to sell assets to meet its operating and capital requirements,
it may not realize the full market value of the assets and the sales
price could be less than the Company's carrying value of the assets.
7
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - 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 Company's financial statements are based on a number of significant
estimates, including oil and gas reserve quantities, which are the
basis for the calculation of depreciation, depletion and impairment of
oil and gas properties, and timing and costs associated with its
retirement obligations.
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).
SHORT TERM INVESTMENTS
The Company's short-term investments consist primarily of preferred
auction rate securities and short-term corporate bonds which are
classified as available-for-sale Preferred auction rate securities
represent preferred shares issued by closed end funds and are typically
traded at auctions that are held periodically, where the dividend rate
for the next period is set. These securities are stated at fair value
based on quoted market prices. The income earned on these investments
is included in interest income in the accompanying financial statements
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 costs of unsuccessful
exploration, 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.
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. As of August 31, 2005, the
8
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company has recognized initial natural gas production from a number of
its wells; however, due to the limited production history, all oil and
gas property costs are considered to be unevaluated and are recorded at
the lower of cost or fair market value. 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. As of August 31, 2005,
management believes no impairment of the unevaluated properties is
required.
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 has, through acquisition and drilling, acquired working
interests in 225 natural gas wells. A limited number of these wells
have had initial gas production, and the others are in various stages
of completion and hook up at August 31, 2005. The Company adopted the
provisions of SFAS 143 to record the 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 lives of the wells, based upon the lives of
comparable wells in the area. The amounts recognized upon adoption 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. The
information below reflects the change in the ARO during the nine months
ended August 31, 2005:
Asset retirement obligation November 30, 2004 $ 713,073
Liabilities incurred 310,329
Accretion 30,917
---------------
Asset retirement obligation August 31, 2005 $ 1,054,319
===============
9
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHARE BASED COMPENSATION
In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation, effective for fiscal years beginning after December 15,
1995. This statement defines a fair value method of accounting for
employee stock options and encourages entities to adopt that method of
accounting for its stock compensation plans. SFAS 123 allows an entity
to continue to measure compensation costs for these plans using the
intrinsic value based method of accounting as prescribed in Accounting
Pronouncement Bulletin Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has elected to continue to account for
its employee stock compensation plans as prescribed under APB 25. Had
compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method prescribed in SFAS 123, the
Company's net (loss) and (loss) per share for the three and nine months
ended August 31, 2005 and August 31, 2004 would have been adjusted to
the pro-forma amounts indicated below.
Three Months Ended
August 31, 2005 August 31, 2004
Net loss
As reported $ (3,829,749) $ (1,067,259)
Add stock based compensation included in
reported net loss 41,784 17,260
Deduct stock based compensation expense
Determined under fair value method (384,817) (747,586)
--------------- ---------------
Pro forma net loss $ (4,172,782) $ (1,797,585)
=============== ===============
Net (loss) per share
As reported $ (0.06) $ (0.02)
=============== ===============
Pro forma $ (0.06) $ (0.03)
=============== ===============
Nine Months Ended
August 31, 2005 August 31, 2004
Net loss
As reported $ (10,756,000) $ (5,851,733)
Add stock based compensation included in
reported net loss 125,353 23,013
Deduct stock based compensation expense
Determined under fair value method (1,154,451) (1,238,831)
--------------- ---------------
Pro forma net loss $ (11,785,098) $ (7,067,551)
=============== ===============
Net (loss) per share
As reported $ (0.17) $ (0.11)
================= ===============
Pro forma $ (0.19) $ (0.14)
================= ===============
10
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHARE BASED COMPENSATION (continued)
The calculated value of stock options granted during 2005 and 2004
under the plan, following calculation methods prescribed by SFAS 123,
uses the Black-Scholes stock option pricing model with the following
assumptions used:
2005 2004
Expected option life-years 10 10
Risk-free interest rate 4.25% 2 - 4.75%
Dividend yield 0 0
Volatility 66 - 78% 79 - 110%
(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 2004 financial statements have been reclassified
to conform to the 2005 financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS 123(R) is generally effective for public companies
for annual periods beginning after June 15, 2005, supersedes APB
Opinion 25, Accounting for Stock Issued to Employees, and amends SFAS
95, Statement of Cash Flows.
SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro-forma disclosure is no longer
an alternative. The new standard will be effective for the company,
beginning December 1, 2005. The Company has not yet completed their
evaluation but expects the adoption to have an effect on the financial
statements similar to the pro-forma effects reported above.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, which changes the guidance in APB 29, Accounting for
Nonmonetary Transactions. This Statement amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS 153
is effective during fiscal years beginning after June 15, 2005. The
Company does not believe the adoption of SFAS 153 will have a material
impact on the Company's financial statements.
11
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (continued)
The Securities and Exchange Commission has issued Staff Accounting
Bulletin (SAB) No. 106 regarding the application of SFAS 143,
"Accounting for Asset Retirement Obligations," on oil and gas producing
entities that use the full cost accounting method. It states that after
adoption of SFAS 143, the future cash outflows associated with settling
asset retirement obligations that have been accrued on the balance
sheet should be excluded from the present value of estimated future net
cash flows used for the full cost ceiling test calculation. SAB No. 106
will be effective for the Company once the Company has proved reserves
and will exclude the future cash flows from settling asset retirement
obligations in its ceiling test computation upon having proved
reserves.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154"). This statement, which replaces APB Opinion
No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, requires that a
voluntary change in accounting principle be applied retroactively to
all prior period financial statements presented, unless it is
impracticable to do so. SFAS 154 also provides that a change in method
of depreciating or amortizing a long-lived non-financial asset be
accounted for as a change in estimate effected by a change in
accounting principle, and also provides that correction of errors in
previously issued financial statements should be termed a
"restatement." SFAS 154 is effective for fiscal years beginning
December 15, 2005. The Company anticipates that the adoption of SFAS
154 will not have a material impact on its financial statements.
NOTE 3 - PROPERTY AND EQUIPMENT
OIL AND GAS PROPERTIES
At August 31, 2005, the Company's oil and gas properties consist of oil
and gas lease acquisition costs and capitalized drilling, completion
and facility costs. The Company had no proved reserves and all
properties are considered to be unevaluated.
As of August 31, 2005, the Company owned interests in 225 natural gas
wells in the Powder River Basin, acquired either through acquisition or
drilling. Thirty-seven wells have recorded initial natural gas
production but due to the lack of sufficient production history, proved
reserves have not been determined. An additional thirty-one wells are
in the de-watering phase, which normally precedes natural gas
production in coal bed natural gas fields. The remaining wells are in
various stages of completion or awaiting hook up to pipelines.
Under the terms of a Lease Acquisition and Development Agreement (the
"Agreement") entered into in March, 2005 the Company has expended
approximately $7,022,000 to acquire working interests in unevaluated
oil and gas properties in the Piceance Basin in Colorado. In connection
with the Agreement the Company entered into a Participation Agreement
with a significant shareholder the ("Related Party"), to acquire all or
a portion of the remaining 41-2/3% working interest in the subject
properties. The Related Party subsequently assigned its contractual
rights under the Agreement to a non-related third party (the "Joint
Venture Partner"). Jointly, the Company and the Joint Venture Partner
have an obligation under the Agreement to commence the drilling of one
well by December 31, 2005 and nine additional wells by August 22, 2006.
In the event the obligation wells are not completed in the prescribed
time, the Company and its Joint Venture Partner must pay liquidated
damages of $500,000 for each well not drilled, or, forfeit their
interests in all leases except the drilling and spacing units for the
wells commenced as of the deadline.
12
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)
OIL AND GAS PROPERTIES (continued)
In March 2005 the Company, through its wholly owned subsidiary,
Pannonian, entered into a farmout agreement with an unrelated party
(the "Farmee") to conduct exploration activities on its Neues Bergland
Exploration Permit in Germany. Prior to the farmout Pannonian owned a
50% interest in the permit. Under the terms of the agreement the Farmee
made an initial payment of $750,000 to Pannonian and its partners to
acquire a 40% interest in the permit, thereby reducing Pannonian's
ownership interest to 30%. The Company recognized a gain of $197,676 on
the transaction, representing the excess of the proceeds over the
original cost of the property. Drilling of the initial test well is
scheduled for the fourth quarter of 2005. The Farmee will pay 100% of
the costs to drill the first well and, at its option, to drill a second
well on the permit.
In May 2005 the Company, through its wholly owned subsidiary,
Pannonian, entered into a farmout agreement with an affiliated company
whose President is a significant shareholder of the Company (the
"Farmee") to evaluate the concession held by Pannonian in the Jiu
Valley Coal Basin in Romania. This concession had been assigned to
Pannonian by the Romanian government, in October 2002, under the terms
of a Concession Agreement (the "Concession"). The farmout agreement
call for the assignment of the Concession to the Farmee; the assignment
of a 75% working interest in the Concession area; and for the drilling
of one test well and an additional, optional, test well, the cost of
which will be paid 100% by the Farmee. In addition the Farmee will pay
Pannonian $100,000 upon approval by the Romanian government of the
assignment of the Concession, and will pay the first $250,000 of
Pannonian's proportionate share of drilling and operating costs
subsequent to the drilling of the first two wells. As of August 31,
2005, drilling of the first test well was ongoing.
UNEVALUATED PROPERTIES
At August 31, 2005 and November 30, 2004 the Company's unevaluated oil
and gas properties consist of costs incurred in the following areas:
May 31, 2005 November 30, 2004
Oil and gas properties - full cost method
United States $ 50,737,210 $ 37,405,620
Europe 37,485 85,909
--------------- ---------------
$ 50,774,695 $ 37,491,529
=============== ===============
The Company's oil and gas expenditures to date, have consisted of
acquisition costs to purchase, lease or otherwise acquire properties,
costs to drill, complete and equip wells and costs to construct
gathering systems and production facilities. The Company has realized
initial natural gas production from thirty-seven wells. Due to the
relatively short production history, the Company does not have
sufficient production information by which reserves can be estimated.
The Company has no proved reserves at August 31, 2005 and all oil and
gas property costs relate to unevaluated properties.
13
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - NOTES PAYABLE
In connection with the acquisition of certain oil and gas properties in
January 2004, the company issued a promissory note in the amount of
$2,600,000. The note called for interest at a rate of 6% per annum and
for principal payments of $1,000,000 on January 14, 2005 and $1,600,000
on June 24, 2005.
On January 19, 2005, the Company entered into an amendment to the
agreement whereby for the payment of $100,000, the payment schedule was
revised as follows:
Due on or before March 1, 2005 $500,000
Due on or before August 19, 2005 1,600,000
Due on or before January 13, 2006 500,000
On March 1, 2005, the Company paid the noteholder $500,000, consisting
of $175,233 of accumulated interest and $324,767 of principal
repayment.
On August 14, 2005 the Company and the noteholder further amended the
agreement to include the following principal repayment schedule:
On or before September 15, 2005 $300,000
On or before January 15, 2006 200,000
On or before April 1, 2006 All remaining principal and interest
On September 15, 2005 the Company paid the noteholder $300,000 in
accordance with the repayment schedule.
NOTE 5 - CONVERTIBLE NOTES PAYABLE
2004 NOTES
In August and October 2004, the Company completed two tranches of a
private offering of Senior Secured Convertible Notes and Warrants.
Gross proceeds from the initial tranche of the offering were
$15,000,000. Gross proceeds from the second tranche of the offering
were $5,000,000. The notes pay interest at the prime rate plus 7.25%
per annum, mature two years from the date of issue, are collateralized
by substantially all the Company's assets, and are convertible into
10,695,187 shares of the Company's common stock based on a conversion
price of $1.87 per share. Monthly principal repayments of $833,333,
plus accrued interest commenced on March 1, 2005. At the Company's
option, and assuming the satisfaction of certain conditions, the
Company may pay the monthly installments in cash or through a partial
conversion of the notes into shares of the Company's common stock at a
conversion rate equal to the lesser of $1.87 (as may be adjusted to
prevent dilution), or 93% of the weighted average trading price of the
Company's common stock on the trading day preceding the conversion.
Note purchasers received warrants to purchase 5,194,806 shares of the
Company's common stock at an exercise price of $1.54 per share, for a
period of three years."). During the nine months ended August 31, 2005
the Company made, in aggregate, principal payments of $5,000,000 and
interest payments of $2,157,560. Of these amounts, $5,675,607 was paid
by issuing 4,966,090 shares of common stock at conversion prices
ranging from $0.93to $1.55 per share, and $1,481,953 was paid in cash.
The fair value of the warrants, estimated as of the issue date under
the Black-Scholes pricing model, resulted in a discount to the notes of
$4,336,316. For the nine months ended August 31, 2005, amortization of
the discount of $2,148,268 is included in interest expense.
14
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
Deferred financing costs associated with the notes in the amount of
$1,648,218 have been capitalized and are being amortized over the life
of the notes. For the nine months ended August 31, 2005 amortization of
deferred financing costs of $723,881, is included in interest expense.
MARCH 2005 NOTES
In March 2005, the Company completed a private offering of Senior
Secured Convertible Notes and Warrants to a group of accredited
investors. Gross proceeds from the offering were $7,695,000. The 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.
Note purchasers received warrants to purchase 1,637,235 shares of the
Company's common stock at an exercise price of $1.88 per share, for a
period of three years. Principal and interest on the notes are payable
upon maturity.
In accordance with Emerging Issues Task Force Issue No. 98-5 ("EITF
98-5"), "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios", and
EITF 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments", the Company recognized the advantageous value of
conversion rights attached to convertible debt and warrants as a
discount to the related debt and an addition to capital in excess of
par value . The fair value of the warrants estimated as of the issue
date under the Black-Scholes pricing model, of $1,545,147 resulted in a
discount to the Notes of $1,286,766, and a beneficial conversion
feature to the notes of $1,286,766. The resulting discount attributable
to the warrants and the beneficial conversion feature of the notes
aggregating $2,573,532 has been recorded as a discount to the notes and
is being amortized over the term of the notes. Amortization of the
discount of $569,808 is included in interest expense for the nine
months ended August 31, 2005.
Deferred financing costs associated with the notes in the amount of
$391,155 have been capitalized and are being amortized over the life of
the notes. For the nine months ended August 31, 2005 amortization of
deferred financing costs of $87,082, is included in interest expense.
MAY 2005 NOTES
In May 2005, the Company completed a private offering of Senior Secured
Convertible Notes to a group of accredited investors. 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 equally with that of the
2004 Notes, and senior to the March 2005 Notes. The notes pay interest
at the prime rate plus 7.25% adjusted and payable quarterly. They
mature May 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 has been
calculated to be the difference between the market price per share at
the date of issue ($1.14) and the conversion price ($1.88), times the
number of shares into which the notes are convertible (5,319,149) or
$3,936,170. This value 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 will be amortized over the five-year term of
the notes. Amortization of the discount of $198,317 is included in
interest expense for the nine months ended August 31, 2005.
15
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
Deferred financing costs associated with the notes in the amount of
$639,888 have been capitalized and are being amortized over the life of
the notes. For the nine months ended August 31, 2005 amortization of
deferred financing costs of $32,240 is included in interest expense.
At August 31, 2005 and November 30, 2004 convertible notes consist of
the following:
August 31, 2005 November 30, 2004
2004 Notes $ 15,000,000 $ 20,000,000
Less unamortized discount (1,186,247) (3,334,515)
March 2005 Notes 7,695,000
Less unamortized discount (2,003,723)
May 2005 Notes 10,000,000
Less unamortized discount (3,737,853)
-----------------------------------------------
25,767,177 16,665,485
Less current portion, net (9,209,168) (6,249,557)
-----------------------------------------------
Long term portion, net $ 16,558,009 $ 10,415,928
===============================================
Total principal payments due in the next twelve months are $10,000,000.
If the Company's common stock meets certain conditions of trading
volume and price, all principle payments may be paid by issuing shares
of common stock.
NOTE 6 - STOCKHOLDERS' EQUITY
COMMON STOCK
During the nine months ended August 31, 2005, the Company issued shares
of its common stock as follows:
o 305,656 shares issued in conjunction with the cashless
exercise of 508,475 Series "A" warrants associated with the
convertible debentures dated September 24, 2003.
o 271,377 shares issued in conjunction with the cashless
exercise of 508,475 Series "B" warrants associated with the
convertible debentures dated October 3, 2003.
o 1,332,676 shares for $992,302 cash for the exercise of
1,332,676 of warrants at exercise prices ranging from $0.71
to $1.54 per share.
o 4,966,090 shares issued to Holders of Senior Secured
Convertible Notes in connection with the conversion of
$5,675,986 of principal and accrued interest at various
conversion rates, ranging from $0.93 to $1.55 per share.
16
GALAXY ENERGY CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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,
2005 and November 30, 2004, options to purchase 2,025,000 and 3,000,000
shares, respectively, were available to be granted pursuant to the
stock option plan.
In December 2004 the Company granted certain employees and consultants
options to purchase a total of 925,000 shares of the Company's common
stock for a term 10 years at the closing price of the common stock on
the dates of grant. The options vest over terms of two to five years.
On January 1, 2005, the Company granted each of the Company's outside
directors options to purchase 12,500 shares of the Company's common
stock for a term 10 years at the closing price of the common stock on
the date of grant. The options were vested upon grant.
NOTE 8 - SUBSEQUENT EVENTS
In September 2005 noteholders of the 2004 Notes converted $665,962 of
the scheduled September1, 2005 principal and interest payment of
$1,005,320 into 743,968 shares of common stock at various conversion
rates.
In September 2005, the Company gave notice to the noteholders of the
2004 Notes of its election to convert the entire scheduled principal
and interest payment of $1,001,005 due on October 1, 2005 into shares
of the Company's common stock, in accordance with the terms of the
Notes. Also in September 2005 the Company gave notice to the
noteholders of the May 2005 Notes of its election to convert the entire
scheduled interest payment of $347,260 due on October 1, 2005 into
shares of the Company's common stock, in accordance with the terms of
the Notes
In October 2005, noteholders of the 2004 Notes and May 2005 Notes
converted $350,000 and $100,000, respectively, of the scheduled October
1, 2005 payments into 281,985 and 85,722 shares of common stock at a
conversion rate of $1.10 to $1.24 per share.
In October 2005 the company entered into an Amendment to the
Participation Agreement (the "Amendment") covering its activities in
the Piceance Basin, Colorado as discussed in Note 3. As of the date of
the Amendment the Company and its Joint Venture Partner have each
expended approximately $7,000,000 on the project. The Amendment calls
for the Company to reduce its working interest in the Piceance project
from its current approximate 50% ownership, down to 25%. The Company's
Joint Venture Partner will fund 100% of the next $14,000,000 of lease
acquisition and drilling operations in the project in order to equalize
the participants total expenditures at the agreed upon 75% - 25% split.
Expenditures incurred after the equalization point will be shared 25%
to the Company and 75% to the Joint Venture Partner.
In October 2005 the registration statement coving the resale of common
stock underlying the May 2005 Notes was declared effective by the
Securities and Exchange Commission. Because the Company did not meet
the deadline for the registration of the common stock to become
effective as required by the Securities Purchase Agreement, the company
was required to pay liquidated damages to investors in the amount of
$226,680.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This report contains forward-looking statements. You should review our
cautionary note about forward-looking statements at the end of this section.
Management believes the completion of its fiscal quarter ended February
29, 2004 marked the completion of its first phase of its business plan. The
goals of the first phase were to obtain promising oil and gas properties in the
Powder River Basin of Wyoming and Montana and adequate funding to pay for those
properties and commence drilling operations. To accomplish those goals, we
needed to build our corporate infrastructure and make the investing public aware
of our presence. We believed that by so doing, we could raise the capital we
needed from the sale of our securities and use shares of our common stock to pay
for property acquisitions.
Our goal for the second phase of our business plan, which commenced
March 1, 2004, was to determine the potential of our properties. We believed
that by so doing, we could develop a plan to secure additional funding for what
is hoped to be development drilling projects. During the second half of the
fiscal year ended November 30, 2004, and in May of 2005 we raised additional
funding for our coal bed methane development program in the Powder River Basin
of Wyoming. We also raised additional funds to diversify our property position
and acquire oil and gas properties in the Piceance Basin of Colorado in March
2005. In May 2005 we entered into a farmout agreement with Empyrean Energy PLC
to evaluate our Neues Bergland Exploration Permit, located near Kusel in the
state of Rheinland Pfalz, Germany. The farmout agreement calls for the drilling
of an initial test well which is expected to begin by mid-November 2005 Also in
May 2005 we entered into a farmout agreement with Falcon Oil & Gas Ltd. (a
related party) to evaluate our concession in the Jiu Valley Coal Basin in
Romania. This agreement provides for drilling two test wells, one of which is
required and one that is optional. The first test well on the Jiu Valley
Concession has been drilled and completion and testing operations have
commenced.
Our tasks now are to establish reserves on our properties and to place
our properties into production. We had interests in 158 completed wells and 68
wells in various stages of completion as of October 5, 2005. We generated
$682,589 in revenues in the first nine months of the current fiscal year and we
expect to generate increasing levels of revenue over the remainder of the
current fiscal year. We anticipate that these revenues, while significantly
larger than in fiscal 2004, will not be sufficient to fund completely our
planned operations and commitments. Accordingly, we will continue to raise funds
from external sources, such as the sale of equity and/or debt securities. We
believe, however, that our recent property acquisition in the Piceance Basin, as
well as the results from our drilling operations in the Powder River Basin,
Germany and Romania, will enhance our ability to obtain such financing on
suitable terms
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2005 COMPARED TO THE THREE MONTHS ENDED AUGUST 31,
2004
During the three months ended August 31, 2005 we recorded natural gas
sales volumes of 61,895 mcf compared to 6,476 mcf in the same period in 2004. We
recorded $323,313 ($5.06/mcf) of natural gas sales and $377,435 ($6.10/mcf) of
lease operating and production tax expense on the sales volumes for the quarter
ending August 2005 compared to natural gas sales of $23,780 and lease operating
and production tax expense of $15,215 during the same period in 2004.
Depreciation, depletion and amortization ("DD&A") expenses associated with the
gas sales were $113,268 or $1.83 /mcf during the quarter ending August 31, 2005
18
compared with zero DD&A expenses during the same period of 2004. Because the
production history of the producing wells is not sufficient to enable us to
recognize proved reserves, we calculated DD&A on the basis of costs incurred on
producing wells and the estimated productive life of the wells.
We recorded interest income earned on cash deposits in commercial banks
of $37,087 during the quarter ending August 31, 2005 compared to $7,652 during
the same period in 2004. The increase in interest income is due to additional
cash resulting from our financing and fund raising activities during our fiscal
year ending November 30, 2004 and in March and May 2005.
For the quarters ended August 31, 2005 and 2004, we recorded general
and administrative costs of $906,760 and $874,001, respectively, as summarized
below.
Three Months Ended
August 31, 2005
2005 2004
Salaries and benefits $ 298,543 $ 158,298
Professional and consulting 117,211 118,678
Travel & entertainment 65,044 127,702
Legal 78,032 139,300
Audit and accounting 23,194 21,651
Investor relations 156,038 114,052
Office lease and expenses 100,958 64,485
Prospect generation, maintenance and 21,240 63,335
presentation
Director fees 46,500 66,500
----------------------------------
$ 906,760 $ 874,001
==================================
Significant period to period changes include:
o Increases in salaries and benefits reflect higher benefit costs, a
change in employment classification from consultant to employee, and
separation packages for three employees terminated during the period.
o Decreased travel and entertainment expenses reflect lower levels of
travel associated with financing activities during the period, as the
Company focuses more on exploiting its existing assets.
o Legal fees reflect lower fees in 2005 as compared to 2004 when the
Company was engaged in significant financing.
o Increased investor relations reflect annual report preparation and
distribution, additional advisors employed to disseminate Company
information to shareholders and greater emphasis on communication with
existing and potential shareholders.
o Increased office lease and expenses reflect the Company's relocation
to larger office space in June 2005 and related higher level of
operational activity.
We recorded $160,258 of DD&A expenses in the quarter ending August 31,
2005 compared to $39,839 in the previous year's quarter. The increase in 2005
versus 2004 primarily reflects DD&A calculated on 37 producing wells during 2005
as compared to only 5 wells the year before.
We recorded interest and financing costs of $2,745,696 in the quarter
ending August 31, 2005 compared to $169,636 in the previous year's period. The
expense for this quarter is comprised of interest on the convertible notes and
other notes payable of $1,190,648, the amortization of the discount on the
convertible notes of $1,034,970, amortization of deferred financing costs of
$246,156, and the value of the discount on the
19
shares issued to noteholders upon conversion of principal and accrued interest,
in the amount of $273,922. The expense in last year's quarter ending August 31,
2004 is comprised of interest on 7% convertible debentures and other notes
payable of $98,384 and amortization of the discount on convertible notes issued
during the period of $71,252.
NINE MONTHS ENDED AUGUST 31, 2005 COMPARED TO NINE MONTHS ENDED AUGUST 31, 2004
During the nine months ended August 31, 2005 we recorded natural gas
sales volumes of 131,895 mcf compared to 6,476 mcf sales volumes in the same
period in 2004. We recorded $682,589 ($5.18/mcf) of natural gas sales and
$753,845 ($5.72/mcf) of lease operating and production tax expense on the sales
volumes for the nine months ended August 2005 compared to natural gas sales of
$23,780 and lease operating and production tax expense of 15,215 during the same
period in 2004. Depreciation, depletion and amortization ("DD&A") expenses
associated with the gas sales were $241,368 or $1.83 /mcf during the nine months
ending August 31, 2005 compared with zero DD&A expenses during the same period
of 2004. Because the production history of the producing wells is not sufficient
to enable us to recognize proved reserves, we calculated DD&A on the basis of
costs incurred on producing wells and the estimated productive life of the
wells.
During the nine months ended August 31, 2005, we recorded a gain on the
sale of oil and gas properties of $197,676, reflecting the excess of proceeds to
be received on the farm-out of the Neues Bergland Exploration Permit in Germany.
No such sales occurred in the corresponding period in 2004.
We recorded interest income earned on cash deposits in commercial banks
of $117,569 during the nine months ending August 31, 2005 compared to $30,886
during the same period in 2004. The increase in interest income is due to
additional cash resulting from our financing and fund raising activities during
our fiscal year ending November 30, 2004 and in March and May 2005.
For the nine months ended August 31, 2005 and 2004, the Company
incurred general and administrative expenses of $3,410,135 and $2,598,051,
respectively, as summarized below
Nine Months Ended
August 31, 2005
2005 2004
Salaries and benefits $ 813,260 $ 373,489
Professional and consulting 499,736 424,932
Travel & entertainment 369,238 346,725
Legal 409,130 428,913
Audit and accounting 137,411 129,392
Investor relations 548,541 384,139
Office lease and expenses 317,722 257,765
Prospect generation, maintenance and 175,597 95,801
presentation
Director fees 139,500 156,895
--------------------------------
$ 3,410,135 $ 2,598,051
================================
Significant period to period changes include:
o Increased salaries and benefits primarily reflects additional staff
members for all of 2005, as compared to only a portion of 2004 in which
staff additions were made at mid year, and a change in employment
classification from consultant to employee.
o Increased investor relations reflect annual report preparation and
distribution, additional advisors
20
employed to disseminate Company information to shareholders and greater
emphasis on communication with existing and potential shareholders
o Increase office lease and expenses reflect more office space in 2005 to
accommodate additional staff and consultants required to manage
significantly increase level of operational activity.
o Increased prospect generation, maintenance and presentations expenses
reflect increased level of operational activity in existing and new
project areas particularly international projects.
o Decrease director fees on 2005 as compared to 2004 reflect steady
fee for all of nine months in 2005 as compared to adjustment to
include prior year fees recorded in 2004.
The Company recorded $334,153 of depreciation and amortization expense
in 2005 compared to $168,188 in 2004. The increase in 2005 versus 2004 primarily
reflects DD&A calculated on 37 producing wells in 2005 as compared to only 5
wells the year before.
The Company recorded interest and financing expense of $7,255,702 in
2005 compared to $3,124,947 in 2004. The 2005 expense is comprised of interest
on the convertible notes and other notes payable of $2,796,163, the amortization
of the discount on the convertible notes of $2,916,393, amortization of deferred
financing costs of $843,204, and the value of the discount on the shares issued
to noteholders upon conversion of principal and accrued interest, in the amount
of $699,942. The 2004 expense is comprised of interest on 7% convertible
debentures and other notes payable of $302,115, liquidated damages related to
the 2003 Convertible Debentures and common stock private placement of $439,050
and amortization and write off upon conversion, of the discount on convertible
debentures of $2,383,782.
The loss recorded by the Company for the nine-month period ended August
31, 2005, of $10,756,000, increased the accumulated deficit as of that date to
$24,306,765.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES. Since inception, the Company has funded its
activities through the sale of convertible debentures, convertible notes, common
stock, and the exercise of warrants, raising net proceeds of $57,806,737 through
August 31, 2005, of which $17,745,137 was raised during the nine month period
then ended through the sale of convertible notes payable and the exercise of
warrants.
From December 2002 through May 2003, we sold 1,602,000 shares of common
stock for gross proceeds of $1,602,000. In October 2003, we completed a
$5,640,000 private placement of 7% secured convertible debentures and warrants,
due two years from date of issue and secured by substantially all of our assets.
Debentures purchasers received five-year warrants to purchase 2,867,797 shares
of common stock at an exercise price of $0.71 per share and 2,867,797 shares of
common stock at an exercise price of $0.83 per share. We filed a registration
statement covering the shares underlying the debentures and warrants, but did
not meet the deadline associated with this filing obligation. We paid a penalty
of $404,000 to the holders of the debentures. During the year ended November 30,
2004, all of the debentures were converted at $0.59 per share into 9,559,322
shares of common stock.
In December 2003, we completed a private placement of 2,503,571 shares
of our common stock and warrants to purchase 500,715 common shares, resulting in
gross proceeds of $3,505,000. The warrants were exercisable for a four-year
period at an original price of $2.71 per share. In accordance with the terms of
the warrants, the exercise price has been reset and these warrants are currently
exercisable at $1.54 per share. We have registered the resale of the shares that
were sold and the shares underlying the warrants.
We completed a second private placement of 6,637,671 shares of our
common stock and warrants to purchase 1,327,535 common shares in January 2004,
resulting in gross proceeds of $11,947,800. The warrants
21
were exercisable for a five-year period at an original price of $4.05 per share.
In accordance with the terms of the warrants, the exercise price has been reset
and these warrants are currently exercisable at $1.54 per share. We have
registered the resale of the shares that were sold and the shares underlying the
warrants.
In August and October 2004, we completed two tranches of a private
placement of senior secured convertible notes and warrants. Gross proceeds from
the initial tranche were $15,000,000, while gross proceeds from the second
tranche were $5,000,000. The notes pay interest at the prime rate plus 7.25% per
annum, mature two years from the date of issue, are collateralized by
substantially all of our assets, and are convertible into 10,695,187 shares of
our common stock based on a conversion price of $1.87 per share. We paid accrued
interest on the principal amount of the notes on January 14, 2005 and began to
make monthly principal installments of $833,333 plus accrued interest as of
March 1, 2005. At our option, and assuming the satisfaction of certain
conditions, we may pay the monthly installments in cash or through a partial
conversion of the notes into shares of our common stock at a conversion rate
equal to the lesser of $1.87 or 93% of the then current market price. Note
purchasers received three-year warrants to purchase 5,194,806 shares of common
stock at $1.54 per share.
In March 2005, we completed a private placement of $7,695,000 in senior
subordinated convertible notes and warrants. The unsecured notes are due April
30, 2007 and may be converted by the holders into shares of common stock at a
price of $1.88 per share. The note holders also received three-year warrants to
purchase 1,637,235 shares of common stock at $1.88 per share. We have registered
the shares underlying the notes and warrants.
On May 31, 2005, we completed a private placement of $10,000,000 of
senior secured convertible notes for the development of our existing oil and gas
properties. The notes pay interest at the prime rate plus 7.25% per annum;
mature five years from the date of issue, but the investors have the right to
have the notes repaid at any time after three years and also in March 2007 if
any of the senior subordinated convertible notes issued in March 2005 are then
outstanding, unless certain circumstances exist; are senior to the senior
subordinated convertible notes issued in March 2005; are collateralized by
substantially all of our assets; and are convertible into 5,319,149 shares of
our common stock based on a conversion price of $1.88 per share. Under these new
notes, we became obligated to pay accrued interest quarterly beginning July 1,
2005. At our option, and assuming the satisfaction of certain conditions, we may
pay the quarterly installments in cash or through a partial conversion of the
notes into shares of our common stock at a conversion rate equal to the lesser
of $1.88 or 93% of the then current market price. No warrants were issued to the
investors related to this financing. However, should we issue fixed price equity
or equity-linked securities at an effective net issuance price between $1.55 and
$1.88 per share prior to January 1, 2006 for cumulative gross proceeds not
exceeding $20,000,000, we are required to issue to the investors three-year
warrants exercisable at $1.88 per share. Additionally, the investors received a
perpetual overriding royalty interest 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
holders of the senior secured notes issued in 2004 took the position that our
issuance of the senior subordinated convertible notes in March 2005 triggered
anti-dilution provisions in the senior secured notes issued in 2004 and related
warrants. While we did not agree with this position, the parties included a
waiver of any anti-dilution adjustment resulting from the issuance of the senior
subordinated convertible notes in March 2005 and related warrants as part of the
terms of this new financing.
OPERATING AND INVESTING ACTIVITIES. Our financing activities described
above have provided sufficient cash for our operating and investing activities.
From inception through August 31, 2005, we used $54,236,779 for operating and
investing activities, of which $24,802,658 was spent during the nine-month
period then ended. We had $4,759,868 of non-restricted cash and short-term
investments at August 31, 2005. In
22
comparison, we expended $14,833,152 for operating and investing activities
during the nine months ended August 31, 2004, and had $15,526,740 of cash at
August 31, 2004.
For the nine months ended August 31, 2005 we incurred a loss of
$10,756,000 compared to a loss or $5,891,184 for the same period in 2004.
Significant non cash expenses included in the reported loss amounts include:
amortization of the discount on convertible notes and of deferred financing
costs of $3,759,600 in 2005 and $2,510,661, interest paid in common stock of
$2,383,782 in 2005 and $-0- in 2004; depreciation, depletion and amortization of
$334,152 in 2005 and $168,188 in 2004.
During the nine months ended August 31, 2005 we expended $21,115,215 on
investing activities compared to $11,524,830 in the same period of 2004,
primarily for the acquisition of undeveloped oil and gas properties.
WORKING CAPITAL DEFICIENCY. At August 31, 2005, we had a working
capital deficiency of $8,422,038, compared to a working capital deficiency of
$626,108 at November 30, 2004. Included in the working capital deficiency at May
31, 2005 was $9,209,168 of convertible note payments and $397,035 of related
accrued interest, due in the next twelve months. During the nine months ended
August 31, 2005 total interest and principal payments made to the noteholders of
the 2004 Notes was $7,157,559. Of this amount the Company has paid $5,675,606 by
issuing 4,966,090 shares of common stock converted at various conversion rates.
Likewise, of the total interest and principal payment of $1,005,320 due on the
2004 Notes on September 1, 2005, $665,962 was paid by issuing 743,968 shares of
common stock converted at various conversion rates. The Company has also given
notice to the noteholders of the 2004 Notes of its election to convert the
entire amount of the scheduled October 1, 2005 principal and interest payment of
$1,001,005, into shares of the Company's stock. Further the Company has given
notice to the noteholders of the May 2005 Notes of its election to convert the
entire amount of the scheduled October 1, 2005 interest payment of $347,260,
into shares of the Company's stock. As of October 12, 2005 we have converted
$350,000 of the 2004 Notes payment into 281,985 shares of common stock, and
$100,000 of the May 2005 Notes payment into 85,722 shares of common stock. We
may, subject to certain conditions, continue to make payment of the amounts due
on the convertible notes in shares of common stock rather than cash. We intend
to closely monitor the trading volume and price of our common stock throughout
the life of the convertible notes to determine the optimum repayment mix of cash
and common stock. At August 31, 2005, we had initial natural gas production from
37 wells. We plan to utilize our available cash to complete and connect to
pipelines up to 18 additional wells in the Powder River Basin during the
remainder part of the current fiscal year. Management believes that natural gas
production from these wells will generate revenues sufficient to service the
cash portion of the debt repayment schedule, if any. Our partner in the Piceance
Basin (Exxel Energy) will provide the funds for the next $14 million dollars of
lease acquisition, drilling and completion expenditures in the Piceance during
the remainder of the current fiscal year and into the next fiscal year. We will
have a 25% working interest in these wells.
We are addressing our working capital deficiency through the sale of
our common stock and debt securities. During the nine months ended August 31,
2005, we received $992,302 from the exercise of 1,332,676 warrants at a prices
ranging from of $1.54 to $0.71 per share. In March 2005, we entered into an
agreement to acquire a working interest in the Piceance Basin in Colorado.
Funding for our share of acquisition and project costs was financed through a
private placement of $7,695,000 in senior subordinated convertible notes and
warrants as described above under the Liquidity and Capital Resources section.
In May 2005, we completed a senior secured convertible note financing in the
aggregate principal amount of $10,000,000 as described above under the Liquidity
and Capital Resources section.
Management believes these transactions are an indication of our ability
to generate additional capital to meet our obligations during the next year.
However, our drilling program for the coming year will require
23
additional capital and will require us to raise additional funds by selling
equity securities, issuing debt, selling assets, or engaging in farm-outs or
similar types of arrangements. Any financing obtained through the sale of our
equity will likely result in additional dilution to our stockholders. If we are
forced to sell assets to meet our operating and capital requirements, we may not
realize the full market value of the assets and the sales price could be less
than our carrying value of the assets.
SCHEDULE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our obligations and commitments to make
future payments under our notes payable, operating leases, employment contracts
and consulting agreement for the periods specified as of August 31, 2005.
- ----------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------
MORE
LESS THAN 1 THAN 5
CONTRACTUAL OBLIGATIONS (1)<F1> TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
- ----------------------------------------------------------------------------------------------------------------------
Convertible Notes Payable
Senior Secured Notes Payable (2)<F2> -- --
Principal $25,000,000 $10,000,000 $5,000,000 $10,000,000 --
Interest 9,082,603 3,544,828 3,181,747 2,356,027 --
Senior Subordinated Notes Payable (3)<F3> --
Principal 7,695,000 -- 7,695,000 -- --
Interest 2,242,618 -- 2,242,618 -- --
Notes payable and accrued interest 2,394,403 2,394,403 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Office & Equipment Leases 492,738 96,537 206,441 189,760 --
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $46,907,362 $16,035,768 $18,325,806 $12,545,787
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(1)<F1> This table excludes the costs of drilling obligations in our European
permits, as we reached agreement with third parties to fund our share
of the obligation amount, should such amount be spent. In the event we
do not fulfill those drilling obligations, we will forfeit the permit.
We have excluded asset retirement obligations because we are not able
to precisely predict the timing for these amounts.
(2)<F2> Under certain conditions, as described elsewhere in this report, we
have the option to pay the principal and interest with shares of common
stock instead of cash. Interest payments were calculated using actual
interest rates charged through August 31, 2005 and 13.50% thereafter.
(3)<F3> Under certain conditions, as described elsewhere in this report, we
have the option to pay the principal and interest with shares of common
stock instead of cash. Interest payments were calculated using actual
interest rates charged through August 31, 2005 and 13.00% thereafter.
</FN>
PLAN OF OPERATION
In addition to the above obligations, at August 31, 2005, we intended
to utilize our available cash for the following capital expenditures on our oil
and gas projects:
(1) $3,000,000 for operations to complete existing wells, to
construct necessary production and gathering facilities and
infrastructure to commence gas production in the Leiter,
Pipeline Ridge, and to enhance production in the Glasgow and
West Recluse areas of Wyoming;
24
As of October 10, 2005, we have completed approximately 75% of the work
identified above leaving $750,000 yet to be spent as described.
Our ability to complete all the drilling activities described above and
to meet our commitments and obligations is dependent upon the success of the
drilling program and the amount of cash flow generated from the sale of oil and
gas from the wells drilled. We continue to pursue funding and industry
participation alternatives to ensure our ability to continue to acquire
additional acreage and complete additional drilling activity. In addition, we
believe our ability to fund our activities and meet our commitments is dependent
upon the trading volume and price of our common stock. If our stock trades at
prices above the exercise prices of outstanding warrants and conversion prices
of outstanding debt securities, we may be able to obtain cash through the
exercise of warrants and pay our debt obligations with the issuance of our
stock.
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.
Currently the Company calculates depreciation and depletion of its oil
and gas properties on the basis of costs incurred on producing wells and the
estimated productive lives of the wells. After the Company is able to recognize
proved reserves, depletion of exploration and development costs and depreciation
of production equipment will be 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.
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 May 31, 2005, and
25
2004, there were no proved reserves. Costs of oil and gas properties are
considered unevaluated at May 31, 2005 and 2004.
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. Our asset retirement obligations ("ARO") relate primarily to the
plugging, dismantlement, removal, site reclamation and similar activities of our
oil and gas properties. Prior to adoption of this statement, such obligations
were accrued ratably over the productive lives of the assets through its
depreciation, depletion and amortization for oil and gas properties without
recording a separate liability for such amounts.
From inception through May 31, 2005, we, through acquisition and
drilling, acquired working interests in 225 natural gas wells. A limited number
of these wells had initial gas production during the period, and the others are
in various stages of completion and hook up at May 31, 2005. We adopted the
provisions of SFAS 143 to record the ARO associated with all wells in which we
own 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 our estimate of the life of the wells, based upon the
lives of comparable wells in the area. The amounts recognized upon adoption 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.
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 that we may grant to employees under our 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 (FASB) 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 we have continued to account for stock options under the intrinsic value
method specified in APB 25.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS 123(R) is effective for public companies for interim or annual periods
beginning after June 15, 2005, supersedes APB Opinion 25, Accounting for Stock
Issued to Employees, and amends SFAS 95, Statement of Cash Flows.
26
SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro-forma disclosure is no longer an alternative. The new
standard will be effective for us, beginning December 1, 2005. We have not yet
completed our evaluation but expect the adoption to have an effect on the
financial statements similar to the pro-forma effects reported above.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, which changes the guidance in APB 29, Accounting for Nonmonetary
Transactions. This Statement amends APB 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective during fiscal years beginning after June
15, 2005. We do not believe the adoption of SFAS 153 will have a material impact
on our financial statements.
The Securities and Exchange Commission has issued Staff Accounting
Bulletin (SAB) No. 106 regarding the application of SFAS 143, "Accounting for
Asset Retirement Obligations," on oil and gas producing entities that use the
full cost accounting method. It states that after adoption of SFAS 143, the
future cash outflows associated with settling asset retirement obligations that
have been accrued on the balance sheet should be excluded from the present value
of estimated future net cash flows used for the full cost ceiling test
calculation. SAB No. 106 will be effective for us once we have proved reserves
and will exclude the future cash flows from settling asset retirement
obligations in our ceiling test computation upon having proved reserves
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154"). This statement, which replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements, requires that a voluntary change in accounting
principle be applied retrospectively to all prior period financial statements
presented, unless it is impracticable to do so. SFAS 154 also provides that a
change in method of depreciating or amortizing a long-lived non-financial asset
be accounted for as a change in estimate effected by a change in accounting
principle, and also provides that correction of errors in previously issued
financial statements should be termed a "restatement." SFAS 154 is effective for
fiscal years beginning December 15, 2005. We anticipate that the adoption of
SFAS 154 will not have a material impact on our financial statements.
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
27
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.
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.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended August 31, 2005, we issued 2,454,322 shares of
common stock upon conversion of principal and interest due under
convertible notes. No underwriters were used in these stock
transactions. We relied upon the exemption from registration contained
in Rule 506 for the sales of shares, as all of the purchasers were
accredited investors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual shareholders meeting held June 21, 2005, the following
matters were voted upon:
----------------------------------------------------------------------------------------------------
ABSTENTIONS
AND
VOTES BROKER NON-
MATTER VOTED UPON VOTES FOR AGAINST VOTES
----------------------------------------------------------------------------------------------------
Election of directors
----------------------------------------------------------------------------------------------------
o Marc E. Bruner 48,681,039 311,945 -0-
----------------------------------------------------------------------------------------------------
o Carmen Lotito 48,684,794 308,190 -0-
----------------------------------------------------------------------------------------------------
o Cecil Gritz 48,725,394 267,590 -0-
----------------------------------------------------------------------------------------------------
o James Edwards 48,722,694 270,290 -0-
----------------------------------------------------------------------------------------------------
o Robert Thomas Fetters, Jr. 48,702,394 290,590 -0-
----------------------------------------------------------------------------------------------------
o Thomas Rollins 48,700,394 292,590 -0-
----------------------------------------------------------------------------------------------------
o Nathan Collins 48,699,394 293,590 -0-
----------------------------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
- --------------------------------------------------------------------------------
REGULATION S-K
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation (1)
- --------------------------------------------------------------------------------
3.2 Articles of Amendment to Articles of Incorporation (2)(3)
- --------------------------------------------------------------------------------
3.3 Bylaws (1)
- --------------------------------------------------------------------------------
29
- --------------------------------------------------------------------------------
REGULATION S-K
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
10.1 2003 Stock Option Plan (2)
- --------------------------------------------------------------------------------
10.2 Lease Option and Acquisition Agreement between Dolphin Energy
Corporation and Quaneco, L.L.C. (4)
- --------------------------------------------------------------------------------
10.3 Amendment to Lease Option and Acquisition Agreement between
Dolphin Energy Corporation and Quaneco, L.L.C. dated
September 2, 2003 (5)
- --------------------------------------------------------------------------------
10.4 Form of Common Stock Purchase Warrant Exercisable at $0.71
per Share (6)
- --------------------------------------------------------------------------------
10.5 Form of Common Stock Purchase Warrant Exercisable at $0.83
per Share (6)
- --------------------------------------------------------------------------------
10.6 Letter amending Lease Option and Acquisition Agreement
between Dolphin Energy Corporation and Quaneco, L.L.C. dated
September 22, 2003 (7)
- --------------------------------------------------------------------------------
10.7 Form of Securities Purchase Agreement dated as of December
18, 2003 between Galaxy Energy Corporation and the purchaser
named therein (8)
- --------------------------------------------------------------------------------
10.8 Form of Common Stock Purchase Warrant Exercisable at $2.71
per Share (8)
- --------------------------------------------------------------------------------
10.9 Sale and Escrow Agreement dated December 22, 2003 between
Pioneer Oil, LLC and Dolphin Energy Corporation (9)
- --------------------------------------------------------------------------------
10.10 Share Acquisition Agreement between Pioneer Oil, LLC and
Galaxy Energy Corporation dated December 22, 2003 (9)
- --------------------------------------------------------------------------------
10.11 Registration Rights Agreement dated as of December 22, 2003
between Pioneer Oil, LLC and Galaxy Energy Corporation (9)
- --------------------------------------------------------------------------------
10.12 Purchase and Sale Agreement by and between Continental
Industries, LC and DAR, LLC and Galaxy Energy Corporation
dated January 14, 2004 (10)
- --------------------------------------------------------------------------------
10.13 Form of Securities Purchase Agreement dated as of January 15,
2004 between Galaxy Energy Corporation and the Purchaser
named therein (11)
- --------------------------------------------------------------------------------
10.14 Form of Common Stock Purchase Warrant Exercisable at $4.05
per Share (11)
- --------------------------------------------------------------------------------
10.15 Strategic Consulting Agreement Between Brian Hughes and
Dolphin Energy Corporation (12)
- --------------------------------------------------------------------------------
10.16 Securities Purchase Agreement dated August 19, 2004 between
Galaxy Energy Corporation and the Buyers named therein (13)
- --------------------------------------------------------------------------------
10.17 Form of Initial Note (13)
- --------------------------------------------------------------------------------
10.18 Form of Conditional Note (13)
- --------------------------------------------------------------------------------
10.19 Form of Common Stock Purchase Warrant (13)
- --------------------------------------------------------------------------------
10.20 Registration Rights Agreement dated August 19, 2004 between
Galaxy Energy Corporation and the Buyers named therein (13)
- --------------------------------------------------------------------------------
30
- --------------------------------------------------------------------------------
REGULATION S-K
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
10.21 Security Agreement dated August 19, 2004 among Galaxy Energy
Corporation, Dolphin Energy Corporation, and Pannonian
International, Ltd. and Promethean Asset Management L.L.C. a
Delaware limited liability company, in its capacity as
collateral agent for the Lender (13)
- --------------------------------------------------------------------------------
10.22 Guaranty dated August 19, 2004 by Dolphin Energy Corporation
and Pannonian International, Ltd. in favor of Promethean
Asset Management L.L.C. in its own behalf and in its capacity
as agent for the benefit of the Buyers (13)
- --------------------------------------------------------------------------------
10.23 Form of Mortgage (13)
- --------------------------------------------------------------------------------
10.24 Purchase and Sale Agreement by and among Tower Colombia
Corporation, North Finn, LLC and American Oil & Gas, Inc., as
Sellers and Dolphin Energy Corporation, as Buyer dated July
15, 2004 (14)
- --------------------------------------------------------------------------------
10.25 Coal Bed Methane Participation Agreement dated November 2,
2004 between Dolphin Energy Corporation and Horizon Gas, Inc.
(15)
- --------------------------------------------------------------------------------
10.26 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 (16)
- --------------------------------------------------------------------------------
10.27 Amended Participation Agreement between Marc A. Bruner and
Dolphin Energy Corporation dated March 16, 2005 (17)
- --------------------------------------------------------------------------------
10.28 Securities Purchase Agreement dated March 1, 2005 between
Galaxy Energy Corporation and the Buyers named therein (16)
- --------------------------------------------------------------------------------
10.29 Form of Note (16)
- --------------------------------------------------------------------------------
10.30 Form of Common Stock Purchase Warrant (16)
- --------------------------------------------------------------------------------
10.31 Registration Rights Agreement dated March 1, 2005 between
Galaxy Energy Corporation and the Buyers named therein (16)
- --------------------------------------------------------------------------------
10.32 Subordination Agreement (16)
- --------------------------------------------------------------------------------
10.33 Second Amendment to Participation Agreement between Dolphin
Energy Corporation and Exxel Energy Corp. dated May 24, 2005
(18)
- --------------------------------------------------------------------------------
10.34 Securities Purchase Agreement dated May 31, 2005 between
Galaxy Energy Corporation and the Buyers named therein (19)
- --------------------------------------------------------------------------------
10.35 Form of Note (19)
- --------------------------------------------------------------------------------
10.36 Form of Qualifying Issuance Warrants (19)
- --------------------------------------------------------------------------------
10.37 Form of Repurchase Warrants (19)
- --------------------------------------------------------------------------------
10.38 Form of Registration Rights Agreement (19)
- --------------------------------------------------------------------------------
10.39 Form of First Amendment to Security Agreement, Pledge
Agreement and Guaranty (19)
- --------------------------------------------------------------------------------
10.40 Form of Mortgage Amendment (19)
- --------------------------------------------------------------------------------
31
- --------------------------------------------------------------------------------
REGULATION S-K
NUMBER EXHIBIT
- --------------------------------------------------------------------------------
10.41 Form of Waiver and Amendment to March 2005 Notes and Warrants
(19)
- --------------------------------------------------------------------------------
10.42 Form of Conveyances of Overriding Royalty Interests (19)
- --------------------------------------------------------------------------------
10.43 Form of March 2005 Subordination Agreement (19)
- --------------------------------------------------------------------------------
10.44 Form of Waiver and Amendment to 2004 Notes and Warrants (20)
- --------------------------------------------------------------------------------
10.45 Second Amendment to Lease Acquisition and Development
Agreement (21)
- --------------------------------------------------------------------------------
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 exhibits to the registrant's
registration statement on Form 10-SB, file number 0-32237.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) Incorporated by reference to the exhibits to the registrant's initial
filing of its registration statement on Form SB-2, file number
333-110053, on October 29, 2003.
(8) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated December 19, 2003, filed December 23,
2003, file number 0-32237.
(9) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated December 22, 2003, filed December 23, 2003,
file number 0-32237.
(10) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated January 14, 2004, filed January 20,
2004, file number 0-32237.
(11) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated January 15 2004, filed January 16,
2004, file number 0-32237.
(12) Incorporated by reference to the exhibits to post-effective amendment
no. 1 to the registrant's registration statement on Form SB-2, filed
August 2, 2004, file number 333-110053
(13) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated August 19, 2004, filed August 20, 2004, file
number 0-32237.
(14) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated September 30, 2004, filed October 5, 2004,
file number 0-32237.
(15) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated November 2, 2004, filed November 4, 2004, file
number 0-32237.
32
(16) 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.
(17) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated March 1, 2005, filed March 21, 2005,
file number 0-32237.
(18) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated March 1, 2005, filed May 26, 2005,
file number 0-32237.
(19) 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.
(20) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated May 31, 2005, filed June 2, 2005, file
number 0-32237.
(21) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated March 1, 2005, filed June 2, 2005,
file number 0-32237.
33
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 14, 2005 By: /s/ CHRISTOPHER S. HARDESTY
---------------------------------------
Christopher S. Hardesty
Chief Financial Officer
34