REPORT
OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Galaxy
Energy Corporation
Denver,
Colorado
We
have
audited the consolidated balance sheets of Galaxy Energy Corporation
and
subsidiaries (the “Company”), a development stage company, as of November 30,
2006 and 2005, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the three years in the period
ended November 30, 2006 and for the period from inception (June 18,
2002) to
November 30, 2006. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of the Company as
of November
30, 2006 and 2005, and the results of their operations and their cash
flows for
each of the three years in the period ended November 30, 2006 and for
the period
from inception (June 18, 2002) to November 30, 2006, in conformity
with U.S.
generally accepted accounting principles.
The
accompanying financial statements have been prepared assuming that
the Company
will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from
operations
and its total liabilities exceeds its total assets. This raises
substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also
described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
HEIN
& ASSOCIATES LLP
HEIN
&
ASSOCIATES
LLP
Denver,
Colorado
March
14,
2007, except for the period from inception (June 18, 2002) to November
30, 2006,
as included on F-4 through F-8, for which the date is November 12,
2007.
GALAXY
ENERGY CORPORATION
(A
Development Stage Company)
CONSOLIDATED
BALANCE SHEETS
NOVEMBER
30, 2006 and 2005
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
608,180
|
|
|
$
|
1,328,469
|
|
Accounts
receivable, joint interest
|
|
|
60,475
|
|
|
|
744,037
|
|
Accounts
receivable, joint interest, related party
|
|
|
923,172
|
|
|
|
32,845
|
|
Accounts
receivable, other
|
|
|
102,800
|
|
|
|
510,196
|
|
Prepaid
and other
|
|
|
107,236
|
|
|
|
167,513
|
|
Total
Current Assets
|
|
|
1,801,863
|
|
|
|
2,783,060
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas properties, at cost, full cost method of
accounting
|
|
|
|
|
|
Evaluated
oil and gas properties
|
|
|
10,991,945
|
|
|
|
9,991,629
|
|
Unevaluated
oil and gas properties
|
|
|
42,767,330
|
|
|
|
41,464,395
|
|
Less
accumulated depletion, amortization and impairment
|
|
|
(8,966,135
|
)
|
|
|
(7,097,299
|
)
|
|
|
|
44,793,140
|
|
|
|
44,358,725
|
|
|
|
|
|
|
|
|
|
|
Furniture
and equipment, net
|
|
|
121,945
|
|
|
|
194,877
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
Deferred
financing costs, net
|
|
|
565,524
|
|
|
|
721,024
|
|
Restricted
investments
|
|
|
459,783
|
|
|
|
379,782
|
|
Other
|
|
|
18,003
|
|
|
|
21,910
|
|
|
|
|
1,043,310
|
|
|
|
1,122,716
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
47,760,258
|
|
|
$
|
48,459,378
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,548,168
|
|
|
$
|
1,880,290
|
|
Accounts
payable - related party
|
|
|
64,400
|
|
|
|
99,078
|
|
Notes
payable - related party
|
|
|
7,549,728
|
|
|
|
-
|
|
Current
portion convertible notes payable, net
|
|
|
10,019,996
|
|
|
|
5,041,524
|
|
Notes
payable
|
|
|
-
|
|
|
|
2,049,728
|
|
Interest
payable
|
|
|
2,488,451
|
|
|
|
402,884
|
|
Total
Current Liabilities
|
|
|
21,670,743
|
|
|
|
9,473,504
|
|
|
|
|
|
|
|
|
|
|
Non-current
obligations
|
|
|
|
|
|
|
|
|
Convertible
notes payable, net
|
|
|
16,308,801
|
|
|
|
10,392,434
|
|
Interest
Payable
|
|
|
572,466
|
|
|
|
744,833
|
|
Asset
retirement obligation
|
|
|
1,288,337
|
|
|
|
1,242,967
|
|
Total
Non-current Obligations
|
|
|
18,169,603
|
|
|
|
12,380,234
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies ( Notes 2 and 10)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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 - 81,661,968 shares
|
|
|
|
|
|
|
and
68,668,029 shares
|
|
|
81,662
|
|
|
|
68,668
|
|
Capital
in excess of par value
|
|
|
71,537,766
|
|
|
|
64,073,382
|
|
Deficit
accumulated during the development stage
|
|
|
(63,699,517
|
)
|
|
|
(37,536,410
|
)
|
Total
Stockholders' Equity
|
|
|
7,919,911
|
|
|
|
26,605,640
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and
Stockholders' Equity
|
|
$
|
47,760,258
|
|
|
$
|
48,459,378
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
GALAXY
ENERGY CORPORATION
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
From
Inception
|
|
|
|
November
30,
|
|
|
November
30,
|
|
|
November
30,
|
|
|
(June
18, 2002) to
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
November
30, 2006
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas sales
|
|
$
|
1,194,642
|
|
|
$
|
1,297,194
|
|
|
$
|
122,455
|
|
|
$
|
2,614,291
|
|
Gain
on disposition of oil and gas property
|
|
|
-
|
|
|
|
197,676
|
|
|
|
-
|
|
|
|
197,676
|
|
Gain
on disposition of oil and gas property,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other income, related party
|
|
|
79,474
|
|
|
|
43,472
|
|
|
|
|
|
|
|
122,946
|
|
|
|
|
1,274,116
|
|
|
|
1,538,342
|
|
|
|
122,455
|
|
|
|
2,934,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expense
|
|
|
781,136
|
|
|
|
965,069
|
|
|
|
59,247
|
|
|
|
1,805,451
|
|
General
and administrative
|
|
|
5,016,534
|
|
|
|
5,316,588
|
|
|
|
3,517,218
|
|
|
|
17,085,902
|
|
Impairment
of oil and gas properties
|
|
|
1,328,432
|
|
|
|
5,273,795
|
|
|
|
-
|
|
|
|
6,667,996
|
|
Depreciation,
depletion and amortization
|
|
|
779,446
|
|
|
|
1,887,074
|
|
|
|
76,390
|
|
|
|
2,743,595
|
|
|
|
|
7,905,548
|
|
|
|
13,442,526
|
|
|
|
3,652,855
|
|
|
|
28,302,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
15,614
|
|
|
|
163,291
|
|
|
|
51,396
|
|
|
|
230,301
|
|
Interest
expense and financing costs
|
|
|
(19,547,289
|
)
|
|
|
(12,244,752
|
)
|
|
|
(6,352,100
|
)
|
|
|
(38,561,787
|
)
|
|
|
|
(19,531,675
|
)
|
|
|
(12,081,461
|
)
|
|
|
(6,300,704
|
)
|
|
|
(38,331,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(26,163,107
|
)
|
|
$
|
(23,985,645
|
)
|
|
$
|
(9,831,104
|
)
|
|
$
|
(63,699,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted
|
|
$
|
(0.36
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighed
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding - basic and diluted
|
|
|
72,094,609
|
|
|
|
64,698,889
|
|
|
|
53,488,853
|
|
|
|
52,553,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
financial statements.
GALAXY
ENERGY CORPORATION
(A
Development Stage Company)
STATEMENT
OF STOCKHOLDER'S EQUITY
PERIOD
FROM INCEPTION (June 18, 2002) TO NOVEMBER 30,
2002 AND YEARS ENDED
NOVEMBER
30, 2003, 2004, 2005 AND
2006
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
During
the
|
|
|
|
Common
Stock
|
|
|
In
Excess
|
|
|
Development
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par
Value
|
|
|
Stage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 18, 2002 (Inception)
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
$0.05 per share
|
|
|
4,000,000
|
|
|
|
4,000
|
|
|
|
196,000
|
|
|
|
|
|
Sale
of common stock for cash at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.001
per share
|
|
|
11,500,000
|
|
|
|
11,500
|
|
|
|
-
|
|
|
|
|
|
$0.02
per share
|
|
|
500,000
|
|
|
|
500
|
|
|
|
9,500
|
|
|
|
|
|
$0.05
per share
|
|
|
3,000,000
|
|
|
|
3,000
|
|
|
|
147,000
|
|
|
|
|
|
$0.34
per share
|
|
|
1,997,058
|
|
|
|
1,997
|
|
|
|
677,003
|
|
|
|
|
|
Recapitalization
of shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
to merger
|
|
|
9,028,000
|
|
|
|
9,028
|
|
|
|
(69,359
|
)
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,140,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 30, 2002
|
|
|
30,025,058
|
|
|
|
30,025
|
|
|
|
960,144
|
|
|
|
(1,140,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
$1.00 per share
|
|
|
1,602,000
|
|
|
|
1,602
|
|
|
|
1,598,228
|
|
|
|
|
|
Issuance
of common stock for services at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.00
per share
|
|
|
10,000
|
|
|
|
10
|
|
|
|
9,990
|
|
|
|
|
|
$
.91 per share
|
|
|
60,000
|
|
|
|
60
|
|
|
|
54,540
|
|
|
|
|
|
Issuance
of common stock to related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
upon
conversion of outstanding debt at $1.00 per share
|
|
|
233,204
|
|
|
|
233
|
|
|
|
232,971
|
|
|
|
|
|
Issuance
of common stock to related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
services at $1.00 per share
|
|
|
90,000
|
|
|
|
90
|
|
|
|
89,910
|
|
|
|
|
|
Common
stock issued to acquire subsidiary
|
|
|
1,951,241
|
|
|
|
1,952
|
|
|
|
(204,184
|
)
|
|
|
|
|
Warrants
to acquire common stock in conjunction with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debenture issuance
|
|
|
|
|
|
|
|
|
|
|
1,285,995
|
|
|
|
|
|
Intrinsic
value of debentures beneficial conversion feature
|
|
|
|
|
|
|
|
2,292,654
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,579,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 30, 2003
|
|
|
33,971,503
|
|
|
|
33,972
|
|
|
|
6,320,248
|
|
|
|
(3,719,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon warrant conversion
|
|
|
45,763
|
|
|
|
46
|
|
|
|
26,954
|
|
|
|
|
|
Issuance
of common stock for cash at $1.40 per share
|
|
|
2,503,571
|
|
|
|
2,504
|
|
|
|
3,502,496
|
|
|
|
|
|
Warrants
issued to placement agents in connection with
|
|
|
|
|
|
|
|
157,599
|
|
|
|
|
|
common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of offering
|
|
|
|
|
|
|
|
|
|
|
(1,784,448
|
)
|
|
|
|
|
Issuance
of common stock for oil and gas properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
$1.40 per share
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
2,798,000
|
|
|
|
|
|
Issuance
of common stock for oil and gas properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
$1.80 per share
|
|
|
3,000,000
|
|
|
|
3,000
|
|
|
|
5,397,000
|
|
|
|
|
|
Issuance
of common stock for cash at $1.80 per share
|
|
|
6,637,671
|
|
|
|
6,638
|
|
|
|
11,941,161
|
|
|
|
|
|
Warrants
issued to placement agents in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock
|
|
|
|
|
|
|
|
|
|
|
900,504
|
|
|
|
|
|
Costs
of offering
|
|
|
|
|
|
|
|
|
|
|
(449,439
|
)
|
|
|
|
|
Issuance
of common stock upon conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debenture
|
|
|
1,525,424
|
|
|
|
1,525
|
|
|
|
898,475
|
|
|
|
|
|
Issuance
of common stock for oil and gas properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
$2.63 per share
|
|
|
360,000
|
|
|
|
360
|
|
|
|
946,440
|
|
|
|
|
|
Issuance
of common stock upon conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debenture and accrued interest
|
|
|
8,054,364
|
|
|
|
8,054
|
|
|
|
4,744,021
|
|
|
|
|
|
The
accompanying notes are an integral part of these
financial statements.
GALAXY
ENERGY CORPORATION
(A
Development Stage Company)
STATEMENT
OF STOCKHOLDER'S EQUITY
PERIOD
FROM INCEPTION (June 18, 2002) TO NOVEMBER 30,
2002 AND YEARS ENDED
NOVEMBER
30, 2003, 2004, 2005 AND
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
During
the
|
|
|
|
Common
Stock
|
|
|
|
In
Excess
|
|
|
|
Development
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Par
Value
|
|
|
|
Stage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cashless exercise of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
placement
agent warrants
|
|
|
719,213
|
|
|
|
719
|
|
|
|
(719
|
)
|
|
|
|
|
Discount
on convertible notes payable due to issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
detachable warrants
|
|
|
|
|
|
|
|
|
|
|
4,336,316
|
|
|
|
|
|
Warrants
issued to placement agents in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
notes payable
|
|
|
|
|
|
|
|
|
|
|
404,021
|
|
|
|
|
|
Stock
based compensation costs for stock options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
non-employees
|
|
|
|
|
|
|
|
|
|
|
34,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(9,831,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 30, 2004
|
|
|
58,817,509
|
|
|
|
58,818
|
|
|
|
40,173,154
|
|
|
|
(13,550,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
|
|
|
1,332,676
|
|
|
|
1,332
|
|
|
|
990,970
|
|
|
|
|
|
Issuance
of common stock for cashless
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of warrants
|
|
|
577,033
|
|
|
|
577
|
|
|
|
(577
|
)
|
|
|
|
|
Issuance
of common stock upon conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
notes and accrued interest
|
|
|
7,940,811
|
|
|
|
7,941
|
|
|
|
8,677,068
|
|
|
|
|
|
Discount
on convertible notes payable due to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
of detachable warrants
|
|
|
|
|
|
|
|
|
|
|
12,902,328
|
|
|
|
|
|
Discount
on issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
market value
|
|
|
|
|
|
|
|
|
|
|
1,074,428
|
|
|
|
|
|
Warrants
issued to placement agents in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection
with convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
88,874
|
|
|
|
|
|
Stock
based compensation costs for stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
granted to non-employees
|
|
|
|
|
|
|
|
|
|
|
167,137
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,985,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 30, 2005
|
|
|
68,668,029
|
|
|
|
68,668
|
|
|
|
64,073,382
|
|
|
|
(37,536,410
|
)
|
Warrants
issued to placement agents in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection
with convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
27,274
|
|
|
|
|
|
Discount
on convertible notes payable due to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
of detachable warrants
|
|
|
|
|
|
|
|
|
|
|
395,986
|
|
|
|
|
|
Stock
based compensation costs for stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
granted to employees & non-employees
|
|
|
|
|
|
|
|
1,525,751
|
|
|
|
|
|
Discount
on convertible notes payable due to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
of detachable warrants
|
|
|
|
|
|
|
|
|
|
|
170,555
|
|
|
|
|
|
Issuance
of common stock upon conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
notes and accrued interest
|
|
|
12,993,939
|
|
|
|
12,994
|
|
|
|
4,799,255
|
|
|
|
|
|
Discount
on issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
below
market value
|
|
|
|
|
|
|
|
|
|
|
545,563
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,163,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 30, 2006
|
|
|
81,661,968
|
|
|
$
|
81,662
|
|
|
$
|
71,537,766
|
|
|
$
|
(63,699,517
|
)
|
The
accompanying notes are an integral part of these
financial statements.
GALAXY
ENERGY CORPORATION
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
From
Inception
|
|
|
|
November
30,
|
|
|
November
30,
|
|
|
November
30,
|
|
|
(June
18, 2002) to
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
November
30, 2006
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(26,163,107
|
)
|
|
$
|
(23,985,645
|
)
|
|
$
|
(9,831,104
|
)
|
|
$
|
(63,699,517
|
)
|
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
(used) by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
for interest
|
|
|
644,549
|
|
|
|
3,695,884
|
|
|
|
12,075
|
|
|
|
4,352,508
|
|
Stock
for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
264,600
|
|
Stock
for services - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,000
|
|
Oil
and gas properties for services
|
|
|
-
|
|
|
|
732,687
|
|
|
|
-
|
|
|
|
732,687
|
|
Stock
for debt - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
233,204
|
|
Amortization
of discount and deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
convertible debt
|
|
|
10,611,349
|
|
|
|
4,870,043
|
|
|
|
2,085,491
|
|
|
|
17,908,562
|
|
Finance
costs incurred for waiver of triggering event
|
|
|
3,457,101
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,457,101
|
|
Write-off
of discount and deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
upon
conversion of convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
2,979,404
|
|
|
|
2,979,404
|
|
Write-off
of discount and deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
upon
extiguishment of convertible debt
|
|
|
-
|
|
|
|
2,162,597
|
|
|
|
-
|
|
|
|
2,162,597
|
|
Compensation
expense on vested stock options
|
|
|
1,525,752
|
|
|
|
167,137
|
|
|
|
34,521
|
|
|
|
1,727,410
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
accretion of ARO expense
|
|
|
779,446
|
|
|
|
1,887,074
|
|
|
|
76,390
|
|
|
|
2,738,594
|
|
Gain
on disposition of oil and gas assets
|
|
|
(72,713
|
)
|
|
|
(197,676
|
)
|
|
|
-
|
|
|
|
(270,389
|
)
|
Impairment
of oil and gas properties
|
|
|
1,328,432
|
|
|
|
5,273,795
|
|
|
|
-
|
|
|
|
6,667,996
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,178
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable - trade, accruals, bank overdrafts
|
|
|
(332,121
|
)
|
|
|
454,463
|
|
|
|
(63,539
|
)
|
|
|
39,658
|
|
Accounts
payable - related
|
|
|
(34,679
|
)
|
|
|
(14,679
|
)
|
|
|
(46,274
|
)
|
|
|
64,400
|
|
Interest
payable
|
|
|
1,913,199
|
|
|
|
441,998
|
|
|
|
631,000
|
|
|
|
3,060,917
|
|
Accounts
receivable, prepaids and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
current
assets
|
|
|
260,908
|
|
|
|
(1,256,589
|
)
|
|
|
(142,523
|
)
|
|
|
(1,187,776
|
)
|
Other
|
|
|
4,405
|
|
|
|
(17,861
|
)
|
|
|
4,973
|
|
|
|
(18,443
|
)
|
Net
cash used by operating activities
|
|
|
(6,077,479
|
)
|
|
|
(5,786,772
|
)
|
|
|
(4,259,586
|
)
|
|
|
(18,685,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to oil and gas properties
|
|
|
(4,145,612
|
)
|
|
|
(18,873,239
|
)
|
|
|
(20,266,368
|
)
|
|
|
(45,425,027
|
)
|
Management
fees earned on operated properties
|
|
|
1,695,830
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,695,830
|
|
Purchase
of furniture and equipment
|
|
|
(1,995
|
)
|
|
|
(128,056
|
)
|
|
|
(145,909
|
)
|
|
|
(281,172
|
)
|
Purchase
surety bonds
|
|
|
(80,000
|
)
|
|
|
(379,783
|
)
|
|
|
-
|
|
|
|
(459,783
|
)
|
Proceeds
from sale of oil and gas asset
|
|
|
100,000
|
|
|
|
240,000
|
|
|
|
-
|
|
|
|
340,000
|
|
Advance
to affiliate
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(60,000
|
)
|
Cash
received upon recapitalization and merger
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,234
|
|
Net
cash used by investing activities
|
|
|
(2,431,777
|
)
|
|
|
(19,141,078
|
)
|
|
|
(20,412,277
|
)
|
|
|
(44,185,918
|
)
|
The
accompanying notes are an integral part of these
financial statements.
GALAXY
ENERGY CORPORATION
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
Inception
|
|
|
|
Year
Ended
|
|
|
|
Year
Ended
|
|
|
|
Year
Ended
|
|
(June
18, 2002)
|
|
|
|
November
30, 2006
|
|
|
|
November
30, 2005
|
|
|
|
November
30, 2004
|
|
|
to
November
30,
2006
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
15,452,800
|
|
|
|
17,905,300
|
|
Proceeds
from sale of convertible notes payable
|
|
|
7,000,000
|
|
|
|
17,695,000
|
|
|
|
20,000,000
|
|
|
|
44,695,000
|
|
Proceeds
from sale of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,040,000
|
|
Proceed
for sale on notes payable - related party
|
|
|
5,500,000
|
|
|
|
|
|
|
|
|
|
|
|
5,500,000
|
|
Proceeds
from exercise of warrants
|
|
|
-
|
|
|
|
992,306
|
|
|
|
27,000
|
|
|
|
1,019,306
|
|
Debt
and stock offering costs
|
|
|
(127,700
|
)
|
|
|
(942,169
|
)
|
|
|
(2,419,978
|
)
|
|
|
(3,980,569
|
)
|
Payment
of convertible notes payable
|
|
|
(4,583,333
|
)
|
|
|
(1,436,447
|
)
|
|
|
-
|
|
|
|
(6,019,780
|
)
|
Payment
of note payable - related party
|
|
|
-
|
|
|
|
(15,946
|
)
|
|
|
(113,632
|
)
|
|
|
(129,578
|
)
|
Payment
of note payable
|
|
|
|
|
|
|
(550,272
|
)
|
|
|
-
|
|
|
|
(550,272
|
)
|
Net
cash provided by financing activities
|
|
|
7,788,967
|
|
|
|
15,742,472
|
|
|
|
32,946,190
|
|
|
|
63,479,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash
|
|
|
(720,289
|
)
|
|
|
(9,185,378
|
)
|
|
|
8,274,327
|
|
|
|
608,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,328,469
|
|
|
|
10,513,847
|
|
|
|
2,239,520
|
|
|
|
-
|
|
Cash
and cash equivalents, end of period
|
|
$
|
608,180
|
|
|
$
|
1,328,469
|
|
|
$
|
10,513,847
|
|
|
$
|
608,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
2,846,091
|
|
|
$
|
1,065,442
|
|
|
$
|
205,084
|
|
|
$
|
4,559,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash investing and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
incurred for oil and gas properties
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,600,000
|
|
|
$
|
3,646,000
|
|
Debt
incurred for finance costs
|
|
$
|
3,547,101
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,547,101
|
|
Stock
issued for services
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
354,600
|
|
Stock
issued for interest and debt
|
|
$
|
4,812,249
|
|
|
$
|
8,685,009
|
|
|
$
|
12,075
|
|
|
$
|
13,742,538
|
|
Stock
issued for convertible debentures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,640,000
|
|
|
$
|
5,640,000
|
|
Warrants
issued for offering and financing costs
|
|
$
|
27,274
|
|
|
$
|
88,874
|
|
|
$
|
1,462,124
|
|
|
$
|
1,685,850
|
|
Discount
on convertible debt issued
|
|
$
|
566,541
|
|
|
$
|
16,538,498
|
|
|
$
|
4,336,316
|
|
|
$
|
14,883,630
|
|
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.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1 - ORGANIZATION AND BUSINESS
COMBINATIONS
Galaxy
Energy Corporation (“Galaxy”) was incorporated under the laws of the State of
Colorado on December 17, 1999, for the purpose of acquiring and developing
mineral properties. On November 13, 2002, Galaxy completed an
Agreement and Plan of Reorganization (the “Agreement”) whereby it issued
20,997,058 shares of its common stock to acquire all of the shares of Dolphin
Energy Corporation (“Dolphin”), a private corporation incorporated on June 18,
2002, under the laws of the State of Nevada. Galaxy was a public
company and had no operations prior to entering into the
Agreement. Dolphin, an independent energy company engaged in the
exploration, development and acquisition of crude oil and natural gas reserves
in the western United States, is considered a development stage company
as
defined by Statement of Financial Accounting Standards (SFAS) No.
7. Dolphin is an exploration stage oil and gas company and had not
earned any production revenue, nor found proved resources on any of its
properties. Dolphin’s principal activities had been raising capital
through the sale of its securities and identifying and evaluating potential
oil
and gas properties.
As
a
result of this transaction, Dolphin became a wholly owned subsidiary of
the
Galaxy. Since this transaction resulted in the former shareholders of
Dolphin acquiring control of Galaxy, for financial reporting purposes the
business combination was accounted for as an additional capitalization
of Galaxy
(a reverse acquisition with Dolphin as the accounting
acquirer). Dolphin was deemed to be the purchaser and parent company
for financial reporting purposes. Accordingly, its net assets were
included in the consolidated balance sheet at their historical book
value.
The
fair
value of the assets acquired and liabilities assumed pursuant to the transaction
with Dolphin are as follows:
Net
cash acquired
|
|
$
|
2,974
|
|
Liabilities
assumed
|
|
|
(63,305
|
)
|
|
|
|
|
|
Net
liabilities assumed
|
|
$
|
(60,331
|
)
|
On
June
2, 2003, Galaxy completed a Share Exchange Agreement whereby it issued
1,951,241
shares of its common stock to acquire all the shares of Pannonian International,
Ltd. (“Pannonian”), a related entity. Pannonian was a private
corporation incorporated on January 18, 2000, under the laws of the State
of
Colorado. The shares issued were valued at the predecessor cost of
the net assets of Pannonian acquired. As a result of the June 2, 2003
transaction, Pannonian became a wholly owned subsidiary of Galaxy.
The
predecessor cost of the assets acquired and liabilities assumed pursuant
to the
transaction with Pannonian were:
Net
cash acquired
|
|
$
|
1,260
|
|
Undeveloped
oil and gas properties
|
|
|
75,680
|
|
Liabilities
assumed
|
|
|
(279,173
|
)
|
|
|
|
|
|
Net
liabilities assumed
|
|
$
|
(202,233
|
)
|
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS
OF
PRESENTATION
The
accompanying consolidated financial statements include Galaxy for the period
from November 13, 2002 to November 30, 2002, and its wholly owned subsidiary,
Dolphin, for the period from June 18, 2002 to November 30, 2002. For
the year ended November 30, 2003, the consolidated financial statements
include
Galaxy and Dolphin for the entire year and Pannonian from the effective
date of
the acquisition, June 2, 2003, to November 30, 2003. For the years
ended November 30, 2004, 2005 and 2006, the consolidated financial statements
include Galaxy, Dolphin, and Pannonian (the “Company”). All
significant intercompany transactions have been eliminated upon
consolidation.
LIQUIDITY
AND GOING CONCERN
The
accompanying consolidated financial statements have been prepared on a
going
concern basis, which contemplates the realization of assets and satisfaction
of
liabilities in the normal course of business. For the year ended
November 30, 2006 the Company incurred operating losses of $26,163,107
and used
cash in operating activities of $6,077,479. During the year ended
November 30, 2006 the Company’s working capital deficit increased to $19,868,880
from $6,690,444, while its cash balance decreased to $608,180 from the
November
30, 2005 balance of $1,328,469. These matters raise substantial doubt
about the Company’s ability to continue as a going concern. The
Company’s continued operation is contingent upon its ability to raise additional
capital through debt or equity placements or sell assets and ultimately
attaining profitability from its oil and gas operations.
As
further discussed in Note 11 – Subsequent Events, subsequent to November 30,
2006, the Company entered into a Purchase and Sale Agreement with a related
party to sell all of the Company’s oil and gas interests in the Powder River
Basin of Wyoming and Montana (the “Powder River Basin Assets”)
.
The purchase price
for the Powder River Basin Assets is $45 million, with $20 million to be
paid in
cash and $25 million to be paid in shares of the purchaser’s common
stock. Closing of the transaction is subject to approval by the
Company’s secured noteholders, approval of all matters in its discretion by the
Company’s Board of Directors, the purchaser obtaining outside financing on terms
acceptable to its Board of Directors, and various other terms and
conditions. The Company intends to use the cash proceeds to repay the
senior secured convertible notes and is in negotiations with the subordinated
noteholders to repay the principal and accrued interest on their notes
utilizing
the shares of common stock of the purchaser. If the Company is unable
to close the asset sale to the related party, those assets will be offered
for
sale to other potential buyers; however there is no assurance such a sale
would
be completed or that the Company will realize the full carrying value of
the
assets. In such an event the Company may be required to write off a
portion of the carrying value and such write-off could be material.
The
Company’s continued operation is contingent upon its ability to raise additional
capital and ultimately attaining profitability from its oil and gas
operations. In addition to the sale of Powder River Basin Assets, the
Company is considering other options for raising additional capital to
fund its
2007 operational budget such as debt and equity offerings, other asset
sales,
the farm-out of some of its acreage and other similar type
transactions. There is no assurance that financing will be available
to the Company on favorable terms or at all or that any asset sale
transaction will close. Any financing obtained through the
sale of Company equity will likely result in substantial dilution to the
Company’s stockholders. If the Company is forced to sell additional assets
to meet its current liquidity needs, it may not realize the
full market value of the asset and the sales price could be less than
the Company’s carrying value of the asset.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
DEVELOPMENT
STAGE
The
Company is considered a development stage company as defined by Statement
of
Financial Accounting Standards (“SFAS”) No. 7, and its principal activities
since inception have been raising capital through the sale of common stock
and
convertible notes and the acquisition of oil and gas properties in the
Western
United States, Germany and Romania. The Company has recorded limited
production from wells in the Powder River Basin of Wyoming and the Piceance
Basin of Colorado; however, management does not consider that the Company
has
commenced principal operations as of November 30, 2006.
USE
OF
ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Significant estimates are required for
proved oil and gas reserves which, as described in Note 3 – Property and
Equipment, have a material impact on the carrying value of oil and gas
property. In addition, significant estimates are required in the
valuation of undeveloped oil and gas properties. Actual results could
differ from those estimates and such differences could be
material. The Company has negotiated a purchase and sale agreement
with a related party to sell certain of its evaluated and unevaluated oil
and
gas properties. The value at which such assets are carried on the
balance sheet is supported by an independent third party appraisal of an
amount
approximately equal to such carrying value, and the negotiated sales price
for
the assets is in excess of the carrying value. If the Company is
unable to close the asset sale to the related party, those assets will
be
offered for sale to other potential buyers; however there is no assurance
such a
sale would be completed or that the Company will realize the full carrying
value
of the assets. In such an event the Company may be required to write
off in the near term a portion of the carrying value and such write-off
could be
material.
The
oil
and gas industry is subject, by its nature, to environmental hazards and
clean-up costs. At this time, management knows of no substantial
costs from environmental accidents or events for which the Company may
be
currently liable. In addition, the Company’s oil and gas business
makes it vulnerable to changes in wellhead prices of crude oil and natural
gas. Such prices have been volatile in the past and can be expected
to be volatile in the future. By definition, proved reserves are
based on current oil and gas prices and estimated reserves. Price
declines reduce the estimated quantity of proved reserves and increase
annual
amortization expense (which is based on proved reserves).
CASH
EQUIVALENTS
For
purposes of reporting cash flows, the Company considers as cash equivalents
all
highly liquid investments with a maturity of three months or less at the
time of
purchase. The Company may have cash in banks in excess of federally
insured amounts.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
ACCOUNTS
RECEIVABLE AND CREDIT POLICIES
The
Company has certain trade receivables consisting of oil and gas sales
obligations due under normal trade terms. Management regularly
reviews trade receivables and reduces the carrying amount by a valuation
allowance that reflects management’s best estimate of the amount that may not be
collectible. At November 30, 2006, the Company has determined no
allowance for uncollectible receivables is necessary.
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 the
sale
represents a significant portion of oil and gas properties and the gain
significantly alters the relationship between capitalized costs and proved
oil
and gas reserves of 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.
The
Company has identified certain oil and gas properties which it intends
to sell
and has negotiated a purchase and sale agreement with a related party to
dispose
of those assets. Full cost accounting rules do no include provisions
for segregating those assets and identifying them as held for sale or
segregating related revenues and expenses as discontinued
operations. Accordingly, those assets are reflected on the balance
sheet as either evaluated and unevaluated oil and gas properties, as appropriate
and the statement of operations reflects the related revenues and expenses
with
other continuing operations.
As
of
November 30, 2006, based on oil and gas prices of $49.50 per barrel and
$6.74
per mcf, the full cost pool exceeded the above-described ceiling
by $297,272 and the Company recorded an impairment of such
amount. As of August 31, 2006, the Company’s full cost pool exceeded
the ceiling limitation based on oil and gas prices of $50.00 per barrel
and
$5.27 per mcf and the Company recognized impairment expense of $1,031,160
during
the quarter ended August 31, 2006.
As
of
November 30, 2005, based upon oil and gas prices of $59.35 per barrel and
$6.79
per mcf, the Company recorded an impairment expense of $5,273,795 representing
the excess of capitalized costs over the ceiling amount.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
OIL
AND
GAS PROPERTIES (Continued)
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.
PROPERTY
AND EQUIPMENT
Furniture
and equipment is recorded at cost. Depreciation is to be provided by
use of the straight-line method over the estimated useful lives of the
related
assets of three to five years. Expenditures for replacements,
renewals, and betterments are capitalized. Maintenance and repairs
are charged to operations as incurred. Long-lived assets, other than
oil and gas properties, are evaluated for impairment to determine if current
circumstances and market conditions indicate the carrying amount may not
be
recoverable. The Company has not recognized any impairment losses on
non-oil and gas long-lived assets.
Depreciation
expense of $74,428, $63,263 and $20,353 was recorded for the years ended
November 30, 2006, 2005 and 2004, respectively.
DEFERRED
FINANCING COSTS
The
Company capitalizes costs associated with the issuance of debt
instruments. These costs are amortized utilizing the interest method
over the term of the debt agreements. Amortization expense of
deferred financing costs were $310,474, $495,475 and $442,816 for the years
ended November 30, 2006, 2005 and 2004, respectively.
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.
As
of
November 30, 2006, the Company had, through acquisition and drilling, acquired
working interests in 249 natural gas and water disposal wells. A
limited number of these wells have recorded gas production, and the others
are
in various stages of completion and hook up at, November 30,
2006. The Company records ARO associated with all wells in which the
Company owns an interest on the date such obligation
arose. Depreciation of the related asset, and accretion of the ARO on
wells from which production has commenced, has been calculated using the
Company’s estimate of the life of the wells, based upon the lives of comparable
wells in the area. The amounts recognized are based upon numerous
estimates and assumptions, including future retirement costs, future recoverable
quantities of oil and gas, future inflation rates and the credit-adjusted
risk-free interest rate.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
ASSET
RETIREMENT OBLIGATION (Continued)
The
information below reflects the change in the ARO during the years ended
November
30, 2006 and 2005:
|
|
2006
|
|
|
2005
|
|
Balance
beginning of period
|
|
$
|
1,242,967
|
|
|
$
|
713,073
|
|
Change in estimate
|
|
|
(161,483
|
)
|
|
|
-
|
|
Liabilities incurred
|
|
|
42,238
|
|
|
|
481,193
|
|
Liabilities settled
|
|
|
-
|
|
|
|
-
|
|
Accretion
|
|
|
164,613
|
|
|
|
48,701
|
|
Balance
end of period
|
|
$
|
1,288,335
|
|
|
$
|
1,242,967
|
|
The
change in estimate during the year reflects updated plugging and restoration
costs and the effect of an increase of the Company’s interest rate used to
calculate the ARO.
FAIR
VALUE
The
carrying amount reported in the balance sheet for cash, accounts receivable,
prepaids, and accounts payable and accrued liabilities approximates fair
value
because of the immediate or short-term maturity of these financial
instruments.
Based
upon the borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of long-term debt
approximates its carrying value.
INCOME
TAXES
The
Company has adopted the provisions of SFAS 109, “Accounting for Income
Taxes.” SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Temporary
differences between the time of reporting certain items for financial and
tax
reporting purposes consist primarily of exploration and development costs
on oil
and gas properties, depreciation and depletion, asset retirement obligation,
and
amortization of discount on convertible debentures.
REVENUE
RECOGNITION
We
record
revenues from the sales of natural gas and oil when delivery to the customer
has
occurred and title has transferred. This occurs when oil or gas has
been delivered to a pipeline or a tank lifting has occurred. We may
have an interest with other producers in certain properties, in which case
we
use the sales method to account for gas imbalances. Under this
method, revenue is recorded on the basis of natural gas actually sold by
the
Company. In addition, we record revenue for our share of natural gas
sold by other owners that cannot be volumetrically balanced in the future
due to
insufficient remaining reserves. We also reduce revenue for other
owners’ gas sold by the Company that cannot be volumetrically balanced in the
future due to insufficient remaining reserves. Our remaining over-and
under-produced gas balancing positions are considered in our proved
reserves. Gas imbalances as of November 30, 2006 and 2005 were not
significant.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
SHARE
BASED COMPENSATION
The
Company has followed Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations, through
November 30, 2005, which resulted in the accounting for grants of awards
to
employees at their intrinsic value in the consolidated financial
statements. Additionally, the Company has recognized compensation
expense in the financial statements for awards granted to consultants,
which
must be re-measured each period under the mark-to-market as required under
EITF
96-18. Galaxy had previously adopted the provisions of FAS No. 123,
“Accounting for Stock-Based Compensation,” as amended by FAS No. 148,
“Accounting for Stock-Based Compensation --Transition and Disclosure,” through
disclosure only.
On
December 1, 2005, the Company adopted FAS No. 123(R), “Accounting for
Stock-Based Compensation,” using the modified prospective method, which results
in the provisions of FAS 123(R) being applied to the consolidated financial
statements on a going-forward basis. Prior periods have not been
restated. FAS 123(R) requires companies to recognize share-based
payments to employees as compensation expense on a fair value
method. Under the fair value recognition provisions of FAS 123(R),
stock-based compensation cost is measured at the grant date based on the
fair
value of the award and is recognized as expense over the service period,
which
generally represents the vesting period. The expense recognized over
the service period is required to include an estimate of the awards that
will be
forfeited. Previously, no such forfeitures have
occurred. The Company is assuming no forfeitures going forward based
on the Company’s historical forfeiture experience. The fair value of
stock options is calculated using the Black-Scholes option-pricing
model.
As
of
November 30, 2006, options to purchase an aggregate of 4,715,000 shares
of the
Company’s common stock were outstanding. These options were granted
during 2006, 2005, and 2004, to the Company’s employees, directors and
consultants at exercise prices ranging from $1.00 to $3.51 per
share. The options vest at varying schedules within five years of
their grant date and typically expire within ten years from the grant
date. Stock-based employee compensation and stock-based non-employee
compensation costs were $1,525,752 before tax for the year ended November
30,
2006. These amounts were charged to operations as compensation
expense. Stock-based non-employee compensation expense granted to
consultants of the Company of $167,137 was charged to operations during
the year
ended November 30, 2005. There was no such expense recognized for the
year ended November 30, 2006.
The
Company had previously adopted the provisions of FAS No. 123, “Accounting for
Stock-Based Compensation,” as amended by FAS No. 148, “Accounting for
Stock-Based Compensation --Transition and Disclosure,” through disclosure
only. The following table illustrates the effect on net income and
earnings per share for the years ended November 30, 2005 and 2004 as if
the
Company had applied the fair value recognition provisions of FAS No. 123(R)
to
stock based employee awards.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
|
Year
Ended
|
|
|
Year
Ended
|
|
Net
loss:
|
|
November
30, 2005
|
|
|
November
30, 2004
|
|
As
reported
|
|
$
|
(23,985,645
|
)
|
|
$
|
(9,831,104
|
)
|
Add:
Stock-based compensation included in net loss
|
|
|
167,132
|
|
|
|
34,525
|
|
Less:
Stock-based compensation determined under the fair value based
method
|
|
|
(1,253,350
|
)
|
|
|
(1,561,351
|
)
|
Pro
forma
|
|
$
|
(25,071,863
|
)
|
|
$
|
(11,357,930
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.37
|
)
|
|
$
|
(0.18
|
)
|
Pro
forma
|
|
$
|
(0.40
|
)
|
|
$
|
(0.21
|
)
|
The
Company uses the Black-Scholes option-pricing model to estimate the fair
value
of the options at the grant and vesting date. The Company granted
240,000 and 975,000 options to purchase common stock during the years ended
November 30, 2006 and 2005 respectively. The fair values of options
granted and vested during 2006, 2005 and 2004 were calculated using the
following weighted-average assumptions:
|
|
Year
ended November 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Expected
dividend yield
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Expected
price volatility
|
|
|
75.51—64.34
|
%
|
|
|
80.33-75.51
|
%
|
|
|
84.19-80.50
|
%
|
Risk
free interest rate
|
|
|
4.25
|
%
|
|
3.5%
to 4.5%
|
|
|
|
3.5
|
%
|
Expected
term of
options
(in years)
|
|
5
years
|
|
|
5—6.5
years
|
|
|
5—6.5
years
|
|
(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. The dilutive weighted average number of common
shares outstanding excluded potential common shares from the conversion
of
convertible debt and the exercise of stock options and warrants of approximately
10,748,000 for the fiscal year ending November 30, 2006.
CONCENTRATIONS
Financial
instruments, which potentially subject the Company to concentrations of
credit
risk, consist of cash and cash equivalents. The Company maintains
cash and cash equivalent accounts at two financial institutions. The
Company periodically evaluates the credit worthiness of financial institutions,
and maintains cash accounts only in large high quality financial
institutions.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
The
Company’s receivables are comprised of oil and gas revenue receivables and joint
interest billings receivable. The amounts are due from a limited
number of entities. Therefore, the collectability is dependent upon
the general economic conditions of the few purchasers and joint interest
owners. The receivables are not collateralized. However,
to date the Company has had no bad debts.
SIGNIFICANT
CUSTOMERS
Although
the Company sells its production to only three purchasers, there are other
purchasers in the areas in which the Company produces natural gas; therefore,
the loss of its significant customers would not adversely affect the Company’s
operations. For the years ended November 30, 2006, 2005 and 2004,
purchases by the following companies exceeded 10% of the total oil and
gas
revenues of the Company:
|
2006
|
2005
|
2004
|
Enserco
Energy Inc.
|
94%
|
82%
|
100%
|
Western
Gas Resources
|
-
|
13%
|
-
|
RECLASSIFICATION
Certain
amounts in the 2005 and 2004 and inception to date financial statements
have
been reclassified to conform to the 2006 financial statement
presentation.
OFF
BALANCE SHEET ARRANGEMENTS
From
time-to-time, we enter into off-balance sheet arrangements and transactions
that
can give rise to off-balance sheet obligations. As of November 30,
2006, the off-balance sheet arrangements and transactions that we have
entered
into include operating lease agreements. We may enter into gas
transportation commitments in the future that would give rise to off-balance
sheet obligations. The Company does not believe that these
arrangements are reasonably likely to materially affect its liquidity or
availability of, or requirements for, capital resources
.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2,
“Accounting for Registration Payment Arrangements.” This FSP
specifies that the contingent obligation to
make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with FASB Statement No. 5, “Accounting for
Contingencies”. This FSP is effective immediately for registration
payment arrangements and the financial instruments subject to those arrangements
that are entered into or modified subsequent to December 31,
2006. For registration payment arrangements and financial instruments
subject to those arrangements that were entered into prior to December
31, 2006,
the guidance in the FSP is effective January 1, 2006 for the
Company. The Company does not believe that this FSP will have a
material impact on its financial position or results from
operations.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
In
February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No.
155, “Accounting for Certain Hybrid Financial Instruments-an amendment of FASB
Statements No. 133 and 140.” SFAS No. 155 amends SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities,” and also resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, “Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets.” SFAS No. 155
was issued to eliminate the exemption from applying SFAS No. 133 to interests
in
securitized financial assets so that similar instruments are accounted
for in a
similar fashion, regardless of the instrument’s form. The Company
does not believe that its financial position, results of operations or
cash
flows will be impacted by SFAS No. 155 as the Company does not currently
hold
any hybrid financial instruments.
In
June
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company’s financial
statements in accordance with Statement of Financial Accounting Standards
No.
109, Accounting for Income Taxes. Specifically, the pronouncement
prescribes a recognition threshold and a measurement attribute for the
financial
statement recognition and measurement of a tax position taken or expected
to be
taken in a tax return. The interpretation also provides guidance on
the related derecognition, classification, interest and penalties, accounting
for interim periods, disclosure and transition of uncertain tax
positions. The Company will be required to adopt FIN 48 for the
fiscal year ended November 30, 2008. The Company is reviewing and
evaluating the effect, if any, of adopting FIN 48 on its financial position
and
results of operations.
In
September 2006, the FASB issued SFAS 157, “Fair Value
Measurements”. This Statement defines fair value as used in numerous
accounting pronouncements, establishes a framework for measuring fair value
in
generally accepted accounting principles and expands disclosure related
to the
use of fair value measures in financial statements. The Statement is
to be effective for the Company’s financial statements issued in 2008; however,
earlier application is encouraged. The Company is currently
evaluating the timing of adoption and the impact that adoption might have
on its
financial position or results of operations.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued
Staff Accounting Bulletin No. 108 (“SAB 108”). Due to diversity in
practice among registrants, SAB 108 expresses SEC staff views regarding
the
process by which misstatements in financial statements are evaluated for
purposes of determining whether financial statement restatement is
necessary. SAB 108 is effective for the Company on December 1,
2006. The Company does not believe SAB 108 will have a material
impact on its financial position or results from operations.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
3 – PROPERTY AND
EQUIPMENT
OIL
AND
GAS PROPERTIES
The
Company recognizes three cost centers for its oil and gas activities, the
United
States Cost Center, the Germany Cost Center and the Romania Cost
Center.
United
States Cost
Center
In
2003
the Company began the acquisition of unevaluated oil and gas properties
primarily in the Powder River Basin region of the Rocky Mountain
area. In 2004 the Company acquired additional unevaluated properties,
began its exploration program by drilling 135 wells and commenced limited
production of natural gas in the Powder River Basin. During 2005
exploratory drilling activities continued in the Powder River Basin, development
of certain areas commenced and natural gas production reached a level that
allowed the Company to recognize proved reserves on those producing
properties. During 2006 the Company continued limited drilling
operations in the Powder River Basin and conducted extended de-watering
operations on certain prospects in the basin. As further discussed in
Note 9, subsequent to November 30, 2006, the Company entered into a Purchase
and
Sale Agreement with a related party to sell all of the Company’s oil and gas
interests in the Powder River Basin of Wyoming and Montana (the “Powder River
Basin Assets”).
In
2005
the Company entered into an exploration project in the Piceance Basin of
northwestern Colorado, acquiring prospective acreage, evaluating and planning
for an exploratory drilling program. In 2006 the Company, as
operator, drilled four wells and participated as non-operator in the drilling
of
four additional wells in the Piceance basin. As of November 30, 2006,
three of the Company’s operated wells are shut in pending completion operations
and three of the non-operated wells have commenced production of natural
gas,
condensate and other hydrocarbon liquids.
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. In December 2005, the Company
commenced drilling the initial test well on the permit. The well, in
which the Company had a carried interest, was completed in January 2006.
In
July 2006, the Company completed the testing of the four primary zones
of
interest in the Glantal-1 well and no significant natural gas flows were
encountered. The wellbore was plugged and abandoned in August
2006. The Company and its joint venture partners are evaluating
further operations on the permit, which could include a seismic program
and
additional exploratory drilling. The Company’s balance sheet reflects
no capitalized oil and gas costs related to the Germany cost
center.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
3 – PROPERTY AND EQUIPMENT
(continued)
In
May
2005 the Company, through its wholly owned subsidiary, Pannonian, entered
into a
farmout agreement with a related party whose President is a significant
shareholder of the Company (Falcon Oil &Gas or “Falcon”) 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 Falcon; 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
Falcon. In addition Falcon paid 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. The Company
recognized a gain of $72,713 on the transaction, representing the excess
of the
proceeds over the original cost of the property. The first test well
on the property, in which the Company has a carried interest, has been
completed. Based upon results of the drilling operations, the
partners in the project have determined to commence completion and testing
operations. As of November 30 2006, the Company and Falcon are
planning the completion program for the first well and the drilling of
a second
well to be carried out in 2007. Following the recognition of the gain
on farmout, the Company’s balance sheet reflects no capitalized oil and gas
costs for the Romanian cost center.
ACQUISITION,
EXPLORATION AND DEVELOPMENT COSTS INCURRED
The
following table presents information regarding the Company’s net costs incurred
in the purchase of unevaluated properties and in exploration and developments
activities:
|
|
For
the Years Ended November 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Acquisition
of unevaluated properties
|
|
$
|
374,756
|
|
|
$
|
8,051,122
|
|
|
$
|
19,365,549
|
|
Exploration
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
3,607,563
|
|
|
|
9,613,262
|
|
|
|
14,645,548
|
|
Europe
|
|
|
-
|
|
|
|
-
|
|
|
|
18,675
|
|
Development
costs
|
|
|
163,292
|
|
|
|
499,945
|
|
|
|
-
|
|
Oil and gas expenditures
|
|
|
4,145,611
|
|
|
|
18,164,329
|
|
|
|
34,029,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligations
|
|
|
42,238
|
|
|
|
481,193
|
|
|
|
710,731
|
|
|
|
$
|
4,187,849
|
|
|
$
|
18,645,522
|
|
|
$
|
34,740,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the year ended 2006, the Company recorded $1,695,830 in management fees
from
Exxel, a related party, in connection with the development of the Piceance
property. These amounts were recorded as a reduction to related
exploration costs incurred by the Company.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
3 – PROPERTY AND EQUIPMENT
(continued)
EVALUATED
PROPERTIES
During
2005 the Company recognized its first proved reserves. The Company
reclassified the accumulated capitalized costs associated with the properties
with reserves to evaluated properties and added the costs to the full cost
pool
amortization base. For the years ended November 30, 2006 and 2005,
depreciation, depletion and amortization expense recorded for the United
States
cost center was $2.19 and $8.29 per MCF, respectively. The Company
recognized impairment expense of $1,328,432 in 2006 and $5,273,795 in 2005,
representing the excess of capitalized costs over the ceiling as calculated
in
accordance with the full cost rules. The Company has identified
certain oil and gas properties which it intends to sell, and has negotiated
a
purchase and sale agreement with a related party to dispose of those
assets. All evaluated properties are included in those assets to be
sold. These assets accounted for a significant portion of the
Company’s oil and gas sales revenues recorded in the years ended November 30,
2006, 2005 and 2004. There is no assurance that the related party
sale or any other asset sale will be completed or that the Company will
realize
the full net book value of the assets. The Company will continue to
evaluate the value of assets held for sale on a quarterly basis as new
information becomes available and should impairment of such assets be determined
appropriate, the Company may be required to write off a portion of the
carrying
value and such write-off could be material
The
table
below represents movements of costs within the United States evaluated
properties full cost pool and accumulated depreciation, depletion, amortization
and impairment for the years ended November 30, 2006, 2005 and
2004:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Full
Cost Pool - Evaluated Properties
|
|
|
|
|
|
|
|
|
|
Balance beginning of period
|
|
$
|
9,991,629
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Properties with proved reserves
|
|
|
204,525
|
|
|
|
4,640,738
|
|
|
|
-
|
|
Reclassification of impaired, unevaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
properties
|
|
|
473,265
|
|
|
|
5,055,320
|
|
|
|
-
|
|
Asset retirement obligation
|
|
|
322,526
|
|
|
|
295,571
|
|
|
|
-
|
|
Balance end of period
|
|
$
|
10,991,945
|
|
|
$
|
9,991,629
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
Depletion, Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
and Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period
|
|
$
|
7,097,299
|
|
|
$
|
48,394.00
|
|
|
$
|
-
|
|
Depreciation, depletion and amortization
|
|
|
540,404
|
|
|
|
1,775,110
|
|
|
|
48,394
|
|
Impairment of oil and gas properties
|
|
|
1,328,432
|
|
|
|
5,273,795
|
|
|
|
-
|
|
Balance end of period
|
|
$
|
8,966,135
|
|
|
$
|
7,097,299
|
|
|
$
|
48,394
|
|
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
3 – PROPERTY AND EQUIPMENT
(continued)
UNEVALUATED
PROPERTIES
Costs
directly associated with the acquisition, exploration and development of
unevaluated properties are excluded from the full cost amortization pool,
until
they are evaluated. During the years ended November 30, 2006 and
2005, as part of its assessment of unevaluated properties for impairment,
the
Company identified three unevaluated properties as either partially or
wholly
impaired. The costs related to those impaired properties, $473,265 in
2006, and $5,055,320, were reclassified from unevaluated to evaluated properties
and added to the full cost pool amortization base.
The
Company has identified certain oil and gas properties which it intends
to sell,
and has negotiated a purchase and sale agreement with a related party to
dispose
of those assets. The Powder River Basin properties as summarized in
the table below are included in those assets to be sold.
At
November 30, the Company’s unevaluated properties in the United States and
European costs centers properties consist of acquisition costs, exploration
and
development costs in the following areas:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
United
States Cost Center
|
|
|
|
|
|
|
|
|
|
Powder River Basin
|
|
|
|
|
|
|
|
|
|
Wyoming
|
|
$
|
33,225,926
|
|
|
$
|
31,071,223
|
|
|
$
|
32,280,054
|
|
Montana
|
|
|
2,064,659
|
|
|
|
1,974,470
|
|
|
|
3,724,593
|
|
Piceance Basin
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado
|
|
|
7,022,463
|
|
|
|
7,022,099
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
-
|
|
|
|
473,265
|
|
|
|
739,336
|
|
ARO Asset and other
|
|
|
454,282
|
|
|
|
896,052
|
|
|
|
710,031
|
|
|
|
|
42,767,330
|
|
|
|
41,437,109
|
|
|
|
37,454,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
German
Cost Center
|
|
|
-
|
|
|
|
-
|
|
|
|
42,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Romania
Cost Center
|
|
|
-
|
|
|
|
27,286
|
|
|
|
43,585
|
|
Total
Unevaluated Properties
|
|
$
|
42,767,330
|
|
|
$
|
41,464,395
|
|
|
$
|
37,539,833
|
|
Based
upon the stage of development of the projects, the Company’s leasehold position
and geological interpretations, each prospect meets the requirements for
continued capitalization and classification as exploratory in accordance
with
the full cost rules and FASB Staff Position No. FAS 19-1, “Accounting
for Suspended Well Costs.” In addition, the value of the Powder River
Basin assets which the Company plans to sell is supported by an independent
third party expert appraisal.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
3 – PROPERTY AND EQUIPMENT
(continued)
The
following table shows by date incurred the unevaluated oil and gas property
costs (net of transfers to the full cost pool, to assets held for sale,
cost
recoveries and sales proceeds)
Net
Costs Incurred During Periods Ended
|
|
|
|
November 30, 2006
|
|
$
|
2,095,726
|
|
November 30, 2005
|
|
|
17,870,729
|
|
November 30, 2004
|
|
|
21,734,634
|
|
November 30, 2003
|
|
|
603,991
|
|
November 30, 2002
|
|
|
462,250
|
|
|
|
$
|
42,767,330
|
|
ASSETS
IDENTIFIED FOR SALE
Included
in evaluated and unevaluated properties is $36,749,568 of costs associated
with
the properties underlying the PSA with PetroHunter (see Note
11). Substantially all of the Company’s oil and gas revenues and
lease operating expenses are associated with these properties.
FURNITURE
AND EQUIPMENT
At
November 30, 2006 and 2005, furniture and equipment is as follows:
|
|
2006
|
|
|
2005
|
|
Furniture and equipment
|
|
$
|
280,429
|
|
|
$
|
279,178
|
|
Less accumulated depreciation
|
|
|
(158,484
|
)
|
|
|
(84,301
|
)
|
|
|
$
|
121,945
|
|
|
$
|
196,882
|
|
NOTE
4 - NOTES
PAYABLE
RELATED
PARTIES
During
the year ended November 30, 2006 the Company issued four separate subordinated
unsecured promissory notes for a total of $5,500,000 in favor of Bruner
Family
Trust UTD March 28, 2005, (the “Bruner Trust”) a related party.
One
of the trustees of the Bruner
Family Trust UTD March 28, 2005 is Marc E. Bruner, the president and a
director
of the company.
Interest accrues at the rate of 8% per annum
and the note matures as summarized below or the time at which the registrant’s
senior indebtedness has been paid in full. In October 2006, the
remaining balance of promissory note originally issued to DAR LLC, together
with
accrued interest, was acquired by the Bruner Trust. The note, in the
amount of $2,049,728 accrues interest at the rate of 12% per annum and
is due on
December 1, 2006. Subsequent to November 30, 2006, the Company and
the Bruner trust executed a Forbearance Agreement whereby the Bruner Trust
agreed to forbear from enforcing its rights that arise as a result of the
failure by Borrower to make payment on the note by the due date until June
30,
2007.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
4 - NOTES PAYABLE
(continued)
At
November 30, 2006 notes payable to the Bruner Trust are as follows:
Issue
Date
|
Due
Date
|
|
Amount
|
|
September
28, 2006
|
January
26, 2007
|
|
$
|
2,500,000
|
|
November
1, 2006
|
March
1, 2007
|
|
|
1,000,000
|
|
November
13, 2006
|
March
13, 2007
|
|
|
500,000
|
|
November
30, 2006
|
March
30, 2007
|
|
|
1,500,000
|
|
January
14, 2004
|
December
1, 2006
|
|
|
2,049,728
|
|
|
|
|
$
|
7,549,728
|
|
OTHER
In
connection with the acquisition of oil and gas properties from DAR LLC,
(“DAR”)
the Company issued a promissory note to DAR in the amount of
$2,600,000. At November 30, 2005, the remaining balance of the note
payable was $2,049,728. The note together with accrued interest was
acquired by the Bruner Trust in October 2006.
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.
On
December 1, 2005, the Company and the holders of the 2004 Notes entered
into an
agreement, that among other things, lowered the conversion price of the
Notes to
$1.25 per share, granted additional warrants to purchase shares of common
stock
and lowered the exercise price of existing and newly issued warrants to
$1.25
per share. In accordance with SFAS 5, Accounting for Contingencies,
the Company recorded the effect of this agreement in the financial statements
as
of November 30, 2005. In accordance with EITF 96-19, Debtor’s
Accounting for a Modification or Exchange of Debt Instruments, the Company
recognized this transaction as an extinguishment of the existing debt and
the
issuance of new debt. The Company wrote off unamortized discount and
deferred financing associated with the original debt in the amount of $773,564,
including the amount in interest and financing expense In
addition, in accordance with EITF 98-5 and EITF 00-27, the Company recognized
the fair value of the warrants and the beneficial conversion feature associated
with the Notes aggregating $7,375,920 as a discount to the Notes and as
additional paid in capital. During the year ended November 30, 2006,
the Company recorded amortization of the discount in the amount of $7,012,918
as
interest expense.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
5 – CONVERTIBLE NOTES PAYABLE
(continued)
On
July
7, 2006, the Company and the holders of its senior secured convertible
notes
issued in 2004 and 2005 entered into a Waiver and Agreement. The
Company had notified the holders of the 2004 Notes of an Equity Liquidity
Test
Failure on July 3, 2006, as defined in its agreements with the holders,
triggering the holders’ right to make an early repayment election in the
aggregate amount of $1,217,929.
In
the
Waiver and Agreement,
the Company and
the
holders agreed to the following:
·
|
The
waiver of the holders’ right to make an early repayment election as a
result of the July 2006 Equity Liquidity Test Failure and any
Equity
Liquidity Test Failure as of August 1, 2006 and/or September
1,
2006;
|
·
|
The
deferral of the August 2006 and September 2006 installment payments
on the
2004 Notes until October 2, 2006, unless earlier converted by
the
holders;
|
·
|
The
ability of the holders to convert up to $5,000,000 in principal
amount of
the 2004 Notes, plus related interest, at their option as a “Company
Alternative Conversion” under the notes through September 30, 2006, with
the amounts converted to be applied first to the August 2006
installment
payment, second to the September 2006 installment payment, and
then to
those installments nearest to the maturity date of the 2004 Notes;
and
|
·
|
The
waiver of the Company’s right to prepay any part of the 2004 or 2005
Notes.
|
During
July, August and September 2006, the holders converted a total of $4,812,249
of
principal and accrued interest into 12,993,939 shares of the Company’s common
stock, in accordance with the terms of the Waiver and Agreement.
On
November 29, 2006, the Company and the holders of the 2004 Notes entered
into a
Waiver and Amendment Agreement. The Company had notified the holders
of the 2004 Notes of the fact that a Triggering Event under the terms of
the
Notes had occurred as of August 31, 2006. Among other things, this
would have enabled the holders of the Notes to require the Company to redeem
all
or any portion of the outstanding principal amount of the Notes at a price
equal
to the greater of (i) 125% of such principal plus accrued and unpaid interest
and (ii) the product of the current conversion rate in effect under the
Notes
multiplied by the volume-weighted average price of Galaxy’s common
stock. The holders agreed to waive the Triggering Event in
consideration for an amendment to the 2004 Notes that reset the principal
amounts of the Notes to 125% of the amounts outstanding as of October 31,
2006.
In accordance with EITF 96-19,
Debtor's Accounting
for a
Modification or Exchange of Debt Instruments,
” the Company recognized
this transaction as an extinguishment of the existing debt and the issuance
of
new debt. The Company wrote off unamortized discount and deferred
financing associated with the original debt in the amount of $957,101 including
the amount in interest and financing cost. In addition, in accordance
with EITF 98-5 and EITF 00-27, the Company recognized the fair value of
the
warrants and the beneficial conversion feature associated with the Notes
aggregating $663,002 as a discount to the Notes.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
5 – CONVERTIBLE NOTES PAYABLE
(continued)
MARCH
2005 NOTES
In
March
2005, the Company completed a private offering of Senior Subordinated
Convertible Notes and Warrants to a group of accredited
investors. 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
connection with the December 1, 2005 agreement entered into with the holders
of
the 2004 Notes, as discussed above, the terms of the March 2005 Notes were
also
amended to lower the conversion price to $1.25 per share, and lower the
exercise
price of existing warrants to $1.25 per share. In accordance with
SFAS 5, Accounting for Contingencies, the Company recorded the effect of
this
agreement in the financial statements as of November 30, 2005. In
accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange
of Debt Instruments, the Company recognized this transaction as an
extinguishment of the existing debt and the issuance of new debt. The
Company wrote off unamortized discount and deferred financing associated
with
the original debt in the amount of $1,389,033 including the amount in interest
and financing cost. In addition, in accordance with EITF 98-5 and
EITF 00-27, the Company recognized the fair value of the warrants and the
beneficial conversion feature associated with the Notes aggregating $2,802,876
as a discount to the Notes and as additional paid in capital. During
the year ended November 30, 2006, the Company recorded amortization of
the
discount in the amount of $2,370,925 as 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 $791,114 and $394,479 is
included in interest expense for the years ended November 30, 2006 and
2005
respectively.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
5 – CONVERTIBLE NOTES PAYABLE
(continued)
MAY
2005
NOTES (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 years ended November 30, 2006 and 2005 amortization of deferred financing
costs of $127,907 and $64,129, respectively is included in interest
expense.
On
November 29, 2006, the Company and the holders of the May 2005 Notes entered
into a Waiver and Amendment Agreement. The Company had notified the
holders of the May 2005 Notes of the fact that a Triggering Event under
the
terms of the Notes had occurred as of August 31, 2006. Among other
things, this would have enabled the holders of the Notes to require the
Company
to redeem all or any portion of the outstanding principal amount of the
Notes at
a price equal to the greater of (i) 125% of such principal plus accrued
and
unpaid interest and (ii) the product of the current conversion rate in
effect
under the Notes multiplied by the volume-weighted average price of Galaxy’s
common stock. The holders agreed to waive the Triggering Event in
consideration for an amendment to the May 2005 Notes that reset the principal
amounts of the Notes to 125% of the amounts outstanding as of October 31,
2006.
In accordance with EITF 96-19, the Company recognized this transaction
as an
extinguishment of the existing debt and the issuance of new debt. The
Company wrote off unamortized discount and deferred financing associated
with
the original debt in the amount of $2,500,000 including the amount in interest
and financing cost. In addition, in accordance with EITF 98-5 and
EITF 00-27, the Company recognized the fair value of the warrants and the
beneficial conversion feature associated with the Notes aggregating $2,750,577
as a discount to the Notes.
APRIL
2006 DEBENTURES
In
April
2006, the Company completed a private offering of Subordinated Convertible
Debentures and Warrants to a group of accredited investors. Gross
proceeds from the offering were $4,500,000. The Debentures pay
interest at 15% per annum, have a 30-month maturity which will extend under
the
terms of the financing until all of the Company’s senior debt has been retired,
and are subordinated to Galaxy’s secured debt and existing senior
debt. The Debentures are convertible into 2,884,615 shares of common
stock based on a conversion price of $1.56 per share. Debenture
purchasers received warrants to purchase 865,383 shares of the Company’s common
stock at an exercise price of $1.60 per share, for a period of five
years. Principal and interest on the Debentures are payable upon
maturity.
The
fair
value of the warrants was estimated as of the issue date under the Black-Scholes
pricing model, with the following assumptions: common stock based on a
market
price of $1.06 per share, zero dividends, expected volatility of 67.46%,
risk
free interest rate of 4.875% and expected life of 2.5 years. The fair
value of the warrants of $295,029 resulted in a discount of $395,986 which
has
been recorded as additional paid in capital and as a discount to the Debentures
and is being amortized over the term of the Debentures. Amortization
of the discount of $95,315 is included in interest expense for the year
ended
November 30, 2006.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
5 – CONVERTIBLE NOTES PAYABLE
(continued)
JUNE
2006
DEBENTURES
In
June
2006, the Company completed a private offering of Subordinated Convertible
Debentures and Warrants to an accredited investor. Gross proceeds
from the offering were $2,500,000. The Debentures pay interest at 15%
per annum, have a 30-month maturity which will extend under the terms of
the
financing until all of the Company’s senior debt has been retired, and are
subordinated to Galaxy’s secured debt and existing senior debt. The
Debentures are convertible into 1,602,564 shares of common stock based
on a
conversion price of $1.56 per share. The Debenture purchaser received
warrants to purchase 480,769 shares of the Company’s common stock at an exercise
price of $1.60 per share, for a period of five years. Principal and
interest on the Debentures are payable upon maturity.
The
fair
value of the warrants was estimated as of the issue date under the Black-Scholes
pricing model, with the following assumptions: common stock based on a
market
price of $0.79 per share, zero dividends, expected volatility of 67.36%,
risk
free interest rate of 5.125% and expected life of 2.5 years. The fair
value of the warrants of $92,695 resulted in a discount of $170,555 which
has
been recorded as additional paid in capital and as a discount to the Debentures
and is being amortized over the term of the Debentures. Amortization
of the discount of $30,603 is included in interest expense for the year
ended
November 30, 2006
The
Company has evaluated the embedded conversion feature in the 2004, the
March
2005, and the May 2005 Notes, and the April 2006 and the June 2006 Debentures
and concluded the feature does not require classification as a derivative
instrument because the feature would be classified as equity if it were
a
freestanding instrument and therefore, meets the scope exception found
in SFAS
133,
Accounting for Derivative
Instruments and Hedging Activities
(“SFAS 133”). Included in
the evaluation is the conclusion the Notes and Debentures meet the definition
of
“conventional convertible instrument” and therefore the embedded conversion
feature is not subject to the provisions of EITF 00-19. Further we
have evaluated the detachable warrants related to the 2004 and the March
2005
Notes and the April 2006 and the June 2006 Debentures, and concluded that
the
warrants also meet the scope exception found in SFAS 133 and are appropriately
classified as equity. We have also evaluated the freestanding
registration rights agreements attached to the Notes and Debentures and
have
concluded they do meet the definition of derivative instruments under SFAS
133. The fair value of the derivative liabilities has been determined
to not be significant based on a probability- weighted, discounted cash
flow
evaluation of its terms.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
5 – CONVERTIBLE NOTES PAYABLE
(continued)
At
November 30, 2006and 2005 convertible notes consist of the
following:
|
|
As
of November 30,
|
|
|
|
2006
|
|
|
2005
|
|
2004
Notes
|
|
$
|
4,160,505
|
|
|
$
|
12,500,000
|
|
Less
unamortized discount
|
|
|
(663,002
|
)
|
|
|
(7,675,920
|
)
|
March
2005 Notes
|
|
|
7,695,000
|
|
|
|
7,695,000
|
|
Less
unamortized discount
|
|
|
(1,172,506
|
)
|
|
|
(3,543,431
|
)
|
May
2005 Notes
|
|
|
12,500,000
|
|
|
|
10,000,000
|
|
Less
unamortized discount
|
|
|
(2,750,577
|
)
|
|
|
(3,541,691
|
)
|
April
2006 Notes
|
|
|
4,500,000
|
|
|
|
-
|
|
Less
unamortized discount
|
|
|
(300,671
|
)
|
|
|
-
|
|
June
2006 Notes
|
|
|
2,500,000
|
|
|
|
-
|
|
Less
unamortized discount
|
|
|
(139,951
|
)
|
|
|
-
|
|
|
|
|
26,328,798
|
|
|
|
15,433,958
|
|
Less
current portion, net
|
|
|
(10,019,996
|
)
|
|
|
(5,041,524
|
)
|
long
term portion, net
|
|
$
|
16,308,801
|
|
|
$
|
10,392,434
|
|
Total
principal payments due in the next twelve months for the notes listed above
are
$11,855,505. If the Company’s common stock meets certain conditions
of trading volume and price, all principal payments may be paid by issuing
shares of common stock.
At
November 30, 2006 the Company’s debt maturity schedule, including related party
debt is as follows:
|
|
|
|
2007
|
|
$
|
19,405,233
|
|
2008
|
|
|
4,500,000
|
|
2009
|
|
|
2,500,000
|
|
2010
|
|
|
12,500,000
|
|
|
|
$
|
38,905,233
|
|
NOTE
6 – STOCKHOLDERS’
EQUITY
COMMON
STOCK
During
the year ended November 30, 2006, the Company issued shares of its common
stock
as follows:
·
|
12,993,939
shares issued Holders of Senior Secured Convertible Notes in
connection
with the conversion of $4,812,248 of principal and accrued interest
at
various conversion rates, ranging from $0.28 to $0.60 per
share.
|
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
6 – STOCKHOLDERS’ EQUITY
(Continued)
COMMON
STOCK (Continued)
During
the year ended November 30, 2005, the Company issued shares of its common
stock
as follows:
·
|
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.
|
·
|
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
|
·
|
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.
|
·
|
7,940,811
shares issued to Holders of Senior Secured Convertible Notes
in connection
with the conversion of $8,685,009 of principal and accrued interest
at
various conversion rates, ranging from $0.90 to $1.55 per
share.
|
During
the year ended November 30, 2004, the Company issued shares of its common
stock
as follows:
·
|
45,763
shares for $27,000 cash for the exercise 45,763 warrants at an
exercise
price of $0.59 per share
|
·
|
2,503,571
shares for cash at $1.40 per share
|
·
|
2,000,000
shares for partial consideration of acquired oil and gas properties
at
$1.40 per share
|
·
|
6,637,671
shares for cash of $1.80 per share
|
·
|
3,000,000
shares for partial consideration of acquired oil and gas properties
at
$1.80 per share
|
·
|
360,000
shares for partial consideration of acquired oil and gas properties
at
$2.63 share
|
·
|
1,525,424
shares upon conversion of $900,000 of convertible debentures
at a
conversion price of $.59 per share
|
·
|
8,033,898
shares upon conversion of $4,740,000 of convertible debentures
at a
conversion price of $.59 per share
|
·
|
20,466
shares upon conversion of $12,075 of accrued interest on convertible
debentures at a conversion price of $.59 per
share
|
·
|
371,206
shares issued in conjunction with the cashless exercise of 508,475
Series
“A” warrants associated with the convertible debentures dated September
24, 2003
|
·
|
348,005
shares issued in conjunction with the cashless exercise of 508,475
Series
“B” warrants associated with the convertible debentures dated October
3,
2003
|
During
the year ended November 30, 2003, the Company issued shares of its common
stock
as follows:
·
|
1,602,000
shares for cash at $1.00 per share
|
·
|
10,000
shares for services at $1.00 per
share
|
·
|
60,000
shares for services at $.91 per
share
|
·
|
233,204
shares to Resource Venture Management (RVM), a related party,
an entity
owned by a founder of the Company, as payment of an outstanding
debt, at
$1.00 per share
|
·
|
90,000
shares to RVM for services rendered, valued at $90,000 ($1.00
per
share)
|
·
|
1,951,241
shares to the shareholders of Pannonian in accordance with the
Share
Exchange Agreement to acquire all the outstanding shares of Pannonian
(Note 1).
|
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
6 – STOCKHOLDERS’ EQUITY
(continued)
During
the period ended November 30, 2002, the Company issued shares of its common
stock as follows:
·
|
11,500,000
shares at inception to officers/directors/founders for cash at
$.001 per
share
|
·
|
500,000
shares for cash at $.02 per share
|
·
|
4,000,000
shares to RVM, for services rendered, valued at $200,000 ($.05
per
share)
|
·
|
3,000,000
shares for cash at $.05 per share
|
·
|
1,997,058
shares for cash at $.34 per share
|
Effective
November 13, 2002, the Company completed the acquisition of Dolphin (Note
1). In conjunction with the acquisition, the Company exchanged
20,997,058 shares of its common stock for 100% of the outstanding common
shares
of Dolphin. The 9,028,000 shares of common stock of the Company
outstanding at the date of acquisition were recapitalized at the net asset
value
of the Company at that date of $(60,331). For financial statement
reporting purposes this transaction was treated as a reverse acquisition
whereby
Dolphin was considered the surviving and reporting entity. For legal
purposes, the Company remained as the surviving entity; therefore, the
capital
structure of the Company was accordingly restated.
The
value
of all common stock issued for non-cash consideration represents the
non-discounted cash price of equivalent shares of the Company’s common stock at
the transaction date.
WARRANTS
In
connection with the issuance of convertible debentures in September and
October
2003, the Company issued warrants to purchase 2,867,797 shares of common
stock
at $.71 per share, and 2,867,797, shares of common stock at $.83 per share
to
purchasers of the debentures, and issued warrants to purchase 230,847 shares
of
common stock at $.59 per share to placement agents for the issue.
In
connection with sales of common stock in December 2003 and January 2004,
the
Company issued warrants to purchase 500,715 shares of common stock at $2.71
per
share, and 1,327,535 shares of common stock at $4.05 per share to purchasers
of
the stock, and issued warrants to purchase 105,166 and 358,435 shares of
common
stock at $1.40 and $1.80 per share, respectively, to placement agents for
the
issue. The fair value of the placement agent warrants, estimated as
of the issue dates under the Black-Scholes pricing model was $157,599 and
$900,504 for the December 2003 and January 2004 common stock offerings,
respectively. These amounts were recorded as issue costs for the
respective common stock offering. In accordance with the antidilutive
rights provisions, the exercise prices of those warrants with original
exercise
prices in excess of $1.54 have been reset to $1.54 per share, in connection
with
the issuance of the 2004 notes. In December 2005 the exercise price
was reset to $1.25 per share in connection with the Waiver and Amendment
entered
into with the holders of the 2004 and May 2005 Notes.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
6 – STOCKHOLDERS’ EQUITY
(continued)
In
August
2004, in connection with the private placement of convertible notes, the
Company
issued warrants to purchase 5,194,806 shares of common stock at $1.54 per
share
for a period of three years. In December 2005 in connection with the
Waiver and Amendment entered into with the holders of the 2004 and May
2005
Notes the number or warrants was increased to 6,400,001 and the exercise
price
was reset to $1.25 per share. Placement agents for the convertible
notes received warrants to purchase 400,000 shares of common stock at $1.54
per
share for a period of five years. In December 2005 the exercise price
was reset to $1.25 per share in connection with the Waiver and Amendment
entered
into with the holders of the 2004 and May 2005 Notes.
In
March
2005, in connection with the private placement of convertible notes, the
Company
issued warrants to purchase 1,637,234 shares of common stock at $1.88 per
share
for a period of three years. In December 2005 the exercise price was
reset to $1.25 per share in connection with the Waiver and Amendment entered
into with the holders of the 2004 and May 2005 Notes.
In
May
2005, in connection with the private placement of convertible notes, placement
agents received warrants to purchase 200,000 shares of common stock at
$1.88 per
share for a period of five years. In December 2005 the exercise price
was reset to $1.25 per share in connection with the Waiver and Amendment
entered
into with the holders of the 2004 and May 2005 Notes.
In
April
2006, in connection with the private placement of convertible notes, the
Company
issued warrants to purchase 868,383 shares of common stock at $1.60 per
share
for a period of five years.
In
June
2006, in connection with the private placement of convertible notes, the
Company
issued warrants to purchase 480,769 shares of common stock at $1.60 per
share
for a period of five years.
As
of
November 30, 2006, warrants issued and outstanding are as follows:
Issue
Date
|
|
Shares
Exercisable
|
|
|
Exercise
Price
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
September 24, 2003
|
|
|
2,008,474
|
|
|
$
|
.59
- $ .83
|
|
September 24, 2008
|
October 3, 2003
|
|
|
551,186
|
|
|
$
|
.59
- $ .83
|
|
October 3, 2008
|
December 18, 2003
|
|
|
605,880
|
|
|
$
|
$1.25
|
|
December 18, 2007
|
January 15, 2004
|
|
|
1,680,414
|
|
|
$
|
1.25
|
|
January 15, 2009
|
August 19, 2004
|
|
|
5,494,805
|
|
|
$
|
1.25
|
|
August 19, 2009
|
October 27, 2004
|
|
|
100,000
|
|
|
$
|
1.25
|
|
October 27, 2009
|
March 1, 2005
|
|
|
1,637,234
|
|
|
$
|
1.25
|
|
March 1, 2008
|
May 31, 2005
|
|
|
200,000
|
|
|
$
|
1.25
|
|
May 31, 2010
|
December 1, 2005
|
|
|
1,205,196
|
|
|
$
|
1.25
|
|
August 19, 2009
|
April 26, 2006
|
|
|
868,383
|
|
|
$
|
1.60
|
|
April 26, 2011
|
June 20, 2006
|
|
|
480,769
|
|
|
$
|
1.60
|
|
June 20, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,832,341
|
|
|
|
|
|
|
At
November 30, 2006 and 2005 the weighted average exercise price for warrants
outstanding is $1.20 and $1.43, respectively, and the weighted average
remaining
contractual life is 1.6 and 2.3 years, respectively.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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 November
30, 2006, and November 30, 2005, options to purchase 1,785,000 and 2,025,000
shares, respectively, were available to be granted pursuant to the stock
option
plan.
On
January 4, 2006, the Company granted each of the Company’s outside directors
options to purchase 60,000 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. On September 1,
2006, the Company amended the terms of the options previously granted to
two
directors who retired from the Board of Directors during the
period. The amendment revised the term so that the options will not
expire 30 days after the termination of services, but instead will expire
according to their original expiration dates and will continue to vest
according
to their original vesting schedules.
A
summary
of option activity under the Plan as of November 30, 2006 and 2005 and
changes
during the years then ended is presented below:
|
|
|
|
|
|
|
Weighted
Avg
|
|
|
|
Number
of
|
|
|
Weighted
Avg
|
|
Remaining
|
Aggregate
|
|
|
Shares
|
|
|
Exercise
Price
|
|
Contractual
Term
|
Intrinsic
Value
|
Options
outstanding - December 1, 2004
|
|
|
3,500,000
|
|
|
$
|
2.37
|
|
|
|
Granted
during period
|
|
|
975,000
|
|
|
$
|
1.32
|
|
|
|
Exercised
during period
|
|
|
-
|
|
|
|
-
|
|
|
|
Forfeited
during period
|
|
|
-
|
|
|
|
-
|
|
|
|
Expired
during period
|
|
|
-
|
|
|
|
-
|
|
|
|
Options
outstanding -November 30, 2005
|
|
|
4,475,000
|
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding - December 1, 2005
|
|
|
4,475,000
|
|
|
$
|
2.15
|
|
|
|
Granted
during period
|
|
|
240,000
|
|
|
$
|
1.19
|
|
|
|
Exercised
during period
|
|
|
-
|
|
|
|
-
|
|
|
|
Forfeited
during period
|
|
|
-
|
|
|
|
-
|
|
|
|
Expired
during period
|
|
|
-
|
|
|
|
-
|
|
|
|
Options
outstanding -November 30, 2006
|
|
|
4,715,000
|
|
|
$
|
2.10
|
|
7.61
|
$ 7,207,557
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at November 30, 2006
|
|
|
2,825,000
|
|
|
$
|
2.10
|
|
7.63
|
$ 5,919,800
|
The
weighted average grant date fair value of options granted during the years
ended
November 30, 2006 and 2005 was $ 0.69 and $0.97 per share. There have
been no options exercised under the terms of the Plan.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
7 - STOCK OPTION PLAN
(continued)
A
summary
of the status of the Company’s nonvested options as of November 30, 2006 and
2005 and changes during the years then ended is presented below.
|
|
Number
of Shares
|
|
|
Weighted
Average
Fair
Value
|
|
|
|
|
|
|
|
|
Non-Vested
Options - December 1, 2004
|
|
|
2,566,250
|
|
|
$
|
1.77
|
|
Granted
during period
|
|
|
975,000
|
|
|
$
|
0.97
|
|
Exercised
during period
|
|
|
-
|
|
|
$
|
-
|
|
Vested
during period
|
|
|
(841,250
|
)
|
|
$
|
1.49
|
|
Forfeited
during period
|
|
|
-
|
|
|
$
|
-
|
|
Non-Vested
Options - November 30, 2005
|
|
|
2,700,000
|
|
|
$
|
1.55
|
|
Granted
during period
|
|
|
240,000
|
|
|
$
|
0.69
|
|
Exercised
during period
|
|
|
-
|
|
|
$
|
-
|
|
Vested
during period
|
|
|
(1,050,000
|
)
|
|
$
|
1.29
|
|
Forfeited
during period
|
|
|
-
|
|
|
$
|
-
|
|
Non-Vested
Options - November 30, 2006
|
|
|
1,890,000
|
|
|
$
|
1.47
|
|
As
of
November 30, 2006, there is $2,772,765 of total unrecognized compensation
cost
related to nonvested share-based compensation arrangements granted under
the
Plan. That cost is expected to be recognized over a weighted-average
period of 2.42 years. The total fair value of shares vested during
the year ended November 30, 2006 and 2005 was $1,358,392 and $1,253,350,
respectively.
The
following table presents additional information related to the options
outstanding at November 30, 2006:
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
Exercise
price
|
|
|
Number
of options
|
|
|
Number
of options
|
|
|
remaining
contractual
|
|
per
share
|
|
|
outstanding
|
|
|
Exercisable
|
|
|
life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.00
|
|
|
|
60,000
|
|
|
|
40,000
|
|
|
|
6.5
|
|
|
1.07
|
|
|
|
50,000
|
|
|
|
10,000
|
|
|
|
9.0
|
|
|
1.19
|
|
|
|
240,000
|
|
|
|
240,000
|
|
|
|
9.1
|
|
|
1.26
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
8.1
|
|
|
1.30
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
7.7
|
|
|
1.34
|
|
|
|
875,000
|
|
|
|
153,750
|
|
|
|
8.0
|
|
|
1.50
|
|
|
|
300,000
|
|
|
|
112,500
|
|
|
|
7.4
|
|
|
1.55
|
|
|
|
325,000
|
|
|
|
137,500
|
|
|
|
7.6
|
|
|
2.24
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
7.4
|
|
|
2.64
|
|
|
|
2,375,000
|
|
|
|
831,250
|
|
|
|
7.4
|
|
|
3.51
|
|
|
|
180,000
|
|
|
|
180,000
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,475,000
|
|
|
|
1,775,000
|
|
|
|
7.6
|
|
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
8 – INCOME
TAXES
The
effective income tax rate differs from the U.S. Federal statutory income
tax
rate due to the following:
|
|
Years
Ended November 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Federal
statutory income tax rate
|
|
|
(35.0
|
%)
|
|
|
(35.0
|
%)
|
|
|
(34.0
|
%)
|
State
income taxes
|
|
|
(3.25
|
%)
|
|
|
(3.3
|
%)
|
|
|
(3.3
|
%)
|
Permanent
differences – interest on convertible
Debt
Other
|
|
|
16.25
|
%
|
|
|
6.5
|
%
|
|
|
15.1
|
%
|
Increase
in valuation allowance
|
|
|
22.0
|
%
|
|
|
31.8
|
%
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income tax provision (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The
principal sources of temporary differences resulting in deferred tax assets
and
tax liabilities at November 30, 2004 are as follows:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
|
|
Federal
and state net operating
loss
Carryovers
|
|
$
|
13,700,000
|
|
|
$
|
13,155,000
|
|
|
$
|
3,671,000
|
|
Asset
retirement
obligation
|
|
|
712,000
|
|
|
|
472,000
|
|
|
|
265,000
|
|
Oil
and gas property
|
|
|
|
|
|
|
657,000
|
|
|
|
-
|
|
Accrued
related party interest and interest on
convertible
debt
|
|
|
952,000
|
|
|
|
-
|
|
|
|
-
|
|
Deferred compensation
|
|
|
661,000
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
Total
deferred
taxes
|
|
$
|
16,025,000
|
|
|
$
|
14,294,000
|
|
|
$
|
3,936,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
drilling costs and other exploration costs capitalized for financial
reporting purposes
|
|
$
|
(3,085,000
|
)
|
|
|
-
|
|
|
|
(319,000
|
)
|
Deferred
financing
costs
|
|
|
(216,000
|
)
|
|
|
|
|
|
|
|
|
Property
and
equipment
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
___________
|
|
|
____________
|
|
|
|
(15,000
|
)
|
Total
deferred
liabilities
|
|
|
(3,303,000
|
)
|
|
|
-
|
|
|
|
(334,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax
asset
|
|
|
12,722,000
|
|
|
|
14,294,000
|
|
|
|
3,602,000
|
|
Less: valuation
allowance
|
|
|
(12,722,000
|
)
|
|
|
(14,294,000
|
)
|
|
|
(3,602,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax
liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
8 – INCOME TAXES
(continued)
The
Company has a $38,800,000 net operating loss carryover as of November 30,
2006. The net operating losses may offset against taxable income
through the year ended November 2026. A portion of the net operating
loss carryovers begin expiring in 2020 and may be subject to U.S. Internal
Revenue code Section 382 limitations.
The
Company has provided a valuation allowance for the deferred tax asset at
November 30, 2006, as the likelihood of the realization of the tax benefit
of
the net operating loss carryforward cannot be determined. The
valuation allowance decreased by approximately $1,572,000 and increased
by
$10,692,000 for the years ended November 30, 2006 and 2005,
respectively.
NOTE
9 - RELATED PARTY
TRANSACTIONS
The
Company incurred consulting fees related to services provided by RVM in
the
amounts of$30,000, $120,000 and $120,000 for the years ended November 30,
2006,
2005 and 2004, respectively. RVM also billed the Company,
$-0-, $30,000, and $79,929, for reimbursement of costs and expenses incurred
on
behalf of the Company during the same years.
All
amounts paid in 2006, 2005 and 2004 were paid in cash. At
November 30, 2006, 2005 and 2004 the Company included amounts due to RVM
of
$-0-, $12,079 and $37,826, respectively, in accounts payable related
parties.
During
the year ended November 30, 2005, in connection with a Lease Acquisition
and
Development Agreement to acquire a 58-1/3%working interest in unevaluated
oil
and gas properties in the Piceance Basin in Colorado, the Company entered
into a
Participation Agreement with Marc A. Bruner to acquire all or a portion
of the
remaining 41-2/3% working interest in the subject properties. Marc A.
Bruner subsequently assigned his rights and obligations under the Agreement
to a
third party company (the “Assignee”), unrelated at the time of
assignment. In exchange for the assignment of his rights and
obligations, the founder received a significant ownership percentage of
the
Assignee, thereby establishing the Assignee as a related party. The
terms of the Participation Agreement as amended, required the Assignee
to pay
the next $14,000,000 of lease acquisition, drilling, completion, and facilities
costs to be incurred on the project. During the year ended November
30, 2006 the Company, as operator of the Piceance Basin project, acquired
additional acreage and drilled four wells on acreage jointly owned by the
Assignee and the Company. In accordance with the terms of the
Participation Agreement the Assignee paid the first $14,000,000 of lease
acquisition, drilling, completion, and facilities costs. In addition,
the Assignee paid the Company $1,695,830 as compensation for management
of the
drilling program during the year. As of November 30,
2006, the Assignee owed the Company $923,172 for its share of joint
venture costs and management fees. This amount, included in accounts
receivable, joint interest at November 30, 2006 was paid by the Assignee
in
December 2006 and February 2007.
During
the year ended 2006, the Company recorded $1,695,830 in management fees
from
Exxel, a related party, in connection with the development of the Piceance
property. These amounts were recorded as a reduction to related
exploration costs incurred by the Company.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
9 - RELATED PARTY TRANSACTIONS
(continued)
During
the year ended November 30, 2005, the Company entered into a farmout agreement
with Falcon Oil and Gas Ltd., (“Falcon”). Marc A. Bruner is President
and CEO of Falcon and is the founder of the Company. The farmout
agreement called for Falcon and the Company to evaluate the concession
held by
the Company in the Jiu Valley Coal Basin in Romania. The farmout
agreement required Falcon to pay 100 % of the costs to drill an initial
test
well and an second, optional, well on the concession, and to pay the Company
$100,000 upon approval by the Romanian government of the assignment of
the
concession to Falcon to earn a 75% interest in the concession. The
Company recognized a gain of $72,713 on the transaction, representing the
excess
of the proceeds over the original cost of the property. The Company
has completed the drilling of the first test well on the concession and
is
evaluating completion and testing operations to be undertaken
Harbor
Petroleum LLC, (“Harbor”) is a company owned 50% and managed by the Company’s
Chief Operating Officer (“COO”). During the years ended November 30,
2005 and, 2004 the Company incurred costs and expenses with Harbor of $41,681and
$271,588, respectively. Of those amounts, compensation expenses paid
to Harbor for services provided by the COO and other Harbor staff, were
$27,500
and $163,737 for the corresponding years. Reimbursement of costs
advanced by Harbor on behalf of the Company of $14,181 and $132,197 were
paid
during the years ended November 30, 2005 and, 2004, respectively. The
Company paid made no payments to Harbor during the year ended November
30,
2006
Florida
Energy, Inc. (“Florida”) is a company owned and managed by the brother
of Marc A. Bruner and the uncle of our President – Marc E.
Bruner. Under the terms of the agreement between the Company, Harbor,
and Florida, Harbor and Florida will each retain a 1% overriding royalty
interest in the acquired leases in Texas, including those leases acquired
as of
the date of the agreement. However, with respect to 400 contiguous
acres designated by Florida, Florida shall have a 3.125% overriding royalty
instead of a 1% overriding royalty interest.
The
Company incurred Directors’ fees totaling $198,775, $193,500and $180,000 during
the years ended November 30, 2006, 2005 and 2004. As of
November 30, 2006 and 2005, $27,000 and $36,000 of Directors’ fees are included
in accounts payable, related.
In
April
2004, the Company executed a strategic consulting agreement with a member
of the
Company’s Advisory Committee. Under the terms of the Agreement, the
individual is to be paid a consulting fee of $95 per hour for all services
in
excess of 40 hours per calendar month and a location fee of $5,000 per
well for
each well drilled on the Company’s acreage in the Powder River Basin in Wyoming
and Montana. In addition, we have agreed to pay an
overriding royalty interest in oil and gas production from all of our properties
in the Powder River Basin not to exceed 2%. During the years ended
November 30, 2005 and 2004, the Company paid the individual $21,250 and
$590,000
in location fees. In the year ended November 30, 2005, the Company
assigned overriding royalty interests with a fair value of $732,687 to
the
individual. The Company paid no location or consulting
fees to the individual in the year ended November 30,
2006.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
9 - RELATED PARTY TRANSACTIONS
(continued)
In
connection with the acquisition of Pannonian, the Company assumed liabilities
due from Pannonian to related parties including advances from the founder
of the
Company of $39,500; notes payable and accrued interest due to the President
of
Pannonian of $37,508; notes payable and accrued interest to a company wholly
owned by the President of Pannonian of $44,400; and accounts payable to
Directors of the Company for services rendered and costs advanced of
$63,346. As of November 30, 2005, all amounts due to related parties
resulting from the acquisition of Pannonian have been paid in full.As of
November 30, 2005 and 2006 the Company owed the President of Pannonian
$37,400
and $50,999 for office and personnel expenses advanced by the
President. These amounts are included in accounts payable, related as
of the respective dates.
During
the year ended November 30, 2006, the Company entered into an agreement
with
PetroHunter Energy Corporation (“PetroHunter”), a corporation whose major
shareholder is Marc A. Bruner, to utilize a drilling rig owned and
operated by a non-related third party drilling contractor, which was under
contract with PetroHunter at the time. The Company’s largest
shareholder, was at January 31, 2007 a 33.4% beneficial shareholder of
PetroHunter. The contract called for drilling costs incurred on the
Company’s well to be invoiced to and paid by PetroHunter and then invoiced by
PetroHunter to the Company. As of November 30, 2006, the Company owed
PetroHunter $8,860 under the terms of the agreement. Such amount was
subsequently paid by the Company to PetroHunter.
See
also
Note 11 – Subsequent Events for the discussion of a purchase and sale agreement
entered into by the Company and PetroHunter subsequent to November 30,
2006
See
Note
4 – Notes Payable – Related Parties for the discussion of notes to related
parties.
NOTE
10 - COMMITMENTS AND
CONTINGENCIES
OFFICE
LEASES
The
Company currently leases space in Denver, Colorado. In addition the
Company pays a portion of the office rental for Pannonian’s office, also in
Denver. Total minimum rental payments for non-cancelable operating
leases for the years ending November 30 are as follows:
2007
|
$103,881
|
2008
|
$107,834
|
2009
|
$109,416
|
2010
|
$
45,454
|
|
|
Rent
expense was approximately $113,695, $125,616 and $98,000 for the years
ended
November 30, 2006, 2005 and 2004, respectively.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
10 - COMMITMENTS AND
CONTINGENCIES (continued)
DELAY
RENTALS
In
conjunction with the Company’s working interests in undeveloped oil and gas
prospects, the Company must pay approximately $104,000 in delay rentals
and
other costs during the fiscal year ending November 30, 2007 to maintain
the
right to explore these prospects. The Company continually evaluates
its leasehold interests, therefore certain leases may be abandoned by the
Company in the normal course of business.
ENVIRONMENTAL
Oil
and
gas producing activities are subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and
may
require the Company to remove or mitigate the environmental effects of
the
disposal or release of petroleum or chemical substances at various
sites. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. Expenditures that relate
to an existing condition caused by past operations and that have no future
economic benefit are expensed. Liabilities for expenditures of a
noncapital nature are recorded when environmental assessment and/or remediation
is probable, and the costs can be reasonably estimated.
CONTINGENCIES
The
Company may from time to time be involved in various claims, lawsuits,
disputes
with third parties, actions involving allegations of discrimination, or
breach
of contract incidental to the operations of its business. The Company
is not currently involved in any such incidental litigation which it believes
could have a materially adverse effect on its financial condition or results
of
operations.
NOTE
11 - SUBSEQUENT
EVENTS
a)
On
December 29, 2006, the Company entered into a Purchase and Sale Agreement
(the
“PSA”) with PetroHunter Energy Corporation (“PetroHunter”) and its wholly owned
subsidiary, PetroHunter Operating Company, a related
party. Pursuant to the PSA, the Company agreed to sell all of its oil
and gas interests in the Powder River Basin of Wyoming and Montana (the
“Powder
River Basin Assets”).
Marc
A.
Bruner, who is the Company’s largest shareholder, was at January 31, 2007 a
33.4% beneficial shareholder of PetroHunter. Marc A. Bruner is the
father of Marc E. Bruner, the Company’s President, Chief Executive Officer and a
director. Marc E. Bruner is the stepson of Carmen J. Lotito, the
Chief Financial Officer and a director of PetroHunter.
The
purchase price for the Powder River Basin Assets is $45 million, with $20
million to be paid in cash and $25 million to be paid in shares of PetroHunter
common stock at the rate of $1.50 per share.
Closing
of the transaction is subject to approval by the Company’s secured noteholders,
approval of all matters in its discretion by our Board of Directors, PetroHunter
obtaining outside financing on terms acceptable to its Board of Directors,
and
various other terms and conditions. Either party may terminate the
agreement if closing has not occurred by March 31, 2007.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
11 - SUBSEQUENT EVENTS
(continued)
Within
ten (10) days of signing the PSA, PetroHunter was required and did make
an
initial earnest money payment of $1.4 million. PetroHunter made an
additional earnest money payment of $600,000 in January 2007. In the
event the closing does not occur for any reason other than a material breach
by
the Company, the deposit shall convert into a promissory note (the “Note”),
payable to PetroHunter, and shall be an unsecured subordinated debt of
the
Company, which is payable only after repayment of our senior
indebtedness.
PetroHunter
became the contract operator of the Powder River Basin Assets beginning
January
1, 2007. At closing, the operating expenses incurred by PetroHunter
as the contract operator will be credited toward the purchase price, or
if
closing does not occur, will be added to the principal amount of the
Note.
b)
On
February 1, 2007 and February 26, 2007 the Company issued two subordinated
unsecured promissory notes in the amounts of $500,000 and $900,000,
respectively, in favor of Bruner Trust, a related party. Interest
accrues at the rate of 8% per annum and the notes mature on the later of
120
days from issue or the time at which the registrant’s senior indebtedness has
been paid in full.
c) The
Company failed to make payment of the Note Payable in the amount of $2,049,728
due to the Bruner Trust on December 1,
2006. On March 14, 2007, the Company and the Bruner Trust
executed a Forbearance Agreement with regard to the Note Payable whereby
the
Bruner Trust agreed to forbear from enforcing its rights that arise as
a result
of the failure by Borrower to make payment on the note by the due date
until
June 30, 2007.
d)
The
Company has made cash payments on the 2004 of $625,000 on the first business
day
December 2006 and January, February and March 2007. As of March 15,
2007 the remaining balance of the 2004 Notes is $1,660,505.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
12 – QUARTERLY FINANCIAL DATA
(UNAUDITED)
The
following is a summary of the unaudited financial data for each quarter
for the
years ended November 30, 2006, 2005, and 2004:
|
|
Three
months ended
|
|
|
|
02/28/06
|
|
|
05/31/06
|
|
|
08/31/06
|
|
|
11/30/06
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
sales
|
|
$
|
425,675
|
|
|
$
|
248,661
|
|
|
$
|
281,559
|
|
|
$
|
238,747
|
|
Gain
on disposition of oil and
gas property and other income, related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,474
|
|
Operating
revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
425,675
|
|
|
|
248,661
|
|
|
|
281,559
|
|
|
|
318,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating
expenses
|
|
|
294,308
|
|
|
|
106,510
|
|
|
|
189,493
|
|
|
|
190,825
|
|
General
and
administrative
|
|
|
1,154,718
|
|
|
|
1,327,423
|
|
|
|
1,172,301
|
|
|
|
1,362,092
|
|
Impairment
oil and gas properties
|
|
|
-
|
|
|
|
-
|
|
|
|
1,031,160
|
|
|
|
297,272
|
|
Depreciation
and amortization
|
|
|
176,344
|
|
|
|
185,984
|
|
|
|
318,379
|
|
|
|
98,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and
other
|
|
|
4,199
|
|
|
|
7,390
|
|
|
|
3,283
|
|
|
|
742
|
|
Interest
and financing
costs
|
|
|
(4,582,103
|
)
|
|
|
(4,365,863
|
)
|
|
|
(3,970,113
|
)
|
|
|
(6,629,210
|
)
|
|
|
|
(4,577,904
|
|
|
|
(4,358,473
|
)
|
|
|
(3,966,830
|
)
|
|
|
(6,628468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(5,777,599
|
)
|
|
$
|
(5,729,729
|
)
|
|
$
|
(6,396,604
|
)
|
|
$
|
(8,259,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and
diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
12 – QUARTERLY FINANCIAL DATA
(UNAUDITED) (continued)
|
|
Three
months ended
|
|
|
|
02/28/05
|
|
|
05/31/05
|
|
|
08/31/05
|
|
|
11/30/05
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
sales
|
|
$
|
111,877
|
|
|
$
|
247,399
|
|
|
$
|
323,313
|
|
|
$
|
614,605
|
|
Gain
on disposition of oil and
gas properties
|
|
|
-
|
|
|
|
197,676
|
|
|
|
-
|
|
|
|
|
|
Operating
revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,472
|
|
|
|
|
111,877
|
|
|
|
445,075
|
|
|
|
323,313
|
|
|
|
658,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating
expenses
|
|
|
172,137
|
|
|
|
204,273
|
|
|
|
377,435
|
|
|
|
211,224
|
|
General
and
administrative
|
|
|
1,255,511
|
|
|
|
1,247,864
|
|
|
|
906,760
|
|
|
|
1,906,453
|
|
Impairment
oil and gas properties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,273,795
|
|
Depreciation
and amortization
|
|
|
68,904
|
|
|
|
104,990
|
|
|
|
160,258
|
|
|
|
1,552,922
|
|
|
|
|
1,496,552
|
|
|
|
1,557,127
|
|
|
|
1,444,453
|
|
|
|
8,944,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and
other
|
|
|
36,560
|
|
|
|
43,922
|
|
|
|
37,087
|
|
|
|
45,722
|
|
Interest
and financing
costs
|
|
|
(2,035,355
|
)
|
|
|
(2,474,651
|
)
|
|
|
(2,745,696
|
)
|
|
|
(2,826,453
|
)
|
|
|
|
(1,998,795
|
)
|
|
|
(2,233,053
|
)
|
|
|
(2,708,609
|
)
|
|
|
(2,780,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(3,383,470
|
)
|
|
$
|
(3,542,781
|
)
|
|
$
|
(3,829,749
|
)
|
|
$
|
(11,067,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and
diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the fourth quarter of the year ended November 30, 2005, the Company recorded
its
first proved reserves and transferred capitalized costs of the prospects
with
reserves to the full cost pool amortization base. Also in the fourth
quarter, the Company determined that three of its oil and gas prospects
were
either partially or wholly impaired and transferred a total of $5,055,320
to the
full cost pool amortization base. Following these transfers the
amortization rate increased from $1.83 per MCF recognized in the first
three
quarters of the year to $8.29 per MCF for the fourth quarter. After
recording amortization for the year, the Company recognized impairment
expense
of its evaluated properties in the amount of $5,273,795 during the fourth
quarter, representing the excess of the full cost pool over the full cost
ceiling as computed in accordance with the full cost rules.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
12 – QUARTERLY FINANCIAL DATA
(UNAUDITED) (continued)
|
|
Three
months ended
|
|
|
|
02/28/04
|
|
|
05/31/04
|
|
|
08/31/04
|
|
|
11/30/04
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,780
|
|
|
$
|
98,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
15,215
|
|
|
|
44,032
|
|
General
and
administrative
|
|
|
676,424
|
|
|
|
1,047,625
|
|
|
|
874,001
|
|
|
|
919,168
|
|
Abandoned
oil and gas
properties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation
and
amortization
|
|
|
1,335
|
|
|
|
21,767
|
|
|
|
18,207
|
|
|
|
35,081
|
|
|
|
|
677,759
|
|
|
|
1,069,392
|
|
|
|
907,423
|
|
|
|
998,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
13,337
|
|
|
|
9,897
|
|
|
|
7,652
|
|
|
|
20,510
|
|
Interest
and financing
costs
|
|
|
(771,594
|
)
|
|
|
(2,288,633
|
)
|
|
|
(191,268
|
)
|
|
|
(3,100,605
|
)
|
|
|
|
(758,257
|
)
|
|
|
(2,278,736
|
)
|
|
|
(183,616
|
)
|
|
|
(3,080,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(1,436,016
|
)
|
|
$
|
(3,348,128
|
)
|
|
$
|
(1,067,259
|
)
|
|
$
|
(3,979,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and
diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the 4
th
quarter of the
year ended November 30, 2004, the Company recorded a cumulative adjustment
in
the amount of $1,306,608 to reflect the write-off of the unamortized balance
of
the discount attributable to the fair value of the warrants, $864,722,
and the
unamortized balance of deferred financing costs, $441,886, at the date
of
conversion of the convertible debentures issued in the prior fiscal
year. The amounts have been charged to operations as interest
expense.
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
13 - SUPPLEMENTAL OIL AND GAS
RESERVE INFORMATION (Unaudited)
The
following reserve quantity and future net cash flow information for the
Company
represents proved reserves located in the United States. The reserves
as of November 30, 2006 and 2005 have been estimated by Gustavson Associates,
Inc., independent petroleum engineers. The determination of oil and
gas reserves is based on estimates, which are highly complex and
interpretive. The estimates are subject to continuing change as
additional information becomes available.
The
standardized measure of discounted future net cash flows is prepared under
the
guidelines set forth by the Securities and Exchange Commission (SEC) that
require the calculation to be performed using year-end oil and gas
prices. The oil and gas prices used as of November 30, 2006 and 2005
are$49.50per bbl of oil and $6.74 per mcf of gas, and
$59.37per bbl of oil and $
6.76
per mcf of gas, respectively. Future production costs are based on
year-end costs and include severance taxes. Each property that is
operated by the Company is also charged with field-level overhead in the
reserve
calculation. The present value of future cash inflows is based on a
10% discount rate. Due to the Company’s current liquidity issues,
proved undeveloped reserves identified in the Gustavson Associates report
have
been excluded from the disclosures below and have been excluded from the
Company’s DD&A and ceiling test calculations.
Proved
Reserves
|
|
Gas
(Mcf)
|
|
|
Oil
(Bbls)
|
|
Balance,
November 30, 2004
|
|
|
-
|
|
|
|
-
|
|
Extensions
and Discoveries
|
|
|
1,171,425
|
|
|
|
353
|
|
Production
|
|
|
(211,481
|
)
|
|
|
-
|
|
Balance,
November 30, 2005
|
|
|
959,944
|
|
|
|
353
|
|
Revisions
to previous estimates
|
|
|
254,143
|
|
|
|
(8
|
)
|
Extensions
and discoveries
|
|
|
1,773
|
|
|
|
20
|
|
Production
|
|
|
(210,439
|
)
|
|
|
(45
|
)
|
Balance,
November 30, 2006
|
|
|
1,005,421
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
Proved
Developed Reserves as of
November 30
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Gas
(Mcf)
|
|
|
1,005,421
|
|
|
|
648,302
|
|
Oil
( Bbls)
|
|
|
320
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
Standardized
Measure of Discounted Future Cash Flows
|
|
|
|
|
|
|
|
|
|
|
November
30
|
|
|
November
30
|
|
|
|
2006
|
|
|
2005
|
|
Future
cash inflows
|
|
$
|
6,769,792
|
|
|
$
|
6,529,934
|
|
Future
cash outflows
|
|
|
|
|
|
|
|
|
Production
costs
|
|
|
(2,954,112
|
)
|
|
|
(2,498,340
|
)
|
Development
costs
|
|
|
(340,000
|
)
|
|
|
(84,000
|
)
|
|
|
|
|
|
|
|
|
|
Future
income taxes
|
|
|
-
|
|
|
|
-
|
|
Future
net cash flows
|
|
|
3,475,680
|
|
|
|
3,947,594
|
|
Adjustment
to discount future annual net cash flows at 10%
|
|
|
(732,608
|
)
|
|
|
(1,005,320
|
)
|
Standardized
measure of discounted future net cash flows
|
|
$
|
2,743,072
|
|
|
$
|
2,942,274
|
|
GALAXY
ENERGY
CORPORATION
(A
Development Stage
Company)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
13 - SUPPLEMENTAL OIL AND GAS
RESERVE INFORMATION (Unaudited) (continued)
|
|
|
|
|
|
|
Changes
in the Standardized Measure of Discounted Future Net Cash
Flows
|
|
|
|
|
Standardized
measure, beginning of period
|
|
$
|
2,942,274
|
|
|
$
|
-
|
|
Sale
of oil and gas, net of production costs and taxes
|
|
|
(414,000
|
)
|
|
|
(332,125
|
)
|
Net
change in sales prices, net of production cots
|
|
|
(242,000
|
)
|
|
|
-
|
|
Discoveries,
extensions and improved recoveries, net of
|
|
|
|
|
|
|
3,274,399
|
|
future
development cost
|
|
|
2,000
|
|
|
|
-
|
|
Change
in future development costs
|
|
|
(276,000
|
)
|
|
|
-
|
|
Revisions
of quantity estimates
|
|
|
449,000
|
|
|
|
-
|
|
Accretion
of discount
|
|
|
294,000
|
|
|
|
-
|
|
Other
|
|
|
(12,202
|
)
|
|
|
-
|
|
Standardized
measure, end of period
|
|
$
|
2,743,072
|
|
|
$
|
2,942,274
|
|
|
|
|
|
|
|
|
|
|